Japan's Olympus admitted on Tuesday it hid losses on securities investments dating back to the 1980s, succumbing to weeks of pressure to explain a series of baffling transactions that have put the future of the firm in doubt.
The revelations by the 92-year-old maker of endoscopes and cameras would appear to vindicate ex-CEO Michael Woodford, who has staged a campaign since being sacked on Oct. 14 to force the firm to come clean on $1.3 billion in questionable payments.
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Olympus President Shuichi Takayama blamed Tsuyoshi Kikukawa, who quit as president and chairman on Oct. 26, Vice-President Hisashi Mori and internal auditor Hideo Yamada for the cover-up, saying he would consider criminal complaints against them.
"I was absolutely unaware of the facts I am now explaining to you," a subdued Takayama, who had staunchly defended the deals when he took over from Kikukawa last month, told a news conference packed with some 200 journalists.
"The previous presentations were mistaken."
Olympus said it had found that funds related to its $2.2 billion purchase of British medical equipment maker Gyrus in 2008, which involved a huge advisory fee of $687 million, as well as payment of $773 million for three domestic firms, were used to hide losses on the securities investments.
The investment in the three domestic firms was largely written off a few months after the deals closed.
The disclosure leaves Olympus, its directors and its accountants open to possible criminal charges for suspected accounting fraud and shareholder suits, lawyers and analysts said, raising questions about the future of the firm, founded in 1919 as a microscope maker
"This is very serious. Olympus admitted it has made false entries to cover its losses for 20 years. All people involved in this over 20 years would be responsible," said Ryosuke Okazaki, chief investment officer at ITC Investment Partners. "There is a serious danger that Olympus shares will be delisted. The future of the company is extremely dark."
The announcement sent Olympus shares tumbling 29 percent to a 16-year low on Tuesday. The company has lost 70 percent of its value, or $6 billion, since it fired Woodford, who had questioned the deals.
Olympus said it would decide whether others were responsible after further investigation. Mori was sacked earlier in the day while the internal auditor offered to resign.
The Olympus affair -- initially given little attention by most domestic media -- is the biggest corporate scandal to hit Japan since a series of scandals at brokerages in the 1990s including one that led to the demise in 1997 of Yamaichi Securities, then the country's fourth largest brokerage.
"It's big. Olympus was supposed to be a paragon of corporate society," said Darrel Whitten, managing director at Investor Networks Inc, an investor relations consultancy.
The company said in a statement the details of the scheme came to light as part of its cooperation with a third-party panel set up to investigate the transactions. That panel was announced a week ago.
Takayama said he believed the loss-postponement scheme had started before the 1990s.
The company said it had funnelled money related to the acquisitions through various funds and other measures to defer posting the losses, similar to practices seen in the days after Japan's bubble economy of soaring asset prices burst in 1990.
Nippon Life Insurance, the biggest shareholder in Olympus, urged the company to be more transparent in its explanations.
"The members of the board appear to have breached their fiduciary duty owed to the company and to the shareholders," said Keiji Isaji, an attorney with K&L Gates law firm in Tokyo.
A spokesman for the Tokyo Stock Exchange said the bourse needed more information before deciding whether to put Olympus shares under supervision, a step towards possible delisting.
The TSE spokesman said Olympus needed to examine the size of the deferred losses and whether they had an impact on shareholder investment decisions before taking further action.
Lawyers said that if Olympus were found to have knowingly falsified its consolidated financial statements that were deemed material in nature, its representatives could face up to 10 years in prison or a fine of up to 10 million yen.
Legal experts also said outside auditors might be criminally liable.
Reuters reported last week that Olympus replaced its auditor in 2009 after a disagreement over how to account for the acquisitions.
In a confidential internal document obtained by Reuters, Kikukawa, the firm's then president, wrote to Olympus executives in the United States and Europe, revealing there had been a disagreement with auditor KPMG which he did not plan to disclose to the stock market.
In May 2009, Kikukawa announced the contract with KPMG had ended and that another global accounting firm, Ernst & Young, would take over. Ernst & Young said it had no comment on the Olympus disclosure.
Olympus has come under increasing pressure to disclose more information to address shareholder concerns in an escalating scandal that has prompted law enforcement agencies in Japan and the United States to investigate.
The company suddenly fired Woodford on Oct. 14, saying he failed to understand the company's management style or Japanese culture.
Woodford said he was forced out for questioning the $687 million paid for advice on the $2 billion Gyrus acquisition, the biggest fee in M&A history and a departure from the 1-2 percent fee normally applied to the value of such deals.
He also questioned the acquisitions of the three small Japanese firms.
Woodford told Reuters on Tuesday the Olympus board should resign. "The position of the board and non execs is untenable now," Woodford said by phone from London.
He added that it was his "desire" to return to manage the endoscope maker should shareholders wish to reinstate him.
Prodded by institutional shareholders, Olympus has named six men, including a former Japanese supreme court justice, to investigate the past M&A deals.
Olympus, founded in 1919 as a pioneering Japanese manufacturer of microscopes, branched out into cameras in the 1930s and two decades later expanded into gastrocameras, which became its mainstay profit earner as its endoscopes captured a 70 percent share of the global market. ($1 = 78.030 Japanese Yen) (Additional reporting by Chikafumi Hodo, Tim Kelly; Antoni Slodkowski: Writing by Linda Sieg; Editing by Michael Watson, Edmund Klamann and Miyoung Kim and Dean Yates)