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Woodford Admits Defeat in Effort to Return to Olympus

January 6, 2012 by Leave a Comment

But Mr. Woodford ended that bid on Friday, saying he had been unable to garner the support of Olympus’s Japanese institutional investors and creditors.

“Despite one of the biggest scandals in history, the Japanese institutional shareholders have not spoken one single word of criticism, in complete and utter contrast with overseas shareholders, who were demanding accountability,” Mr. Woodford said Friday. “I’m taking the plane and saying goodbye to Japan as a businessman.”

For the Japanese business world, it could prove a damaging conclusion to a scandal that had come to be seen as a test of just how far the country would go to police white-collar crime at Olympus, a maker of cameras and medical endoscopes.

A perceived reluctance on the part of financial regulators to pursue the scandal, as well as the tacit endorsement of the Olympus board by friendly bankers and Japanese institutional shareholders, has reinforced views among foreign investors that entrenched executives in Japan are still able to thwart any attempts at change. The company’s shares have also avoided — for now, at least — a delisting from the Tokyo Stock Exchange, a move that would have decimated shareholder value.

Mr. Woodford said he had instructed his lawyers to prepare to sue Olympus for unfair dismissal. The Olympus board has said that Mr. Woodford was let go because it did not like his aggressive Western management style.

“I got fired and lost my job for doing the right thing, and they’re still there,” Mr. Woodford said.

He said the strain that his long struggle was putting on his family back in England, especially his wife, was also a big consideration in his decision to abandon the fight.

Olympus’s stock market value has dropped by half since Mr. Woodford was fired in mid-October. Its shareholders’ equity has also been exposed as dangerously low, at just 42.9 billion yen ($556 million) at the end of September, casting a shadow over the company’s long-term viability. Many foreign investors have said the current management was tainted and should leave, for the sake of robust corporate governance.

A fund manager in the United States, Southeastern Asset Management, which holds about 5 percent of Olympus’s shares and has been an outspoken critic of the company, previously warned that any attempts by the incumbent board to protect its own interests “would deal a severe blow to the reputation of Japan’s capital markets and corporate governance.” Representatives of the fund manager were not immediately available for comment.

Top Olympus executives acknowledged in November that the company had indeed conducted an effort spanning decades to cover up $1.7 billion in investment losses in a global scheme that has led to investigations by the authorities in Japan, the United States and Britain.

Investigators are looking into what they say is a scheme that began in the 1990s to hide losses by selling bad assets to funds and other entities and later settling those losses through payments masked as acquisition fees.

Three executives implicated by an independent panel have left Olympus over the scandal, but the rest of the board, led by the current chief executive, Shuichi Takayama — a former board member who took the helm of the company in November — has been scrambling to retain control. Olympus has refused to reinstate Mr. Woodford or to offer him an apology.

Instead, Olympus is said to be looking to raise capital from domestic investors, which would dilute the influence of overseas shareholders and make fundamental changes less likely.

Last month, the Nikkei business daily reported that Olympus might issue about 100 billion yen in new preferred shares, and that Japanese companies like Fujifilm and Sony might be possible investors. Those two companies, however, have denied that any such investment was in the works.

Olympus’s biggest lenders, including the Sumitomo Mitsui Financial Group, which also holds an equity stake in the company, have backed the board. Mr. Woodford said the bank had refused to meet with him. Sumitomo Mitsui has refused to comment.

Japan’s system of cross-shareholdings between companies with business ties — like companies and their main banks — means that top executives at Japanese companies face little pressure from investors to improve performance or bolster corporate governance.

Trying to beat that system, Mr. Woodford rallied support among Olympus’s foreign shareholders, setting up a proxy fight with the board. He also lined up a fresh slate of directors, made up of people he said were “impressive” members of the Japanese business community.

The plan, he said, was to present those candidates at a shareholder meeting that the current chief executive, Mr. Takayama, had promised to hold in March or April.

But Mr. Woodford said Friday that he had become convinced that even if he won the proxy fight and returned to the company, the schism between Japanese and foreign shareholders would make any real turnaround impossible.

“It wouldn’t be healthy,” he said. “It was that realization that made me stop.”

Article source: http://www.nytimes.com/2012/01/07/business/global/former-chief-ends-his-bid-to-overhaul-olympus.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Former Chief Ends His Bid to Overhaul Olympus

January 6, 2012 by Leave a Comment

But in an outcome that may confirm foreign investors’ worst suspicions about corporate clubbiness here, Michael C. Woodford, the ousted chief executive of Olympus, ended that bid Friday, saying he had been unable to garner the support of the company’s Japanese institutional investors and creditors.

“Despite one of the biggest scandals in history, the Japanese institutional shareholders have not spoken one single word of criticism, in complete and utter contrast with overseas shareholders, who were demanding accountability,” Mr. Woodford, who is British, said Friday. “I’m taking the plane and saying goodbye to Japan as a businessman.”

Mr. Woodford said he had instructed his lawyers to prepare to sue Olympus for unfair dismissal. The Olympus board has said that Mr. Woodford was let go because it did not like his aggressive Western management style.

“I got fired and lost my job for doing the right thing, and they’re still there,” Mr. Woodford said.

He said the strain that his long struggle was putting on his family back in England, especially his wife, was also a big consideration in his decision to abandon the fight.

For the Japanese business community, it could prove a damaging conclusion to a scandal that had come to be seen as a test of just how far the country would go to police white-collar crime at Olympus, a maker of cameras and medical endoscopes that is one of the country’s vaunted blue-chip companies.

A perceived reticence on the part of financial regulators to pursue the scandal, as well as the tacit endorsement of the Olympus board by friendly bankers and Japanese institutional shareholders, has reinforced views among foreign investors that entrenched executives in Jpaan are still able to thwart any attempts at change. The company’s shares have also avoided — for now, at least — a delisting from the Tokyo Stock Exchange, a move that would have decimated shareholder value.

Still, the company’s stock market value has dropped by half since Mr. Woodford was fired in mid-October. Its shareholders’ equity has also been exposed as dangerously low, at just ¥42.9 billion, or $556 million, at the end of September, casting a shadow over the company’s long-term viability. Many foreign investors have said the current management is tainted and should leave, for the sake of robust corporate governance.

A U.S. fund manager, Southeastern Asset Management, which holds about 5 percent of Olympus’s shares and has been an outspoken critic of the company, previously warned that any attempts by the incumbent board to protect its own interests “would deal a severe blow to the reputation of Japan’s capital markets and corporate governance.” Representatives of the fund manager were not immediately available for comment.

Top Olympus executives acknowledged in November that the company had indeed conducted an effort spanning decades to cover up $1.7 billion in investment losses in a global scheme that has led to investigations by the authorities in Japan, the United States and Britain.

Investigators are looking into what they say is a scheme that began in the 1990s to hide losses by selling bad assets to funds and other entities and later settling those losses through payments masked as acquisition fees.

Three executives implicated by an independent panel have left Olympus over the scandal, but the rest of the board, led by the current chief executive, Shuichi Takayama — a former board member who took helm of the company in November — has been scrambling to retain control. Olympus has refused to reinstate Mr. Woodford or to offer him an apology.

Instead, Olympus is said to be looking to raise capital from domestic investors, which would dilute the influence of overseas shareholders, making fundamental changes less likely.

Last month, the Nikkei business daily reported that Olympus might issue about ¥100 billion in new preferred shares, and that Japanese companies like Fujifilm or Sony might be possible investors. Those two companies, however, have denied that any such investment is in the works.

Backing the board have been Olympus’s biggest lenders, including Sumitomo Mitsui Financial Group, which also holds an equity stake in the company. Mr. Woodford said the bank had refused to meet with him. Sumitomo Mitsui has refused to comment.

Japan’s system of cross-shareholdings between companies with business ties — like companies and their main banks — has meant that top executives at Japanese companies have faced little pressure from investors to improve performance or bolster corporate governance.

Trying to beat that system, Mr. Woodford had rallied support among Olympus’s foreign shareholders, setting up a proxy fight with the board. He also lined up a fresh slate of directors, made up of people who he said were “impressive” members of the Japanese business community.

The plan, he said, was to present those candidates at a shareholder meeting that the current chief executive, Mr. Takayama, has promised to hold in March or April.

But Mr. Woodford said Friday that he had become convinced that even if he had won the proxy fight and returned to the company, the schism between Japanese and foreign shareholders would make any real turnaround impossible.

“It wouldn’t be healthy,” he said. “It was that realization that made me stop.”

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As Wall St. Polices Itself, Prosecutors Use Softer Approach

July 8, 2011 by Leave a Comment

Federal prosecutors officially adopted new guidelines about charging corporations with crimes — a softer approach that, longtime white-collar lawyers and former federal prosecutors say, helps explain the dearth of criminal cases despite a raft of inquiries into the financial crisis.

Though little noticed outside legal circles, the guidelines were welcomed by firms representing banks. The Justice Department’s directive, involving a process known as deferred prosecutions, signaled “an important step away from the more aggressive prosecutorial practices seen in some cases under their predecessors,” Sullivan Cromwell, a prominent Wall Street law firm, told clients in a memo that September.

The guidelines left open a possibility other than guilty or not guilty, giving leniency often if companies investigated and reported their own wrongdoing. In return, the government could enter into agreements to delay or cancel the prosecution if the companies promised to change their behavior.

But this approach, critics maintain, runs the risk of letting companies off too easily.

“If you do not punish crimes, there’s really no reason they won’t happen again,” said Mary Ramirez, a professor at Washburn University School of Law and a former assistant United States attorney. “I worry and so do a lot of economists that we have created no disincentives for committing fraud or white-collar crime, in particular in the financial space.”

While “deferred prosecution agreements” were used before the financial crisis, the Justice Department made them an official alternative in 2008, according to the Sullivan Cromwell note.

It is among a number of signs, white-collar crime experts say, that the government seems to be taking a gentler approach.

The Securities and Exchange Commission also added deferred prosecution as a tool last year and has embraced another alternative to litigation — reports that chronicle wrongdoing at institutions like Moody’s Investors Service, often without punishing anyone. The financial crisis cases brought by the S.E.C. — like a recent settlement with JPMorgan Chase for selling a mortgage security that soured — have rarely named executives as defendants.

Defending the department’s approach, Alisa Finelli, a spokeswoman, said deferred prosecution agreements require that corporations pay penalties and restitution, correct criminal conduct and “achieve these results without causing the loss of jobs, the loss of pensions and other significant negative consequences to innocent parties who played no role in the criminal conduct, were unaware of it or were unable to prevent it.”

The department began pulling back from a more aggressive pursuit of white-collar crime around 2005, say defense lawyers and former prosecutors, after the Supreme Court overturned a conviction it won against the accounting firm Arthur Andersen. That ended an era of brass-knuckle prosecutions related to fraud at companies like Enron.

Another example of this more cautious prosecutorial strategy: Government lawyers now go to companies earlier in an inquiry, and often tell companies to figure out whether improper activities occurred. Then those companies hire law firms to investigate and report back to the government. The practice was criticized last year when the Justice Department struck a settlement with Beazer Homes USA, a home builder accused of mortgage fraud.

This “outsourcing” of investigations — as some lawyers call it — has led to increased coziness between the government and companies, some critics say.

In banking, the collaboration is even stronger, dating to the mid-1990s when banks were asked to regularly report suspicious activities to the Treasury Department, an effort that aimed at relieving regulators of some of their enforcement loads. But it gave regulators a false assurance that banks would spot and report all wrongdoing, former investigators say. Moreover, companies are not as likely to come forward with evidence related to senior executives or to widespread patterns of misbehavior, some academics say.

Intended to make the most of the government’s limited investigative resources, the government’s cooperation with corporations and industry groups can work well and save money when business hums along as usual. But some veterans of government prosecutions question such collaboration in financial crisis cases, and contend they should have been pursued more aggressively.

“Traditionally, a bank would tell the Department of Justice when an employee engaged in crimes, but what do you do when the bank itself is run by a criminal enterprise?” said Solomon L. Wisenberg, former chief of the financial institutions fraud unit for the United States attorney in the Western District of Texas in the early 1990s. “You have to be able to investigate without just waiting for the bank to give you the referral. The people running the institutions are not going to come to the D.O.J. and tell them about themselves.”

A Clash of Agencies

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Former Citigroup Accountant Accused of Embezzling $19.2 Million

June 28, 2011 by Leave a Comment

But federal prosecutors claim Mr. Foster gave himself a bonus fit for a star investment banker by embezzling more than $19.2 million from Citi before its auditors picked up on the scheme.

Mr. Foster, a 35-year-old former assistant vice president in Citi’s internal treasury finance department, was arrested by Federal Bureau of Investigation agents at Kennedy Airport Sunday morning after returning from a trip to Europe and Asia.

On Monday afternoon, he pleaded not guilty to charges of bank fraud at a hearing in Federal District Court in Brooklyn and was expected to be set free on $800,000 bond.

Mr. Foster, who is divorced and has two children, had been enjoying the high life. He owned six properties, including an apartment in Midtown Manhattan; two luxury apartments in Jersey City; a $1.35 million house in Tenafly, N.J.; and a $3 million home in Englewood Cliffs, N.J., that had a $500,000 entertainment system and bathroom mirrors that turned to video screens when touched, according to a law enforcement official.

He also owned a Maserati GranTurismo and BMW 550xi. A Ferrari was on order, said the official, who was not authorized to speak about the investigation.

Mr. Foster’s lawyer, Isabelle A. Kirshner, said that she had spoken only briefly with her client and had just started to review the allegations.

“We will investigate the matter thoroughly,” she said. She would not comment on her client’s personal assets.

The fraud charges are the latest effort by the Justice Department to crack down on white-collar crime at a time when the agency is under increasing pressure to hold Wall Street bankers accountable. This case is against a relatively junior Citigroup executive, and appears to have little to do with the financial crisis.

Still, it is yet another embarrassment for a bank that once made its entire work force take an ethics pledge and uses “responsible finance” as a corporate slogan.

It also raises new questions about Citi’s internal controls, nearly two years after regulators forced it to strengthen its risk management and compliance practices upon losing tens of billions of dollars during the financial crisis.

Earlier this month, the bank came under fire from lawmakers after taking more than a month to disclose that hackers stole data from more 360,000 Citi credit card accounts.

In this case, it took nearly a year after the claimed embezzlement began before Citigroup’s internal auditors uncovered that millions of dollars were missing.

According to the complaint, Mr. Foster transferred the money from various Citigroup corporate accounts to his own bank account at JPMorgan Chase late last year. From July to December 2010, he moved about $900,000 from Citigroup’s interest expense account and about $14.4 million from Citigroup’s debt adjustment account to the bank’s main cash account. Then, on eight separate occasions, he wired the money to a personal account at Chase.

To conceal some of the transactions, the complaint contended that Mr. Foster used a false contract or deal number to be placed in the reference line of the wire transfer. Mr. Foster voluntarily quit Citigroup in January, according to a person briefed on his employment. His reasons for leaving are not known.

“The defendant allegedly used his knowledge of bank operations to commit the ultimate inside job,” said Loretta E. Lynch, the United States attorney for the Eastern District of New York in Brooklyn.

Citigroup detected the fraud a couple of weeks ago during an internal audit of the treasury department, where Mr. Foster worked, according to the complaint and a person briefed on the situation. The bank said it immediately contacted law enforcement officers after discovering the suspicious transactions and has put in additional safeguards and internal controls.

“We are outraged by the actions of this former employee,” said Shannon Bell, a Citigroup spokeswoman. “In light of the ongoing investigation, we cannot comment any further at this time.”

Mr. Foster joined Citigroup in 1999, shortly after graduating from Rutgers University with an accounting degree, according to his profile on LinkedIn. He rose to become an assistant vice president, supervising the derivatives unit in the bank’s treasury finance department.

Since leaving Citigroup, he has billed himself as a part-time hedge fund consultant, according to his profile. On Facebook, he counts “traveling the world” as a favorite activity.

Mr. Foster was traveling in Europe and Asia, when an F.B.I. agent showed up at the home of his parents in Teaneck, N.J., early last week, according to his lawyer. Alerted by his parents, she added, Mr. Foster immediately contacted the F.B.I. agent and made arrangements to return to the United States.

Mr. Foster was arrested on Sunday morning after arriving on a flight from Bangkok.

If convicted, Mr. Foster faces up to 30 years in jail.

William K. Rashbaum contributed reporting.

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DealBook: Galleon Conviction Likely to Embolden Prosecutors

May 12, 2011 by Leave a Comment

Raj Rajaratnam leaves federal court after his conviction. He is scheduled to be sentenced on July 29.Andrew Gombert/European Pressphoto AgencyRaj Rajaratnam leaves federal court after his conviction. He is scheduled to be sentenced on July 29.

Raj Rajaratnam, the billionaire investor who once ran one of the world’s largest hedge funds, was found guilty on Wednesday of fraud and conspiracy by a federal jury in Manhattan, giving the government its biggest victory yet in a widening investigation of insider trading.

The verdict is expected to embolden prosecutors in their campaign to ferret out criminal activity on Wall Street trading floors. By using wiretaps — a tactic normally reserved for Mafia and drug trafficking cases — to secretly record the phones of Mr. Rajaratnam and others, the government now has a new weapon against white-collar crime.

Mr. Rajaratnam, dressed in a dark suit and a gold tie, remained stoic and stared straight ahead as the courtroom deputy read out the verdict — guilty on all 14 counts.

Just as the insider trading cases of the 1980s focused on the major Wall Street figures of that era — risk arbitragers like Ivan Boesky and junk-bond financiers like Michael R. Milken — the recent wave of prosecutions home in on some of the most influential players in today’s markets: hedge funds. As the investment firms have grown in clout and prominence, now managing more than $2 trillion and minting dozens of billionaires, the industry has attracted more scrutiny.

“Mr. Rajaratnam was among the best and the brightest — one of the most educated, successful and privileged professionals in the country,” said Preet Bharara, the United States attorney for Manhattan. “Yet, like so many others recently, he let greed and corruption cause his undoing.”

The Galleon networkAzam Ahmed and Guilbert Gates/The New York Times Click on the above graphic to get a visual overview of the Galleon information network.

Mr. Bharara’s office has headed the crackdown on insider trading. His office alone has charged 47 people with insider trading over the last 18 months; of those, 36 have been convicted or have pleaded guilty. Some of those who pleaded guilty were cooperating witnesses in Mr. Rajaratnam’s trial.

The case stoked the worst suspicions of Main Street investors: That the stock market was a rigged game controlled by powerful Wall Street financiers who made fortunes trading on secret information unavailable to the public. Over the two months of the trial, jurors heard evidence that Mr. Rajaratnam used a corrupt network of tipsters to gain about $63 million from illegal trading in stocks, including Google and Hilton Worldwide.

Mr. Rajaratnam, 53, could be sentenced to as much as 25 years in prison. Prosecutors said federal sentencing guidelines would suggest a sentence of 15 and half to 19 and a half years. He could also be forced to disgorge tens of millions of dollars in illegal trading profits.

Judge Richard J. Holwell ordered home detention and electronic monitoring for Mr. Rajaratnam while he awaits his sentencing set for July 29.

John Dowd, a lawyer for Mr. Rajaratnam, said his client would appeal.

Jurors, who reached their decision on the 12th day of deliberations, did not respond to requests for comment.

Over a nine-month stretch in 2008, agents from the Federal Bureau of Investigation taped Mr. Rajaratnam’s telephone conversations. They listened in as he matter-of-factly swapped illegal stock tips with corporate insiders and fellow traders.

“I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share,” Mr. Rajaratnam said to one of his employees in advance of the bank’s earnings announcement.

For years, Mr. Rajaratnam was lionized as one of Wall Street’s savviest investors. At its peak, his Galleon Group hedge fund managed more than $7 billion in assets. Investment banks counted Galleon, which paid out roughly $300 million in trading commissions annually to brokerage firms, as one of their largest trading clients.

In the early hours of Oct. 16, 2009, federal agents arrested Mr. Rajaratnam at his Sutton Place apartment on the East Side of Manhattan.

Mr. Rajaratnam fought the charges against him, insisting that he had done nothing wrong. Mr. Dowd said that his client’s success as a money manager came from “shoe-leather research, diligence and hard work.”

He based his defense on the so-called mosaic theory of investing. Galleon was famous for doggedly digging for information about publicly traded companies that would form a “mosaic” — a complete picture of a company’s prospects that gave it an investment edge over other investors.

Prosecutors acknowledged that Galleon performed legitimate stock research. But at the same time, they argued, the firm routinely violated securities laws. In the words of a former Galleon portfolio manager who testified during the trial, the firm did its homework — but also cheated on the test.

“Cheating became part of his business model,” said a prosecutor, Reed Brodsky, in his summation.

The verdict marks an end to a Wall Street success story. A native of Sri Lanka, Mr. Rajaratnam came to the United States in 1981 to study business at the prestigious Wharton School at the University of Pennsylvania. He joined Needham Company, a small investment bank, and carved out a reputation as an expert in technology companies.

Mr. Rajaratnam’s ascent coincided with both the tech boom of the 1990s and the emergence of hedge funds. When he formed the Galleon Group in 1997, investors clamored to put their money with him. Mr. Rajaratnam posted superior investment returns, attracting clients like New Jersey’s state pension fund and UBS, the giant Swiss bank.

Galleon brought Mr. Rajaratnam great wealth, estimated by Forbes magazine at $1.3 billion. During the trial, Mr. Rajaratnam’s former friends told the jury about lavish vacations. For his 50th birthday, he chartered a private jet to fly dozens of family and friends to Kenya for a safari.

Fiercely competitive, Mr. Rajaratnam could be heard on wiretaps speaking in sports and military metaphors. He compared himself to fighting Muhammad Ali in the ring and said during the financial crisis, “I’m feeling the pain, but they can’t kill me. I’m a warrior.”

It was that competitiveness that caused Mr. Rajaratnam, despite a blizzard of incriminating evidence, to fight the charges, according to two former Galleon employees who requested anonymity.

“Raj hated to lose and loved a good fight,” one former colleague said. “He’s a big sports fan, and I think in some ways he viewed this trial as a contest.”

His appeal will take aim at the use of wiretaps, contending that they were unconstitutional and that there was no cause for employing such unconventional investigative tactics.

Legal experts say that the biggest blow to Mr. Rajaratnam’s defense came last November, when Judge Holwell denied his request to prohibit the government from using the recorded conversations at trial.

A breakthrough in the multi-year investigation of Mr. Rajaratnam came in 2006 during an inquiry of a hedge fund run by Rengan Rajaratnam, Mr. Rajaratnam’s younger brother who has not been charged.

While reviewing e-mails and instant messages, a prosecutor discovered incriminating communications between the brothers.

More than a year later, a government informant taped calls with Mr. Rajaratnam on which he exchanged confidential tips. On the basis of those recordings, a federal judge agreed to allow a wiretap on Mr. Rajaratnam’s phone.

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