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Olympus Admits to Covering Up Decades of Investment Losses

After firing its British whistle-blowing CEO last month, purportedly due to cultural differences, and defending its positions for the past several weeks, Olympus Corp. admitted to one of the largest long-term loss cover-ups in corporate Japanese history.  On Tuesday, November 8, Olympus president Shuichi Takayama admitted that “[i]t is a fact that we carried out inappropriate accounting,” according to the Wall Street Journal.  Olympus shares fell 29% on November 8 in response to the news. 

Takayama confessed that Olympus hid huge security investment losses from the 1990s by paying inflated fees to its acquisition advisors, including $687 million to an obscure firm in the Cayman Islands in connection with its $1.9 billion acquisition of Gyrus in 2008.  The fees raised red flags since they amounted to approximately one-third of the acquisition price and such fees normally range between 1%-2%.  In addition, Olympus purchased three Japanese companies for a total of $940.1 million from 2006 to 2008 that had little revenue and seemed peripheral to the company’s core business, and then wrote off approximately $700 million of that value.

The Business Insider presented the following timeline summary of the relevant events regarding the Olympus scandal:

Early 1990s: After losing money due to yen strength, Olympus creates a special purpose vehicle to buy battered securities at market value. The cost to fund this scheme would increase over time.

2006-2008: Olympus spends $773 million to buy three tiny domestic startups, which had no relation to the company’s core business.

2008: Olympus pays a $687 million advisory fee on its $2.2 billion purchase of British company Gyrus.

October 2011: It takes new foreign CEO Michael Woodford just months to identify these fraudulent payments. Woodford is fired. The stock starts tanking. The chairman resigns.

November 2011: New president Takayama comes clean about the fraud. He blames former chairman Kikukawa as well as Vice President Hisashi Mori and internal auditor Hideo Yamada. The stock price closes down 70% in three weeks.

An official for Japan’s Securities and Exchange Surveillance Commission (SESC) said that “[g]enerally speaking, we will carry out the necessary inspection if there is suspicion of false statement in financial reports.”

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