FBI probing Olympus fee; shares tumble

TOKYO Mon Oct 24, 2011 1:21pm EDT

Michael Woodford, the former chief executive of Olympus Corp, poses for a photograph in London, October 19, 2011.   REUTERS/Alex Smith

Michael Woodford, the former chief executive of Olympus Corp, poses for a photograph in London, October 19, 2011.

Credit: Reuters/Alex Smith

TOKYO (Reuters) - The FBI is investigating the massive advisory fee involved in Olympus Corp's takeover of a British company, a person familiar with the probe said, in a deepening scandal that has wiped out more than half the company's value.

The British CEO who says he was fired for questioning the $687 million payment to advisers in the $2.2 billion takeover of medical equipment maker Gyrus in 2008 has called on authorities in both Britain and Japan to also investigate the payments.

The endoscope and camera maker said last week it would commission its own independent review of past acquisitions, although the ousted CEO, Michael Woodford, said the company was playing for time. It carried out a review in 2009 that concluded no management wrongdoing, documents he provided show.

The 92-year-old company is struggling to contain the crisis following Woodford's revelations. Olympus acknowledges it made the advisory fee payment and denies any wrongdoing. But it has not explained why it agreed to a fee that amounted to about a third of the value of the takeover when such fees normally come to about 1 percent. At $687 million, the fee is the largest on record.

Woodford, 51, who spent three decades at Olympus, has identified the advisory firms involved in the takeover as New York-based AXES America LLC and AXAM Investments Ltd in the Cayman Islands.

The Federal Bureau of Investigation in New York is currently investigating the payment, according to the person familiar with the investigation. This person was not authorized to speak publicly as the investigation is ongoing.

No additional details on the probe were immediately available.

The New York Times first reported that the FBI was investigating the Olympus scandal.

NO ILLEGAL, UNJUST CONDUCT

Documents provided by Woodford show Olympus appointed a three-person external panel in May 2009 to look into the Gyrus takeover and three other deals. The panel found no problems with the way the acquisitions was conducted.

"Please ask Messrs Kikukawa and Mori why they need another 'independent' third party committee investigation?" Woodford said in an email to Reuters, referring to Chairman Tsuyoshi Kikukawa and senior executive Hisashi Mori.

The 2009 report was issued before Olympus paid the bulk of its huge fee to AXES and AXAM, Woodford's documents show.

Olympus said it was checking whether there was a third-party review conducted in 2009. In a statement on Monday, it denied Woodford's assertion that it switched auditors from KPMG AZSA & Co to Ernst & Young in 2009 because of a disagreement on accounting for the Gyrus acquisition.

KPMG had advised Olympus against making part of the advisory payment for the Gyrus deal in preferred stock, Woodford says in a letter dated October 11 to the Olympus board. The preferred stock ballooned in value and made up the bulk of the advisory payment.

Olympus said it switched auditors because KPMG's contract had come to an end, although Woodford's documents suggested "substantial difference in views" on some aspects of the Gyrus acquisition.

Olympus shares closed down 10.7 percent at 1,099 yen each on Monday. They hit an intraday low of 1,012 yen, their weakest price since March 1998.

Traders attributed the selling to long-only investors bailing out of the stock following the report of the FBI probe and reaction to more brokerages suspending their ratings recommendation on the firm.

"Many players seem to expect it to fall to around 700-800 yen," said a trader at a Japanese brokerage.

At 700 yen, it will be at about 10 percent above its book value.

The Tokyo Stock Exchange said on Monday it is urging Olympus daily to disclose more information about the controversial payments. It will look carefully at any third-party probe on the case.

Last week, Olympus bowed to investor pressure and announced it was setting up an external panel of lawyers and accountants to probe its past M&A deals.

Harris Associates, a Chicago-based group that holds 2.5 percent of Olympus shares, said the move was a promising sign.

"We think it's important that the panel members have no ties to Olympus, that they be given complete access to the company's books and records, and that they work quickly to get answers to our many questions," said Chief Investment Officer for International Equities David Herro.

Olympus has not given details on the identities of the advisers in the Gyrus takeover other than acknowledging that the fees were paid to two obscure firms, AXES and AXAM Investments.

Woodford, who is now in Britain, has sent dossiers on the Gyrus payments to British and Japanese authorities.

Olympus said it fired him after clashes over management style, while Woodford said he was dismissed for calling on senior executives to resign over the excessive payments.

(Reporting by Lisa Twaronite and James Topham in Tokyo, Basil Katz in New York and Jeremy Pelofsky in Washington, DC; writing by Isabel Reynolds; editing by Edmund Klamann, Miyoung Kim, Neil Fullick and Andre Grenon)

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Comments (6)
QuietThinker wrote:
White collar crime most certainly. Officers of the company ripping off their shareholders. That was shareholder money being siphoned off for the benefit of a few. Shareholders take another big hit, as if top managers weren’t already ripping off the shareholder with excessive salaries approved by their cronies on the board. How long can capitalism stand with such mistreatment of shareholders?

Oct 24, 2011 9:53am EDT  --  Report as abuse
Seerthlapth wrote:
Olympus appointed the first “independent” panel to oversee the transaction and that went spectularly. Now they’re trying the same trick again with their own “independent” panel to review the transaction. How f’ing stupid do they think investors and regulators are? The only way a review would have any credibility at all would be at the hands of regulators. And even they can be manipulated by political hacks in the pockets of people who are sitting on $687 million in ill gotten gains. Yet more proof that we don’t have a free market capitalist economic system. We have a corrupt privileged aristocracy helping themselves to anything and everything including political influence to make sure this sort of financial rape is technically “legal”. Time to drag the cockroaches into the light. Kudos to Michael Woodford for calling attention to this whatever his motives.

Oct 24, 2011 10:22am EDT  --  Report as abuse
Oolith wrote:
This is an example of an honest person within a corrupt organization that has become empowered to take action. In corrupt organizations, there are honest people that given an opportunity they will take action against corrupt practices.
The Fraud Triangle describes three factors that are present in every situation of fraud:
Motive (or pressure), Rationalization, and Opportunity
In this case, removing the pressure empowered an honest person to report observed corruption. Prior to the Culling Corruption Campaign (mistakenly called Arabian Spring – The Arabian Spring is vague term that allows a certain distance from the Culling Corruption Campaign phenomenon), a CEO would likely be cowed and treated contemptuously in pulp media for being forthright.

Oct 24, 2011 8:09pm EDT  --  Report as abuse
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