Arrests in Olympus Scandal

Point to Widening Inquiry

Into a Cover-Up
By HIROKO TABUCHI
TOKYO Arrests of seven people Thursday accused of involvement in
the $1.7 billion accounting scandal at Olympus, including the companys
former chairman and executive vice president, point to a widening
investigation into a cover-up ostensibly carried out by top management
with the help of a group of former bankers.

Tsuyoshi Kikukawa, who was the companys chairman until the scandal
broke last fall, was arrested in Tokyo as were two other former
executives on suspicion of having falsified financial statements, Tokyo
prosecutors said. Two former Nomura investment bankers who had been
previously mentioned by investigators were also taken into custody,
accused of violating securities laws, and so were two of the bankers
associates.

By aiming a spotlight on what critics say is Japans lax corporate

governance, and casting a shadow over one of the countrys former blue-
chip companies, the Olympus scandal has become a test of how far
Japan is willing to go to fight white-collar crime.

Under Japanese securities laws, the men arrested Thursday could each
serve up to 10 years if found guilty. But convictions for white collar-
crime have been rare in Japan, and courts have been known to hand
down suspended sentences even in egregious cases.

Executives linked to a $350 million accounting scandal at the major

Japanese brokerage firm Nikko Cordial in 2006 never served any jail
time, for example.

The former Olympus executives arrested, besides Mr. Kikukawa,

according to the prosecutors office, were Hisashi Mori, the former
executive vice president, who was fired after the scandal broke; and
Hideo Yamada, a former internal auditor, who resigned in the scandals
wake.

The Japanese authorities also arrested the two former Nomura bankers,
Akio Nakagawa and Nobumasa Yokoo, who ran Global Company, an
investment firm. The firms receipt of hundreds of millions of dollars in
advisory fees from Olympus in the early 2000s, according to
investigators, raised questions that eventually led to the accounting
frauds being detected.

Two men who authorities described as the bankers associates, Taku

Hada and Hiroshi Ono, were also arrested. Both had served on the board
of Global. Mr. Hada was also listed as a director for three companies that
Global is accused of helping Olympus to acquire, as part of the
accounting fraud.

Efforts to reach lawyers for the arrested executives for comment were
not successful.

The irregular accounting came to light in October after Olympus fired

Michael C. Woodford, a Briton who was the companys president and
chief executive. At the time, Mr. Kikukawa, still the chairman, attributed
the dismissal to Mr. Woodfords aggressive Western management style.

But Mr. Woodford subsequently went public saying he had been fired for
questioning a series of payouts made by the company from 2006 to
2008, and he provided what he said was evidence to the news media.
Investigation by securities and law enforcement agencies in Japan,
Britain and the United States ensued, as did an internal inquiry by an
outside panel hired by Olympus.

Mr. Woodford then began a campaign to return and lead a turnaround at

Olympus, whose share price has collapsed since the scandal broke. But
he abandoned that effort in December after the companys biggest
domestic shareholders sided against him an opposition that that some
foreign investors have said confirms their worst fears of corporate
Japans resistance to outsiders and change.
Mr. Woodford said Thursday in an e-mail that he felt vindicated by the
arrests. After going to hell and back, this is a day to remember, he
wrote.

Olympus said that it was aware of the gravity of the situation and was
cooperating fully with the authorities.

The arrests, particularly of Mr. Hada and Mr. Ono, place new scrutiny on
the obscure companies Olympus acquired in Japan from 2006 to 2008
for a total of almost $800 million.

Those companies Altis, a medical waste recycling company;

Humalabo, a facial cream maker; and News Chef, which makes plastic
containers were unprofitable and had little in common with
Olympuss main lines of business, which are cameras and medical
equipment. Olympus wrote down the bulk of their value within the same
fiscal year of the acquisitions.

Mr. Yokoos Global Company advised Olympus to make those

acquisitions. But company filings show Mr. Yokoo himself had set up
the three companies, in two cases using entities that had long gone
dormant. According to Olympuss investigative panel, the purchases and
write-downs were used to account for earlier financial losses Olympus
had never formally acknowledged.

Police officials are also investigating almost $700 million in fees

Olympus paid to Global Company as an adviser on Olympuss
acquisition of Gyrus, a British medical equipment maker, in 2008. That
fee amounted to more than a third of the $2 billion acquisition price, an
advisory payment more than 30 times the norm. The Olympus panel has
linked Mr. Nakagawa to that transaction.

Investors are now focusing on how Olympus will shore up its finances,
as well as who will lead the company as it battles to regain credibility. In
December, it restated five years worth of earnings, exposing a $1.1
billion hole in its balance sheet. That has led to speculation that it would
need to merge with or sell itself to a competitor to stay afloat.
On Monday, Olympus forecast a $410 million loss for its financial year,
which ends in March. Still, the current president, Shuichi Takayama, a
longtime Olympus executive, said the companys mainstay medical
equipment business remained robust and that the company might not
need to raise outside capital.

Also clouding Olympuss outlook is the possibility of being delisted

from the Tokyo Stock Exchange, an action that could devastate its
already battered share price. The exchange decided last month to keep
Olympus listed for the time being, saying a cover-up orchestrated by a
few executives did not merit a delisting. But the exchange indicated
Thursday that it could revisit that decision based on fresh evidence.

Mr. Takayama is expected to step down at a shareholders meeting

scheduled for April. He has been sued by Olympus over the scandal,
along with 18 other former and current executives.