Three former executives of disgraced medical equipment and camera maker Olympus Corp were arrested on Thursday over their role in a $1.7 billion accounting fraud, one of Japan’s biggest corporate scandals.
The three had been identified by an investigative panel, commissioned by the company, as the main culprits in the fraud, seeking to delay the reckoning from risky investments that Olympus, like many Japanese companies, made in the late-1980’s bubble economy.
Tokyo prosecutors arrested ex-President Tsuyoshi Kikukawa, former Executive Vice President Hisashi Mori and former auditor Hideo Yamada on suspicion of violating the Financial Instruments and Exchange Law, officials said in a statement.
Also arrested were four others, including former bankers Akio Nakagawa and Nobumasa Yokoo, suspected of helping the executives hide huge investment losses through complex M&A deals.
The arrests come as investors focus on who will run the once-proud company when its management steps down at an April 20 shareholders meeting, and whether Olympus will seek a capital tie-up to fix its balance sheet.
Olympus is banking on that April meeting marking a turning point in the scandal, with at least six of its 11-member board, including President Shuichi Takayama, set to resign.
His successor is likely to be one of three board members the panel said were not responsible for the cover-up – Masataka Suzuki, Kazuhiro Watanabe and Shinichi Nishigaki – said a source familiar with the matter, who did not want to be identified due to the sensitivity of the issue.
“The arrests of former executives won’t impact possible tie-ups with Terumo, Sony, Fujifilm and others,” said a sell-side equity manager at a Japanese firm, who did not want to be named as he is not authorized to talk to the media.
“Olympus continues to be very attractive to other companies because of its endoscope business.”
Last year, the investigative panel found Kikukawa, Mori and Yamada had played leading roles in a 13-year scheme to hide the losses, and they are among 19 executives Olympus is suing over the scandal.
The panel said it found no evidence of involvement by organized crime, despite speculation that “yakuza” gangsters were somehow involved in the cover-up scheme.
An Olympus spokesman said the company would cooperate fully with the investigative authorities. The company is also under investigation by law enforcement agencies in Japan, Britain and the United States.
Kikukawa’s condominium house was among 20 sites raided in December by prosecutors. Kikukawa, who took over as president in 2001, was reportedly aware of the details of the cover-up.
Nakagawa, who began his banking career at Nomura Securities, was a founding member of the Axes group, which was awarded a $687 million advisory fee for Olympus’ acquisition in 2008 of UK medical equipment firm Gyrus that was at the heart of the scandal.
Yokoo, another ex-Nomura banker, ran a consulting firm, Global Company, which was hired by Olympus in 2000 to scout for new businesses and steered investment into three small money-losing Japanese firms.
The scandal was exposed last October by then-chief executive Michael Woodford, a rare foreign CEO in Japan, who was sacked by the Olympus board after questioning dubious M&A deals that were later found to have been used to conceal the losses.
The affair also fanned concerns about lax corporate governance in Japan generally.
Olympus in December filed five years’ worth of corrected financial statements plus overdue first-half results, revealing a $1.1 billion dent in its balance sheet, triggering talk it would need to merge or forge a business tie-up to raise capital.
On Monday, it forecast a $410 million full-year loss due largely to its ailing camera operations, but its core endoscope business appeared unscathed by the scandal, and its president said the firm might not need outside capital.
Olympus shares were down 1.8 percent at 1,280 yen on Thursday in a flat overall market.