Espicom View: The decision not to appeal the District Court's penalty is in Olympus' best interests. The company's new President, Hiroyuki Sasa, has been transparent about Olympus' past fraudulent activities since he came to the helm. By accepting this penalty, Sasa is sending a clear message that the company accepts its past wrongdoings, and appears to be doing its utmost to win back shareholder confidence. While Olympus' shares fell slightly in light of this latest ruling, this is likely a knee-jerk reaction from some investors. Overall, the company's share price restoration proves that Olympus has succeeded in winning back the trust of its investors.
Prosecutors from the Tokyo District Public Prosecutors' Office in Japan have charged Olympus at the Tokyo District Court, for breach of the Securities and Exchange Act and the Financial Instruments and Exchange Act, ie, for filing of annual securities reports with false statements. On July 3, the company received a judgement from the Tokyo District Court imposing a penalty of JPY 700mn, although the prosecution originally demanded a penalty of JPY 1bn.
In October 2011, Olympus was embroiled in a global scandal, when it emerged that the company had participated in fraudulent long-term loss-hiding activities. The activities were uncovered by the company's then new CEO, Michael Woodford, who raised questions over suspect acquisitions Olympus had made outside of its core business, as well as disproportionately high M&A fees associated with them. Of particular suspicion was the February 2008 acquisition of Gyrus ACMI, which carried a US$687mn middle-man fee, a sum equal to 31% of the purchase price.
On October 14 2011, Woodford was sacked as Olympus' CEO by the company's Board of Directors, allegedly over Woodford's insistence that the Olympus officials come clean about the series of questionable acquisitions totalling US$1.6bn. The deals had been approved by Woodford's predecessor, Tsuyoshi Kikukawa, as well as the Olympus Board, but in several cases, the parties receiving the sums were not identified in Olympus' financial statements. Woodford was replaced by Kikukawa, who was reinstated, but on October 26 2011, Kikukawa resigned, to be replaced by new President, Hiroyuki Sasa. On November 8 2011, Olympus was forced to admit that its accounting practices had been used to conceal losses, dating back to the 1990s. Kikukawa was blamed, along with the company's auditor and an Executive Vice President.
In light of the latest penalty by the Tokyo District Public Prosecutors' Office, Olympus has stated that it takes the judgement with the 'utmost seriousness' and has decided not to seek an appeal against this judgement. Accordingly, if the prosecutor does not lodge an appeal during the stipulated appeal period, the judgement on Olympus will be confirmed. If confirmed, a surcharge payment order imposed on the company in July 2012, amounting to approximately JPY 172mn, is expected to be cancelled under the stipulations of the Financial Instruments and Exchange Act. Olympus President Sasa made the following statement upon receiving the judgement of the criminal trial:
'I have accepted this judgement with the utmost seriousness. Upon being given the statements of the chief judge that in the sentencing consideration was given to the efforts made by the company together with its employees to recover trust in the company since its scandal came to light, I was once again filled with resolve. We will continue to reinforce full compliance and governance to renew ourselves as a business with the trust of our stakeholders, in particular, our shareholders and customers'.
In light of the loss-hiding scandal, President Sasa has implemented a 'Back to Basics' strategy for the company going forward, in an effort to promote transparency and win back confidence of its customers and investors. The company aims to return to the basic values it had at founding. Focus has been placed on restructuring governance, reviewing cost structures and rebuilding its business portfolio, with an emphasis on optimal allocation of management resources, among other strategies.
Olympus' shares plummeted in November 2011 as a result of the scandal, from US$28.25 on October 10, to US$6.99 on November 8. However, since Sasa's inception, Olympus' share price has been steadily climbing, reaching a high of US$33.70 in May 2013. Shares took a slight dip on July 8, when Olympus disclosed this latest prosecution, but overall, the company's shares have been restored to their pre-scandal value, which suggests investor trust and confidence in Olympus has returned.