Olympus Used Bermuda Fund To ‘Invent’ Assets
An investment banker raised concerns about dubious accounting at Japan’s disgraced Olympus Corp as long ago as the 1990s, after he discovered it was using Bermuda-based funds to “invent” assets and patch up its balance sheet, news agency Reuter reports [today [Nov. 15].
The banker’s concerns, which he says were discussed inside Wall Street bank PaineWebber, his employer at the time and the arranger of Bermuda schemes for Olympus, is one of the earliest red flags known to have been raised over the Japanese company’s accounting irregularities, which continued for two more decades.
The Olympus scandal went public last month when newly appointed chief executive Michael Woodford claimed he was forced to quit for blowing the whistle on unusually large advisor fees.
“The Japanese accounting regiment at that time was very strange,” said the banker, explaining he had raised questions because Olympus was exploiting a loophole in accounting rules that mislead investors about its real financial health.
He said the Bermuda investments had been arranged for Olympus by two Japanese bankers then working for PaineWebber and who remain at the centre of the Olympus accounting scandal.
“I think when they started they were taking advantage of some crazy Japanese accounting rules, so what they did at the beginning may well have been to the letter of the law, if not to the spirit of the law.”
Those rules allowed Japanese firms to avoid valuing unlisted investment funds at market values, in common with other nations back then, but the practice flouted overriding accounting principles, in force in Japan and elsewhere, that demanded firms present a true and fair view of their financial position.
Olympus, a once-proud maker of cameras and medical equipment, last week admitted to hiding losses since the 1990s and using part of $1.3 billion in unusual M&A payments to aid the cover-up. But the firm still has not said how much it concealed or how it managed to do this for so long.
Since the scandal burst out into the open a month ago, the company has lost 80 percent of its market value on concerns over its future. Japanese police and regulators are investigating the case along with the US Federal Bureau of Investigation.
The banker, who kept documents related to Olympus’s Bermuda investments from the time and gave copies to Reuter last week, said he was working at PaineWebber in 1994 when he first became concerned. He said he alerted the bank’s compliance officers.
He left PaineWebber in 1996, partly because he no longer wanted any involvement in the Olympus account. Around that time, the bank shut its Japanese equity business, a move the banker said was related to growing unease within PaineWebber about its role in helping Japanese firms like Olympus to mislead investors.
In the mid-1990s, PaineWebber was among several investment banks that crafted such techniques to hide investment losses, banking sources have told Reuters. Known as “tobashi” schemes, they were eventually outlawed in 2000, at the same time Japan adopted fair-value accounting rules.
“We had a pretty clear indication that this was the sort of business we didn’t want to be in,” the banker said.
He declined to be identified. He still works in the financial industry, but is not authorised by his employer to talk about Olympus.
UBS bought PaineWebber in 2000, and a Tokyo-based spokesman for the Swiss bank said it had no knowledge of any Olympus fund investments that had been brokered by PaineWebber before the acquisition.
The former PaineWebber banker said Olympus’s Bermuda investments, brokered by PaineWebber and managed by Bermuda-based hedge fund Olympia Capital International, were used to inflate the book value of assets on the company’s balance sheet and obscure the impact of its existing portfolio losses.
Olympia Capital founder Oskar Lewnowski, 80, who is Austria’s honorary consul to Bermuda, told Reuter his fund had done business with Olympus, but he did not recall the details.
There is no suggestion Olympia knew how Olympus was accounting for its investments in the Olympia funds.
The PaineWebber bankers who directly handled the investments for Olympus were Akio Nakagawa and Hajime Sagawa, now central figures in the scandal. The pair left PaineWebber after it closed its equity business in Tokyo and went on to run their own boutique operation which secured a whopping $687 million advisory fee from Olympus a decade later.
