Olympus’s $687 Million Scam Lay Hidden in Cardiff Filing System

Olympus Corp. (7733) executives including the current head of investor relations signed off on misleading accounts, restated earnings and delayed regulatory filings to help conceal $687 million in fake costs used to hide losses.

Documents filed at Companies House in Cardiff, Wales, reveal gaps in disclosure rules that enabled Olympus to mask the cost of the 2008 takeover of London-listed Gyrus Group Plc for more than three years. Like Enron Corp.’s use of off-balance sheet entities to hide losses, a simple idea underpinned Olympus’s complex deception, said Bruce E. Aronson, a former partner at Hughes Hubbard & Reed LLP in New York.

“The structures may seem sophisticated, but one feature of every scheme is that they pretend a security is still worth full book value,” said Aronson, who is studying comparative corporate governance in Tokyo. The schemes aren’t “a way of hiding losses in the long term.” They’re just “putting off the day of reckoning,” he said.

Olympus on Nov. 8 admitted inflated advisory fees paid in the $2.1 billion acquisition of Gyrus were used to conceal soured investments dating back decades. In a practice known as “tobashi” -- loosely translated as “to make fly away” -- the company used offshore entities to park assets in the hope that a market recovery would erase losses before they had to be accounted for.

A week after Olympus paid $620 million in March 2010 to buy back preference shares given to its advisers as fees, former Chairman Tsuyoshi Kikukawa and two senior aides, who were all serving as Gyrus directors, filed financial statements saying it wasn’t “meaningful to estimate a fair value” for the securities. Gyrus instead booked them at $177 million, the documents show.

KPMG Leaves

Gyrus’s auditor, KPMG Audit Plc, left the role in part because of its client’s accounting for the securities, it said in a letter to directors that was filed to Companies House. Olympus’s investors were never passed the letter or KPMG’s qualified accounts, according to two shareholders who declined to be identified.

The payment to the advisers, Axam Investments Ltd., is part of criminal probes in the U.S., U.K. and Japan.

Akihiro Nambu, the Japanese camera maker’s investor- relations head, signed the 2009 accounts on April 5, 2010. The third Gyrus director, Hisashi Mori, was fired last week as executive vice president over his role in hiding the losses.

Under the U.K.’s Companies Act 2006, it is an offense for directors not to circulate accounts and the auditor’s report to shareholders. Gyrus’s only shareholder is Olympus, and under Japanese law there is no obligation for the three directors of the U.K. company to pass on the report.

Delayed Filing

Repeated attempts to interview Kikukawa, Mori and Nambu and other Olympus officials, including visits to the homes of some, have failed. Tsuyoshi Kitada, a Tokyo-based spokesman, declined to comment on whether Gyrus’s 2009 accounts and the auditor’s report were sent to the full Olympus board.

Olympus executives delayed booking the true cost of the fees until March 2011, nine months after Axam Investments was struck off by the Cayman Islands registrar.

The tax haven’s secrecy rules mean the beneficiary of the payout is not yet known. However, Olympus’s admission the funds were intended to help erase losses suggests the money was to be routed back to the company.

Preference Shares

After they took over Gyrus’s board, Kikukawa, Mori and Nambu on Sept. 30, 2008, authorized the issue of $200 million of preference shares, filings show. The directors also gave themselves the right to allot $176,981,106 of the shares -- only disclosing that these were awarded to Axam more than 18 months later in the Gyrus annual return.

Because of the dividend set on the securities, their fair value was much higher. Olympus agreed to buy back the shares for $620 million, according to two March 22 agreements signed by Kikukawa and Mori, copies of which were given to Bloomberg News. Those agreements, and earlier exchanges with Axam, show Olympus executives knew the eventual payout to Axam would far exceed the nominal value booked in the 2009 accounts.

KPMG approved the 2009 Gyrus financial statement, though it did so with reservations because the company had failed to provide sufficient proof Axam wasn’t a related party. The auditors also took issue with the accounting treatment of the preference shares.

“We consider that there are circumstances connected with our ceasing to hold office that should be brought to the attention of the company’s members or creditors,” KPMG Audit wrote in a letter to Gyrus Group dated April 26, 2010.

‘Incorrectly Recorded’

When the 2010 financial statement was filed a year later, Gyrus revised earnings for 2009 because it had “incorrectly recorded” the preference shares at nominal value. Gyrus booked the securities in its year-end accounts at the same value as paid to Axam on March 31, 2010. The revision knocked about $330 million from Gyrus’s $716 million in net assets.

New auditor Ernst & Young LLC also approved accounts with reservation, citing the lack of information about Axam in a March 21, 2011, filing. Both Gyrus annual reports were submitted more than a year from the end of the reporting period, exceeding the U.K.’s nine-month limit.

“If you see companies producing the numbers late, there’s a problem with the audit procedures,” said Eli Amir, professor of accounting at London Business School. Auditors’ duty “is to the shareholders of the company,” so they may not report their findings to regulators, he said. “They might walk away to decrease their exposure to litigation or other sanctions.”

Failed to Account

Amir said he was speaking in general, and not specifically about Gyrus. KPMG’s London-based spokesman Gavin Houlgate and Ernst & Young spokeswoman Vicky Conybeer declined to comment.

Olympus’s annual report for the 12 months to March 31, 2010, showed a 15.5 billion yen ($201 million) “prior period adjustment” loss related to the purchase of preference shares from a third party. The company added about 13.5 billion yen to goodwill on its balance sheet to account for the purchase, according to a conference call after the earnings.

Olympus didn’t say who the third party was.

Southeastern Asset Management Inc., Olympus’s biggest shareholder, said it raised the issue in an email exchange with the company’s investor-relations department in May last year.

Nambu’s division claimed the purchase was related to financing for the Gyrus acquisition, not payment to an adviser, Southeastern wrote in a letter to the board dated Oct. 20 this year and which was copied to the U.K.’s Serious Fraud Office and Japanese regulators.

Olympus has appointed an independent committee including former judges to probe its acquisitions and hidden losses. The findings are expected by mid-December. Olympus last week said it would publish corrected accounts and its half-year earnings by Dec. 14.

The SFO, which prosecutes white-collar crime, has started a probe into accounting at Olympus, a person familiar with the case said last week, declining to be identified because they weren’t authorized to speak to the media.

To contact the reporters on this story: Katie Linsell in London at klinsell@bloomberg.net; Mariko Yasu in Tokyo at myasu@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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