TOKYO (Reuters) - A former Japanese banker who helped Japan’s Olympus Corp shift losses off its books decades ago appears to be a key figure behind its decision to award a massive advisory fee to a little-known U.S. investment firm, Japanese broking sources who know the ex-banker said.
Akio Nakagawa, who worked for the New York-based firm that won the stunning $687 million fee, has had business dealings with the once-venerable camera-maker for three decades, said the sources who were familiar with his activities and career.
As part of his relationship with Olympus and other corporate clients, Nakagawa also provided a type of financial engineering designed to temporarily shift losses from their books in a way that was popular from the early 1990s but was eventually stamped out by regulators in 2000, they added.
Japanese regulators first tried to outlaw the practice in 1992, concerned firms were using it to hide losses from investors, but loopholes and complex financial engineering enabled it to continue out of view until the end of the decade.
Olympus, engulfed by scandal since its sacked CEO-turned-whistleblower revealed the huge advisory fee last month, confirmed on Tuesday it had used this practice in the 1990s to defer publicly reporting losses on its securities investments.
In a statement that followed Reuters’ questions to the firm about its accounting practices and Nakagawa, Olympus also said that several M&A deals struck a decade later, including one linked to the fee, had been used to conceal the final writeoff of these long-standing losses.
In making the disclosure, Olympus gave no details on the losses concerned or how the M&A deals were used to finally cancel them out, and it said an independent panel was still probing the matter. It also fired its executive vice president, Hisashi Mori, saying he, former chairman Tsuyoshi Kikukawa and another executive were responsible.
Olympus continued to decline to address whether Nakagawa had played a role in its loss-shuffling, saying it did not disclose information about individual business relationships.
Nakagawa, who does not stand accused of any wrongdoing, could not be reached for comment. His whereabouts are unknown.
Olympus shares dived 29 percent after its announcement on Tuesday, and they have now lost 70 percent of their value since revelations of the $687 million fee surfaced last month.
Shareholders are still demanding to know why Olympus paid such a vast sum to a small U.S. outfit few had heard of. The broking sources say the company’s relationship with Nakagawa is likely to be part of the answer.
“He was seen as a useful guy by his corporate clients,” said a former executive at a major Japanese bank who says he met Nakagawa at the time he was engaged in so-called “portfolio reshuffling” on behalf of Japanese firms.
Companies used portfolio reshuffling in the early 1990s to avoid taking big paper losses on share portfolios which had crashed along with Japan’s 1980s bubble economy.
The idea was to craft transactions that shifted the losses from a parent company to another holding firm or a fund, a temporary maneuver to keep the losses off the parent’s books until, hopefully, share values recovered.
The practice thrived after Japan’s stock market crashed in 1990, though regulators outlawed loss-shuffling in its crudest form in 1992. More sophisticated forms continued until 2000 when Japan’s Financial Services Agency finally came to grips with the problem and sent a clear signal to the market by punishing the local securities arms of Deutsche Bank and BNP Paribas for helping clients defer bond-trading losses.
Nakagawa was head of equities for Wall Street bank PaineWebber in Japan in the early 1990s when shuffling losses around was at its peak, the broking sources said.
At that time, some Japanese firms were in denial about the collapse in stock values, wrongly believing they would bounce back in time for the transactions to be reversed.
And sometimes brokerages that had sold them the loss-making investments in the first place were willing to help clients in this endeavor, taking on their losses in the interests of keeping their business in the long term, the sources said.
Japan’s benchmark Nikkei 225 index has never come close to regaining its 1989 peak and the market still trades at about a quarter of its value back then.
WORLD’S LARGEST M&A FEE
Nakagawa worked at established investment banks until 1998 when he teamed up with Hajime Sagawa, an ex-colleague from his early days in the 1970s at Japan’s Nomura Securities. He joined Sagawa’s Axes America, according to a U.S. regulatory filing.
Sagawa, who has so far been the main focus of questions over the fee, lives in Florida and has also not been able to be reached for comment, although Sagawa’s wife has told Reuters he is traveling and has done nothing wrong.
In 2006, Olympus hired Axes to scout out acquisition targets and, two years later, agreed to pay Axes the world’s largest M&A advisory fee, according to Thomson Reuters data, for its $2 billion purchase of UK medical equipment firm Gyrus.
The fee was equal to a third of the purchase price, eclipsing investment banking industry norms of 1-2 percent.
Axes was hired as adviser due to Sagawa’s experience and network of staff, Olympus’s Mori had told reporters.
Axes negotiated to be paid the Gyrus fee in both cash and stock, and transferred the rights to the stock component to an affiliated firm, Cayman Islands-registered AXAM Investments, which in 2010 sold the stock back to Olympus for $620 million.
Sagawa also held himself out to be a director of AXAM, according to an internal Olympus document obtained by Reuters, though there is no evidence of Nakagawa being linked to AXAM.
The FBI and the Japan Securities Exchange Surveillance Commission are looking into this fee and other Olympus deals after ex-CEO Michael Woodford wrote to the authorities following his dismissal. He also alerted Britain’s Serious Fraud Office.
After his dismissal on October 14, Woodford said he had been fired for asking questions about the Gyrus fee.
Olympus says it sacked Woodford for his management style and misunderstanding of Japanese culture. The firm has declined to reveal the identities behind Axes. It says it doesn’t know their whereabouts.
Nakagawa already had business dealings with Olympus when he joined Drexel Burnham Lambert in 1988, and he kept Olympus as a customer as he worked for a series of Western investment banks in the years that followed, the sources said.
“He was one of the first generation to make the shift from Nomura to the foreign houses. He was like the migratory bird of Western banks,” said one Japanese securities industry source.
U.S. brokerage regulator FINRA’s records show that between 1977 and 1996 Nakagawa worked at Merrill Lynch, E.F. Hutton and Co Inc, Shearson Lehman Hutton Inc, Drexel Burnham Lambert and PaineWebber, before settling in 1998 at Axes America.
He was there until 2007, and also served for some years as the president of Axes Securities Japan, the records show.
Axes Securities Japan has since lost its securities dealing license and is now listed as Axes Japan. Axes Japan did not return calls for comment.
Nakagawa and Sagawa both started their careers at Nomura Securities, Japan’s top investment bank, and would later be colleagues at both Drexel Burnham Lambert and PaineWebber.
Banking industry sources who know both men believe Nakagawa would have been more directly involved in cultivating and managing Axes’ relationship with Olympus due to his long-standing business relationship with the company.
The Japanese practice of portfolio reshuffling was gradually banned by securities regulators during the 1990s, but securities industry sources say brokers found new, legal ways to provide the same service and keep good relations with corporate clients.
No public records are available for PaineWebber’s client deals during Nakagawa’s time there, but a 1992 regulatory filing suggests Olympus may have shuffled assets in a pattern consistent with methods used to avoid losses, according to investment bank sources asked to comment on the filing.
The document submitted to the Japan Financial Services Authority by Credit Suisse First Boston (CSFB) cited Olympus as recipient of a “scheme to enable the repurchase or resale of assets and liabilities from investment trusts.” The filing was made after the authority demanded CSFB disclose all of their client activity relating to postponement of losses.
Additional reporting by Kevin Krolicki in DETROIT; Editing by Abi Sekimitsu, Mark Bendeich and Dean Yates