A Rotten Picture at Olympus

By Bill Powell / Tokyo Monday, Dec. 12, 2011
    • Sculpture by Thomas Keeley for TIME

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    The unfolding Olympus scandal also has its roots in the 1990s — specifically in the bursting of the Japanese bubble. Before then, making money seemed effortless. Even blue-chip companies were taking funds from their traditional lines of business and pouring them into the ever rising stock and real estate markets — a practice known as zaitech trading. Olympus was one of them. Toshiro Shimoyama, who ran the firm from 1984 to '93, admitted as much. "When the main business is struggling, we need to earn through zaitech ," he told a press conference in 1986. But when the economy tanked — Japan's leading stock index, the Nikkei, peaked in December 1989 — zaitech profits became embarrassing losses for scores of companies, and the losses deepened as the decade progressed. That, by the company's own account, is what happened at Olympus.

    Like many other corporations, Olympus tried to hide its losses through financial sleight of hand. The idea was to pay someone, or some company, to acquire the bad investments, thus getting them off the books. When the markets recovered, the investments would then be transferred back to the original owner. This process became known as tobashi (to blow away). The problem, for Olympus and many others, was that the markets never did recover.

    What happened next is now at the center of the Olympus controversy. From 2006 to '08, according to the company, it paid almost $1 billion to acquire three Tokyo-based companies that had no revenue, no operating history and no relation to its core businesses. It then purchased, in 2008, British medical-equipment maker Gyrus for nearly $2 billion — a deal on which it paid an astonishing $687 million fee to two financial-advisory firms that later shut their doors. (None of these companies have been charged with wrongdoing.) Both Shuichi Takayama, current Olympus president, and a panel the company put together to look into the payments admit they were made to disguise zaitech losses. In effect, Olympus was trying to create ostensibly legitimate transactions on its books that were roughly equivalent to the size of those losses.

    The Tokyo prosecutor's office and the SESC suspect that Olympus made $6 billion in tobashi -related payouts over 10 years, much of it to entities suspected of criminal links. One such 2005 payment, first reported in the New York Times , involved $208 million that was used to acquire a tech company that authorities believe is a front set up by Yamaguchi-gumi, Japan's biggest yakuza group. The probe now needs to establish if Olympus chose to run its tobashi schemes through entities that may be linked to organized crime or if it was coerced into doing so. Investigators also believe it is likely that the amount Olympus paid out exceeds its zaitech losses. "Extortion," says one source close to the affair, "is what these guys do."

    At the meeting on Nov. 25, Woodford said, directors agreed that the money trail needed to be followed wherever it led. He said the firm hoped to restate its accounts by Dec. 14, factoring in all payments made from 2000 to '09, but he also emphasizes that evidence of yakuza links is "not yet definitive at all." If authorities are able to confirm their suspicions, however, it could mean the dismemberment of Olympus. Delisted, its businesses would be cheap acquisitions for a competitor. (Its valuation is already down almost 75% from where it stood in early October.)

    All of this may be why Woodford, who had insisted he wanted to return to help clean up the company, now says he's "not begging" for the job. His reluctance is hardly surprising. Investigators have only just begun sorting through the rot, but Olympus is already the epitome of a corporate-governance system that is at best complacent and, at worst, apparently far more sinister than that.

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