By Hiroko Tabuchi
In June 1998, a disturbing rumor tore through trading floors in Tokyo: Olympus had suffered colossal losses on derivatives trading, punching a large hole in its balance sheet. The company’s shares spiraled down 11 percent in three days.
But Olympus categorically denied the rumor and went on to post record profits. All was well in the house of Olympus, the newly installed president, Tsuyoshi Kikukawa, assured investors.
That story came back to haunt the company this week after a shocking revelation, prompted by accusations by Michael Woodford, its ousted British chief executive turned whistle-blower: The company admitted it had hidden losses from the early 1990s using a series of inflated acquisition payments of over $1 billion, much of it made through obscure overseas funds, in a bid to clear its balance sheet.
Mr. Kikukawa has resigned in disgrace as chairman, along with two of his lieutenants, and could face criminal charges over the cover-up if securities laws were violated, analysts say. The company has lost three-quarters of its value, faces the possibility of delisting from the Tokyo Stock Exchange and may have a large financial hole to climb out of after all the losses are accounted for.
The Tokyo Metropolitan Police has begun an investigation into the cover-up, people familiar with the matter said Thursday. The investigation is led by the section of the force that handles financial crimes, and it will focus on charges of aggravated breach of trust, the people said, speaking anonymously because they were not authorized to speak with the media.
A Tokyo police unit that handles organized crime is also involved with the investigation, the people said. Media reports have suggested that Olympus worked with people with links to the Japanese mafia to help set up the transactions that masked losses.
The scandal is rocking corporate Japan not least because of the company’s succession of firings, denials and admissions; it is also certain to expose weaknesses in Japan’s financial regulatory system and corporate governance, analysts said.
Analysts also warned that more Japanese companies could be hiding losses they incurred in the country’s asset-and-stock-price bubble economy of the late 1980s. Companies routinely poured billions of yen into speculative trades — moves called “zaitech,” or “financial techniques” — that turned sour when the bubble burst in 1990.
“This has been two lost decades for corporate accounting. It’s easy to imagine companies hiding losses for years, waiting for financial markets to recover,” said Hideaki Kubori, a lawyer in Tokyo who specializes in corporate governance and compliance. “But the recovery never came.”
Exporters like Olympus were especially eager to prop up their earnings to counter a surge in the value of the yen after 1985, which crimped overseas profit.
“In that era, companies found they could make more money investing in land or stocks than you could in your main business,” said Hiroshi Osano, a professor at the Institute of Economic Research at Kyoto University.
But after the bubble burst, Japanese companies entered a painful decade of writing off losses. “Those that dealt with the problem straightaway struggled through the 1990s and pulled through,” Mr. Osano said.
The losses Olympus incurred, however, appear to have been so big that the company decided some finessing was in order. It was an enthusiastic investor in derivatives and other risky investments under Toshiro Shimoyama, president from 1984 to 1993, who told the Nikkei industrial daily newspaper in 1986: “When the main business is struggling, we need to earn through zaitech — though doing too much is no good.”
Though it is still unclear how, and how much, Olympus lost from its bubble-era investment spree, there are hints of excessive risk-taking. Until 1990, returns on investments propped up its profit; by 1991, it had written down 2.1 billion yen in securities valuation losses, the first of many write-downs.
In September 1998, three months after the rumors of the colossal trading losses, Olympus said it had written off part of a 45 billion yen investment in emerging market bonds. In its midterm earnings statement in October 1999, the company said it had booked a loss of almost 17 billion yen from trades including interest rate and currency swaps. The company also recorded a loss on a 2.9 billion yen investment in what turned out to be a Ponzi scheme run by the New Jersey firm Princeton Economics International.
Those write-downs, however, were the exception, not the norm, and Olympus now admits that it hid investment losses; a third-party panel of legal experts is still assessing how much.
“It is possible that if Olympus had booked all its losses, it would have become insolvent,” said Tsutomu Yamada, a market analyst at Kabu.com Securities in Tokyo. “So Olympus management decided to handle the losses off the books. They did it for the sake of the company.”
Although Olympus has not detailed the system by which it hid the losses, the local news media have speculated that it used a once common maneuver known as “tobashi.” In tobashi, translated loosely as “to blow away,” a company hides losses on bad assets by selling those assets to other companies, often dummies, only to buy them back later.
That allows the company with the bad assets to temporarily mask losses, said Mitsuhiro Fukao, a finance professor at Tokyo’s Keio University. Tobashi was banned in the early 2000s.
Tobashi was made infamous by Yamaichi Securities, which hid over 200 billion yen in losses. Yamaichi collapsed in 1997. It was Olympus’s preferred broker.
“The idea is that you pay off the losses later, when company finances are better,” Mr. Fukao said. “If this was the case at Olympus, the payments it made would have been made to finally settle” the loss, he said.
Olympus appears to have pushed to settle its tobashi dues from 2006 to 2008, when the local economy was picking up and corporate profits rebounding. “Business was finally strong enough to be able to foot a write-down,” said Mr. Osano at Kyoto University.
It was during those years that the company engineered the payouts that have come under scrutiny: $687 million in fees to an obscure financial adviser over Olympus’s acquisition of the British medical equipment maker Gyrus in 2008, a fee that was roughly a third of the $2 billion acquisition price, more than 30 times the norm.
Olympus also acquired three small Japanese companies from 2006 to 2008 with little in common with its core business for a total of $773 million, only to write down most of their value within the same fiscal year.
But at the end of 2008, the global financial crisis plunged companies into the red. Olympus booked a 115 billion yen loss in the fiscal year that ended in March 2009. Its loss attracted little attention, however, alongside equally dismal numbers from other struggling manufacturers.
With that taken care of, Olympus appeared ready to start a new chapter, said Mr. Yamada of Kabu.com. The chief executive who publicized the payments was promoted, he said, “to focus on growing the company. They did not expect him to start digging into the past.”
Experts now warn that Olympus faces a tough future. Depending on the size of its losses, the company could even fall into insolvency, warned Akira Ohira, an analyst at the credit research firm Tokyo Shoko Research.
“If the company is hiding even more losses that it is forced to book, it could soon run into severe financing problems,” Mr. Ohira said. “Right now, banks do not like the fact that the size of total losses is unclear.”
With such a sharp drop in its market value, Olympus could also become the target of takeovers by rivals, said Kabu.com’s Mr. Yamada. “Its endoscope business is highly successful, and there could be a bidding war.”
Executives involved in the cover-up are likely to be prosecuted if violations of securities and company laws are suspected, said Tatsuo Uemura, professor in securities regulation and corporation law at Waseda University.
“Olympus’s actions go far beyond a simple fudging of numbers. They used all sorts of schemes, acquiring firms and paying advisers,” he said.
The fallout from the scandal could also extend to auditors, who will need to explain why they failed to noticed such big losses for so long, Mr. Fukao said.
“You just can’t hide hundreds of millions of dollars in losses on your balance sheet, and for so long,” Mr. Fukao said. “There would have been signs. More people should have known.”
And it is likely that other companies will be suspected of similar behavior. “It will be hard to prove to foreign investors that Olympus is the only one,” Mr. Yamada said.
