December 6, 2011

The Culture Was Corrupt at Olympus, Panel Finds

By HIROKO TABUCHI and KEITH BRADSHER

TOKYO An outside panel appointed by Olympus to investigate its financial scandal issued a harsh report Tuesday, calling the companys recently departed management rotten to the core. The panel, led by a former Japanese Supreme Court judge, also details the roles it claims were played by three former Nomura bankers in arranging a cover-up, and it says Olympus paid the bankers for their efforts. It also criticizes Olympuss auditors, KPMG AZSA and Ernst & Young ShinNihon, for failing to expose fraud at the company. The report says that Olympus had persuaded several banks, including Socit Gnrale of France, to submit incomplete financial statements to auditors, apparently in an effort to conceal financial maneuvers that the report says involved at least $1.7 billion and were meant to hide failed investments during the 1990s. There is no indication the banks knew of Olympuss cover-up, the report said. According to the report, Olympus told the banks that they did not need to respond to KPMG queries about collateral, which was used to finance loans to investment funds involved in the loss cover-up. The management was rotten to the core, and infected those around it, said the report, which ran more than 200 pages, with appendixes. KPMG and Ernst & Young denied wrongdoing Tuesday. The Tokyo branch of Socit Gnrale said it could not comment on the contents of the Olympus report. Inquiries to the banks headquarters in Paris were not immediately answered. Despite its harsh tone, the report by the Olympus-appointed panel seemed to sharply define the limits of blame and potential wrongdoing. Most significantly, the panel repeated a preliminary finding it had announced last month: that it had found no evidence of organized crime involvement in the Olympus scandal. The possibility of organized crime involvement in the cover-up has become a crucial issue because evidence of mob links could prompt the Tokyo Stock Exchange to delist Olympus shares. Such a move could seriously damage shareholder value by making the stock difficult to sell. Olympuss stock rose 15 percent in Tokyo on Tuesday before the reports release, on news reports that the panel would deny any mob involvement. In a statement, however, the Tokyo Stock Exchange warned Tuesday that the company could still be delisted if it failed to meet a Dec. 14 deadline to submit its latest financial statement. Olympus shares have already lost half their value since the scandal began in October. Olympus issued a statement saying it takes very seriously the results of the report and that it was considering further fundamental measures to restore confidence as soon as possible. It also said that it was committed to filing its financial statements by the Dec. 14 deadline to avoid a delisting. Olympus appointed the panel on Nov. 1, shortly after accepting the resignation of Tsuyoshi Kikukawa over the scandal and replacing him with Shuichi Takayama, who had been a managing director. The report took pains to blame Mr. Kikukawa and a small circle of other executives who have already left the company, and stressed that possible legal action should not extend to others at Olympus. It said the company could be salvaged, seemingly heading off speculation that it might be carved up and sold. The report left many open questions as even the panels chairman at least partly acknowledged by saying that a forensic accounting by auditors would still be necessary, as well as the completion of investigations under way by Japanese and overseas legal and regulatory authorities.

In a news conference here, Tatsuo Kainaka, the panels chairman and a former judge of Japans Supreme Court, said it was still unclear how much of Olympuss money had been siphoned off and where it had ended up. The report said there was a continuing outflow of money from the company. It is unclear how much went to who specifically, Mr. Kainaka said. There is no mistake that there was a flow of a substantial amount of funds, but we have not identified an amount. Even the finding that there are no organized crime links is only preliminary. A criminal investigation by Japanese police is still pursuing evidence of mob connections, according to two people close to that inquiry. Despite those limitations, the panels findings appeared to largely vindicate the companys ousted president, Michael C. Woodford, who had publicly questioned a series of exorbitant acquisition payments made by the company before his tenure. Mr. Woodford, who was fired in October after confronting Olympuss former chairman, has called for the entire Olympus board to resign and has said he was in talks with shareholders to help install fresh management at the company. The report said auditors, executives and board members who had not done more to question past dealings should step down. Not all parts of the company were involved in misconduct, the report said. Still, it said, Olympus should remove its malignant tumor and literally renew itself. It urged legal action against the executives implicated in the cover-up, including Mr. Kikukawa, the former chairman. He and two other Olympus executives have left the company since the scandal began. The report said that it had found no evidence to suggest that those three or any other Olympus executives had personally gained from the scandal. But legal experts said executives involved in the cover-up could face prison time if convicted of violating securities or corporate laws. The report criticized Olympuss auditors, KPMG AZSA and Ernst & Young Nippon, saying they had not done enough to expose the companys financial maneuvers. In 2009, when KPMG AZSA was the auditor, it raised serious concerns with the companys recent acquisitions, the report said. But KPMG backed down and rubberstamped Olympuss finances, the report said, after the company insisted that a third-party inquiry had found nothing wrong. And when Ernst & Young Nippon took over as Olympuss auditor later that year, the two auditing firms did not sufficiently share information, so knowledge of past dealings by Olympus was not passed along, the report said. KPMG responded to the report Tuesday by saying that it had complied with accounting standards and was cooperating with public investigators. Ernst & Young responded that it did not believe the report had found its auditing negligent. The report also claimed that Olympus had instructed three banks in which the company had accounts that they did not need to respond to KPMG queries about collateral, which was used to finance loans to investment funds involved in the loss cover-up. All three complied with Olympuss request, the report said, although there was no indication the banks knew of the cover-up. But the panel also indicated that detecting misconduct at Olympus was difficult because of actions by Olympus with its bankers. The panel claimed that Olympus had requested three financial institutions to provide incomplete financial statements on company savings to KPMG, despite requests from the auditors for more information. The three are Socit Gnrale, LGT of Liechtenstein and Commerzbank International Trust (Singapore), which was a unit of Commerzbank of Germany until its sale last year to Trident Trust of Singapore. LGT said in a statement: LGT Bank has taken note of the Third-Party Report released today and has no further comments. LGT has been fully cooperating with the Third-Party Committee which it has contacted on its own initiative. Commerzbank said in a separate statement, At all times Commerzbank was in full compliance with all relevant laws and obligations and will assist with any possible enquiries by the regulator.

Trident Trust declined to comment on Wednesday morning. The report said the former Nomura bankers Akio Nakagawa, Hajime Sagawa and Nobumasa Yokoo helped Olympus executives devise ways to mask and eventually settle losses, including using acquisition payouts and overseas funds to mask irregular transactions. A reporters repeated attempts in recent weeks to reach the three former bankers have been unsuccessful. The registered office of Mr. Yokoos investment firm in Tokyo is no longer being used, and no one answered the door at his home address. No Japan address could be found for Mr. Nakagawa, and news reports have traced him to Hong Kong. Mr. Kainaka said at the news conference that the panel was aware of the whereabouts of Mr. Nakagawa and Mr. Yokoo, although he declined to elaborate. But he said Mr. Sagawa, whose registered address is in Florida, had not been found. The panel characterized Olympus as having had a company culture that put a premium on secrecy and obedience above sound corporate governance. Past presidents had low regard for transparency and governance, the report said, and standing up to them to speak the truth meant you risked being put out to pasture, which is apparent from what happened to Woodford. In a statement, Mr. Woodford renewed his calls for complete disclosure of Olympuss finances, and fresh leadership, at Olympus. Todays report, he said, must be the beginning, and not the end, of our efforts to discover what has happened at Olympus.
Hiroko Tabuchi reported from Tokyo and Keith Bradsher from Hong Kong.