March 29, 2024

Olympus Hid Investing Losses in Big Merger Payouts

TOKYO — Olympus said Tuesday that more than $1 billion in merger payouts were used to hide years of losses on investments, an acknowledgment that is an abrupt about-face for the company, which had denied any wrongdoing in the wake of a widening scandal.

That revelation alone could make this one of the biggest accounting fraud cases in corporate history. It is also a spectacular turn of events amid a boardroom battle that has pitted Olympus’s former British chief executive turned whistle-blower, Michael C. Woodford, against an otherwise all-Japanese company board.

Mr. Woodford was fired in mid-September after trying to force an investigation into a series of acquisitions, made before his appointment as president in February. He has since released internal documents to the news media and called for the entire company board to resign. Since the accusations, Olympus has lost half its stock market value as many questioned the company’s governance.

Olympus, which is based here in Tokyo, had categorically denied any wrongdoing over the deals, made from 2006 to 2008. Just last week, the company appointed a panel of outside experts to investigate, a measure Olympus said was aimed at assuaging investor fears.

But in an extraordinary statement issued Tuesday, the company said the panel found that the money for mergers had in fact been used to mask heavy losses on investments racked up since about 1990.

The panel found that Olympus channeled money through several investment funds to “eliminate latent losses,” the company said in the statement, without elaborating. The revelations came as a surprise because the panel had not been expected to reach any conclusions for at least several more weeks.

The payouts in question involve $687 million in fees Olympus paid to an obscure financial adviser over its acquisition of the British medical equipment maker Gyrus in 2008. That fee amounted to roughly a third of the $2 billion acquisition price, a fee amount more than 30 times the norm.

The Federal Bureau of Investigation and the Securities and Exchange Commission in the United States are also investigating the Gyrus deal, according to people familiar with the matter.

Olympus also acquired three small companies in Japan for a total of $773 million, only to write down most of their value within the same fiscal year. Those companies — Altis, a medical waste recycling company, Humalabo, a facial cream maker, and News Chef, which makes plastic containers — had little in common with Olympus’s main line of business of producing cameras and other electronics. Those businesses had not made money before being acquired, according to the credit ratings agency Tokyo Shoko Research.

At a news conference, the company’s new president, Shuichi Takayama, bowed deeply in apology. “It is true that there were inappropriate dealings,” he said. “Our previous statements were in error.” But he stopped short of acknowledging fraud at the company, and said that no money had flowed out of the company. He said Olympus was still investigating the case and was still unprepared to reveal the scale of past losses.

Mr. Takayama also said that Hisashi Mori, an executive vice president, had been fired over his involvement in the cover-up. Hideo Yamada, who is also implicated, has offered his resignation, he said. He reiterated the company’s position that Mr. Woodford’s departure had to do with his aggressive Western-style management style rather than his inquiries into the acquisitions. Mr. Takayama said that despite the disclosure, he hoped to keep Olympus’s shares listed on the Tokyo Stock Exchange. Its shares were down nearly 30 percent Tuesday afternoon.

Mr. Woodford, who worked at Olympus for 30 years, had begun to look into those payouts after a Japanese financial magazine, Facta, published an exposé on the deals. In September, Mr. Woodford commissioned a report by PricewaterhouseCoopers into the Gyrus deal that raised concern over actions taken by Olympus management, including a lack of due diligence.

Based on the report, Mr. Woodford called for a full investigation in a letter dated Oct. 11. He urged the company’s chairman at the time, Tsuyoshi Kikukawa, and other members of the board to resign, accusing them of “calamitous errors and exceptionally poor judgment” and comparing them to rogue traders.

But the next day, the Olympus board unanimously voted to oust Mr. Woodford. He said he was not permitted to speak at the board meeting, and was advised to leave the country immediately.

Mr. Kikukawa resigned in late October. In a statement at the time, he denied wrongdoing.

Questions remain over Olympus’s links to the obscure investment and advisory companies that facilitated those acquisitions, including an investment fund incorporated in the Cayman Islands, as well as Axes, a company that oversaw those funds from the United States and Japan.

The Global Company, an investment advisory firm based in Tokyo, was closely involved in setting up the three companies as well as facilitating their sale to Olympus, according to a New York Times investigation. Executives at those companies have not been available for comment.

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You’re the Boss: S.B.A. Unveils New Venture Capital Fund

The Agenda

How small-business issues are shaping politics and policy.

The Small Business Administration announced on Thursday that it had formed a $130 million venture capital fund to invest in high-growth companies in Michigan. The fund is the first of what Karen Mills, the S.B.A. administrator, said is a $1 billion commitment over five years through what the agency calls Impact Investment funds, part of the Obama administration’s Startup America initiative announced in January.

In Michigan, the S.B.A. has joined forces with the State of Michigan Retirement Systems, which will contribute $35 million through its own investment fund, and Dow Chemical, which will invest $15 million. The S.B.A. will provide up to $80 million in debt financing. In the next three or four years, the fund, called the InvestMichigan! Mezzanine Fund, will invest between $5 million and $15 million in about 20 companies that either do business or have a substantial presence in Michigan or are poised to relocate there.

Speaking on a conference call that included the chief executive of Dow and Rick Snyder, Michigan’s Republican governor, Ms. Mills said the state’s dire economic situation made it a logical starting point for the program. “This is an economy in transition,” she said. “But the good news is the opportunity is also there. Many of the high-growth firms in Michigan simply need more capital to grow, scale up, and hire.” (As it happens, the state is certain to be a battleground in the 2012 presidential election.)

The Impact Investment Fund initiative is a new variation on the agency’s longstanding, and grossly under-utilized, investment program. As currently constituted, the program allows funds, called small-business investment companies, to borrow money from the S.B.A. and in turn re-loan that money to their portfolio companies. The S.B.A. then pools the money lent to the small-business investment companies and sells the debt as debentures on Wall Street; because the investment is guaranteed by the government, the interest rate is low. According to Kelly Williams, a managing director of Credit Suisse and a manager of the InvestMichigan! fund, the interest rate on these debentures is presently about 4 percent — much lower than a bank loan.

The program, which is self-financed through the interest payments and fees charged to the investment companies, is authorized to loan $3 billion each year; last year, Ms. Mills said, it committed only half that.

But the initiative does have limitations. Though the program is called Startup America, Invest!Michigan will not invest in start-ups. Because small-business investment company investment is typically more debt than equity — in the case of Invest!Michigan, about 70 percent debt, according to S.B.A. spokeswoman Hayley Meadvin — the companies receiving the investment must have enough cash flow to make regular interest payments to their backers. Indeed, according to Ms. Williams, the fund will seek companies that have already proven themselves, generating revenue of at least $20 million a year and profit of $3 million to $5 million.

Until 2004, the S.B.A. also licensed small-business investment companies that took pure equity stakes in portfolio companies, and so could invest in risky early-stage companies. However, the Bush administration, convinced that losses in that program would cost the government billions of dollars, stopped issuing new licenses for those types of investment companies. The program’s authorization eventually expired, and Congress has not renewed it.

The Obama administration has not sought to renew the equity program, either, though the S.B.A. says it is developing a $1 billion fund for early-stage companies, set to be launched in late 2011 or early 2012. In the meantime, the administration has channeled more private-sector dollars into the debenture program. And with the Impact Investment initiative, it has taken a decidedly more hands-on approach. Unlike a typical S.B.I.C., where an investment manager would first organize the fund and then approach the S.B.A. for a license, this fund was in fact organized by the agency itself.

While many newly elected Republican governors have taken pains to distance themselves from Obama administration initiatives that they view as heavy-handed federal intervention, Gov. Snyder had no such qualms on Thursday. “We’re pleased that you look upon Michigan as a great opportunity, because we want to be a pioneer on an opportunity like this,” he said to Ms. Mills on the conference call. “It’s very exciting to be part of this process.”

Ms. Williams said the fund has already started scouting for prospective investments. The first deal, she said, would close within a month or so.

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