Former Olympus Corp. (7733) officials face as long as 10 years in prison if investigations into the company’s claims that they hid decades of losses lead to convictions for fraud, falsification of financial statements or aggravated breach of trust.
The Tokyo Prosecutor’s Office is investigating Olympus on suspicion the company broke securities laws after the camera maker said Nov. 8 that ex-chairman Tsuyoshi Kikukawa, former executive vice president Hisashi Mori and auditor Hideo Yamada colluded to hide losses by paying inflated fees to advisers.
“The allegations appear to be a classic accounting or securities fraud and are significant enough that Japanese authorities may take firm action,” said Samuel Williamson, a partner in Kirkland & Ellis LLP’s white collar criminal investigations and government enforcement practice.
Prison for such offenses in Japan is rare, said Williamson, a former U.S. Department of Justice prosecutor now based in Shanghai. While the founder of Internet startup Livedoor Inc. Takafumi Horie is serving 2 1/2 years in prison for accounting fraud, the former president of cosmetics maker Kanebo Ltd. Takashi Hoashi had his two-year sentence for the same crime suspended when it was issued in 2006.
“With U.K. and U.S. authorities reportedly looking into the allegations, this has already received more international attention than Livedoor or Kanebo,” Williamson said.
Olympus shares dropped by their daily limit of 100 yen today, falling 17 percent to close at 484 yen on the Tokyo Stock Exchange. The stock has plunged 81 percent since Michael C. Woodford was fired as chief executive officer on Oct. 14.
Japanese police have begun investigations into Olympus and will probably share information with overseas authorities, the Yomiuri newspaper reported today, without saying where it got the information.
Yoshiaki Yamada, an Olympus spokesman in Tokyo, and a spokeswoman at the city’s Metropolitan Police Department both declined to comment on the report when contacted by Bloomberg News.
Olympus said Nov. 8 that it continues to pursue an internal investigation into the allegations by Woodford that $1.5 billion was siphoned out of the company through writedowns and fees related to a series of takeovers.
Pressure to Review
Kikukawa, who had Woodford removed, resigned Oct. 26 as investors increased pressure for a review of the deals. Kikukawa denied any wrongdoing when he stepped down and said he intended to stay on the board.
Olympus declined a request to interview Kikukawa, Mori and Yamada. In six attempts to talk to Kikukawa at his home, the former chairman didn’t appear.
Mori, who was fired Nov. 8, couldn’t be reached at the Kawasaki city home address for him given in U.K. filings. Yamada is willing to resign, according to Olympus.
Aggravated breach of trust under article 960 of the Companies Acts carries a penalty of as long as 10 years in prison and a fine of as much as 10 million yen ($128,700). Falsifying securities reports under article 197 of the Financial Instruments and Exchange Act carries the same punishment, while fraud under the penal code can be punished by as long as 10 years in prison.
The U.S. Federal Bureau of Investigation is probing payments by Olympus to advisers related to the 2008 acquisition, said a person familiar with the inquiry who declined to be identified because they weren’t authorized to speak publicly about it. Woodford, who has met with investigators at the Serious Fraud Office in London, also said the FBI is investigating the matter.
The probes center on more than $600 million in fees paid to Axam Investments Ltd., a now-defunct Cayman Islands fund connected to U.S.-based Japanese banker Hajime Sagawa.
Separately, Boston-based law firm Block & Leviton LLP said Nov. 8 it is representing investors seeking to recover money lost due to investment fraud.
“The case may be the biggest since Kanebo and Livedoor,” said Nobumichi Hattori, a corporate strategy professor at Tokyo- based Hitotsubashi University.
“It’s very shameful,” said Hattori, the former head of Goldman Sachs Group Inc.’s mergers and acquisitions business in Japan.