TOKYO/HONG KONG Akio Nakagawa, a 60-year-old semi-retired Japanese banker, had seemingly vanished.
Nakagawa was at the center of one of corporate Japan's biggest scandals: the decades-long cover-up of losses at Olympus Corp. Japanese and U.S. investigators wanted to quiz him about the record $687 million advisory fee his firms had received on a single deal from the famed maker of cameras and endoscopes.
When a reporter tracked him down in Hong Kong on a recent Sunday afternoon, he was in no mood to talk.
"Get out of here. Get out of here," Nakagawa yelled in English to the concierge staff as he waited for an elevator to his $13,000-a-month serviced apartment. "I don't want him here."
Until Nakagawa and other key players talk, many unanswered mysteries will remain in the $1.7 billion accounting fraud at Olympus.
For Olympus interactive graphics, see: r.reuters.com/pud35s
Two in-house architects of the cover-up resigned and have yet to speak. The whereabouts of Nakagawa's partner at a boutique investment firm is unknown. Briton Michael Woodford, who briefly served as Olympus CEO until being sacked this autumn after blowing the whistle on suspicious acquisitions, suggested Japanese yakuza gangsters may have been involved. No such links have yet been established -- or ruled out. It's unclear how many people inside and outside Olympus knew of the irregularities.
And no one has been able to pin down how much, if any, of the $1.7 billion was stolen. An independent panel appointed by Olympus reported this month it was mainly used to hide investment losses dating back a generation, though that probe's thoroughness has been called into question.
The case is in part a tale of blowback from the collapse of Japan's 1980s bubble economy. The panel's report, and separate interviews with more than a dozen people familiar with what happened, shed fresh light on how a secretive corporate culture sustained, and was ultimately undone by, a decades-long coverup.
At its center were an inner circle of Olympus executives who sought to delay the reckoning from mistakes that Olympus, like many companies, made in that seminal era of Japan's economic history. They were aided by a coterie of aggressive bankers who promised to buy them time. Three of the most important of these men, including Nakagawa, had cut their teeth at Nomura Securities, Japan's top brokerage and lord of the bubble era. Nakagawa left Nomura for a series of western investment banks where he specialized in "zaitech," or financial engineering, the bubble-era practice of playing the markets by manufacturing firms. And when the bubble crashed he and his partner, Hajime "Jim" Sagawa, practiced the art of "tobashi," accounting maneuvers that would make problems "fly away" off balance sheets and into overseas funds and shell companies.
Nakagawa has not responded to repeated attempts for an interview. Neither has Sagawa, now 64. At his waterfront home in Boca Raton, Fla., last month, Sagawa's wife Ellen said: "My husband was on Wall Street for many years and was well-respected. My husband is clean as a whistle, I assure you."
HIGH TECH TO ZAITECH
As the Nikkei stock average roared to new heights in the 1980s, investment bankers gained riches and new respect in Japanese society. They exerted increasing influence over corporate clients, relationships cemented at upscale bars and hostess clubs in Tokyo with thousand-dollar bottles of champagne and gold-dusted chocolate mousse deserts.
Brokers found willing customers in dying industries such as basic chemicals and textiles, persuading them better returns could be had investing in stocks or bonds than in core operations.
Manufacturing exporters, the engine of the Japanese economic miracle, proved a harder sell. Why would a company like Olympus, established in 1919, the world's biggest maker of endoscopes and a top producer of cameras, want to tie its fate to the mercurial financial markets?
That mindset changed after the Plaza Accord in September 1985, when major industrial powers agreed to devalue the dollar. The yen sharply appreciated, gutting Japanese corporate profits. Operating profit at Olympus in fiscal year 1986 halved and the company sold property to support its bottom line.
Suddenly the idea of using "zaitech," or financial engineering to pad earnings made sense to Toshiro Shimoyama, then president of Olympus.
"Until last year, I was against zaitech but conditions have changed," he told Nikkei industrial daily in November 1986. "Somehow we have to make up for this yen strength through non-operating income or our numbers will only worsen. We can no longer dismiss zaitech as an evil thing."
Hideo Yamada, a rising star in the Olympus finance department, and his understudy, Hisashi Mori soon began pouring money into riskier securities, such as structured bonds composed of interest and currency swaps, according to the panel's 230-page report.
Nakagawa had already won over Olympus as a client by 1988 when he joined Drexel Burnham Lambert, before the firm went under after illegal activities in the junk bond market. He had honed his skills as a salesman during prior stints at Merrill Lynch and E.F. Hutton.
"Nakagawa was a genius when it came to persuading people in the finance department," said an ex-colleague. "He convinced them it was the job of a finance department to create more money by investing the company's funds, and told them they should do that aggressively because it was their core business."
The Nikkei average peaked on the final trading day of 1989 and promptly went into a tailspin, losing nearly 40 percent the following year, crushing stock portfolios across the corporate sector.
An indication something had gone awry in Olympus came in July 1991, when it figured prominently on a list of companies receiving compensation from Yamaichi Securities, its main broker, to cover 1.2 billion yen in stock trading losses. The scandal rattled the brokerage industry and led to a ban on such reimbursement schemes, because they were only given to large and favored clients.
But shuffling bad assets off balance sheets was still within the rules. Yamada and Mori doubled down on Olympus' bets with investments in riskier securities, the panel report says, while moving loss-making investments to affiliates and offshore funds in tobashi schemes, bankers familiar with the matter said.
Among their investments were high-risk instruments that paid interest up front but required the buyer to pay the interest back if the bonds were in the red at maturity, exacerbating the loss, according to the panel's report.
Olympus was also one of several Japanese firms that bought high-yielding notes from an affiliate of a foreign-owned firm called Princeton Economics. Those notes later proved worthless, dealing Olympus and others huge losses in what prosecutors years later would call a giant Ponzi scheme.
Yamada and Mori could not be reached for comment through Olympus.
Masatoshi Kishimoto, who took over as president in 1993, knew of the loss-covering activities, the Olympus panel concluded this month, but did nothing to stop it. Kishimoto could not be reached for comment.
FOREIGN BANKS ROLE
By the mid-1990s the losses had grown to tens of billions of yen, threatening the financial health of the firm. To hide the deficit, Olympus turned to foreign banks, more versed in structuring deals involving offshore funds.
"It was a really lucrative business," said a former executive at a Western investment bank in Tokyo, speaking about tobashi transactions. "You could get 20 to 30 percent of the amount of losses being shuffled off the balance sheet as commission."
Enter Credit Suisse First Boston. It signed a contract with Olympus in January 1992 to shift losses into a money trust with a principal value of 14.7 billion yen, according to a client list provided to the financial regulator and seen by Reuters. It was similar to other tobashi schemes: bad securities were sold at book value to a trust off Olympus' balance sheet, thus disguising the true nature of the consolidated accounts. A spokesman for Credit Suisse in Tokyo declined to comment.
By then, Nakagawa had joined PaineWebber in Tokyo, in charge of equities and involved in the Olympus account, working with Sagawa. The two had worked at Drexel in the 1980s before Sagawa was named a managing partner at PaineWebber, according to a 1991 profile in Securities Week.
Executives of managing director class and above from all departments at PaineWebber would meet regularly to come up with solutions for clients pummeled by the bubble's collapse, according to a person who worked at the firm.
Nakagawa helped devise a scheme using Bermuda-based vehicles to "invent" assets and disguise securities losses that at one point reached 84 billion yen, according to an ex-colleague who showed documents of the transactions.
Olympus made sure its bankers knew they were appreciated. Late one December a large cardboard box filled with 50 cameras arrived at the PaineWebber office, a year-end gift for the staff, said a former assistant at the firm.
PaineWebber shut down its Japanese equity business in 1996, partly due to growing unease within the bank about its role in helping Japanese firms manage their balance sheets, the ex-colleague said.
After a two-decade career at some of the world's biggest investment banks, Nakagawa for the first time struck out on his own. He formed Axes (Japan) Securities in 1998 as the Japanese arm of a business called Axes Group. His long-time friend, Sagawa, had set up Axes America the year before.
Tobashi transactions and other debts triggered the collapse of Yamaichi Securities in November of 1997. It was a near cataclysmic event for the economy and markets, already rattled by the Asian financial crisis.
Japan's financial regulator finally outlawed tobashi schemes in 2000. That same year, Japan introduced new mark-to-market accounting rules, requiring companies to account for securities at market value instead of at their purchase price.
Olympus by then was staring at a 100 billion yen hole in its balance sheet, the panel report says, and so turned to an even-more complex tobashi solution. The company began working with Nakagawa, Sagawa and Nobumasa Yokoo.
Yokoo's ties with Olympus and its portfolio manager, Yamada, stretched back to his days at Nomura Securities in the 1980s, the panel report says.
At Nomura, where he was in charge of Olympus' account, he built a reputation for devising financial stratagems for clients before leaving in 1998 to set up his own consulting firm, Global Company, a person familiar with the matter said.
"Yokoo was an incredible salesman," said Shuhei Abe, a former Nomura banker who now heads hedge fund Sparx Asset Management.
Yokoo, Nakagawa and Sagawa helped Olympus craft what the panel called a "loss separation scheme" comprising various funds and bank accounts to get impaired securities off its balance sheet and out of the view of regulators, the panel report says.
It was built on three funding routes: a bank account in Lichtenstein, another in Singapore and investment funds in Japan. All three worked on the same principle: the anchor provided financing to "receiver funds," which bought bad assets from Olympus at book value and removed them from the Olympus balance sheet.
The three men also provided Mori and Yamada with important introductions. Yokoo set them up with people at LGT Bank in Lichtenstein, for instance, where they created an account for "secret M&A" using cash and Japanese government bonds as collateral, the report says. In an email statement, LGT said it cooperated with the panel but declined further comment.
Having hived off the losses to offshore vehicles, Olympus set out to find companies to buy. The idea was to put large values on the acquisitions, circulate the money spent on them back to the receiver funds and close out the accounting loop, the report says.
VENTURE CAPITAL FUND
In March 2000 Olympus invested 30 billion yen into a venture capital fund run by Yokoo called G.C. New Vision Ventures L.P. One of his first targets was ITX, a technology incubator. G.C. New Vision invested 2.3 billion yen in ITX ahead of a planned initial public offering of ITX shares. ITX was meant to reap profits for Olympus as a central vehicle in the loss-covering scheme. That plan backfired when the IPO flopped in 2001, the panel report says. But Olympus eventually bought all the ITX shares for at least 60 billion yen.
Yokoo's older brother, Akinobu, was ITX CFO at the time, and would later rise to ITX CEO and a senior post at Olympus in 2005. Akinobu, now president of an aviation equipment firm, saw no conflict of interest because he didn't know his younger brother was behind the fund.
"This doesn't have anything to do with me," Akinobu told Reuters, adding that he didn't think his younger brother had done anything wrong. He said Nobumasa was likely in Japan but he didn't know exactly where he was.
THREE OBSCURE FIRMS
Between 2003 and 2005, G.C. New Vision found the three obscure, loss-making Japanese firms into which Olympus would eventually invest $773 million: medical waste recycler Altis, cookingware maker News Chef and health food firm Humalabo. It then quickly wrote down the investments.
Yamada and Mori had by then risen to the executive suite at Olympus. They needed one more big deal to finish off hiding the bubble-era losses, which had only grown, the panel report says.
Olympus was coming off a strong year financially in 2004 with a 63 billion yen operating profit. The president then, Tsuyoshi Kikukawa, had declared a strategy of acquisitions to grow the firm. He was also aware of the loss-covering plan before assuming the top job in 2001, the panel report said.
"We have plenty of money. But if there is a big target that requires more there are various ways to procure funding," Kikukawa told Reuters in March 2005. "The most important thing is finding the target then you can worry about funding, not the other way around."
Olympus announced a "big target" in November 2007 -- the $2.2 billion acquisition of British medical device maker Gyrus. The bill for Gyrus would be far more expensive, however. Nakagawa and Sagawa's firms were given a $687 million advisory fee for brokering the deal -- a fee about 30 times the industry norm.
In fact, they pocketed far less, about 3.5 billion yen, according to panel head Tatsuo Kainaka. The rest was used to help close out the receiver funds, which was finally completed with a 31.5 billion yen payment to Olympus in March 2011 from a Cayman-based vehicle called SG Bond Plus Fund.
CEO TURNS WHISTLE-BLOWER
The oddities on Olympus' books were turned up by a little known investigative magazine called Facta. It raised questions in a July article about the acquisitions of Altis, News Chef, and Humalabo, and highlighted the hefty premium Olympus paid for Gyrus.
Woodford, a 51-year-old Briton and newly minted president of Olympus, requested a lunch meeting with Chairman Kikukawa and Vice President Mori in August to ask them about those allegations. The meeting was "good humored," Woodford recalled in a recent interview, until he produced a copy of the Facta article, and "the mood changed markedly."
Kikukawa told him he had decided Woodford should not be told about the allegations because Woodford was "too busy" dealing with other matters. "You're the president," Woodford says Kikukawa told him. "I told people not to tell you."
Woodford wrote six letters to Mori and Kikukawa in the ensuing weeks demanding answers about the transactions, while commissioning PriceWaterhouseCoopers to investigate. On October 14 he was dismissed by the Olympus board.
Days later, Olympus admitted it had paid the exorbitant advisory fee and overpaid for three acquisitions, and said it would set up an independent panel to probe the scandal. With the FBI sniffing around the case, Chairman Kikukawa quit on Oct 26.
Kikukawa, Mori and Yamada are now awaiting possible criminal charges.
NICE OLD MAN
Before the scandal broke, Nakagawa was living a quiet life, said a person with knowledge of his business and personal life in Hong Kong. There he is registered as a shareholder in an outfit called PromoTech Investment Limited along with an old colleague from Axes Japan.
Nakagawa had been taking extra care of his health following surgery for an aneurysm a few years ago, the person said. His routine included hiking in the hills after work and lots of sushi, often at the Nadaman Japanese restaurant near the Pacific Place condominium where a reporter found him.
"He was half-retired," the person said. "He was a nice old man." And he remains out of the public eye. A Reuters reporter who re-visited his apartment last week was blocked by a concierge. "He's not here anymore," the concierge said. "He's already left." (James Pomfret reported from Hong Kong; additional reporting by Emi Emoto, Tim Kelly, Reiji Murai, Maki Shiraki, Yoko Kubota and Chikafumi Hodo in Tokyo; Kevin Gray in Miami and Kirstin Ridley in London)
(Editing by Bill Tarrant and Mike Williams)