Espicom View : We have previously stated that Olympus should expect further backlash related to its past fraudulent activities, so a prosecution from the UK's Serious Fraud Office comes as no surprise, following the penalty imposed on the company by prosecutors in Japan earlier this year. However, this latest prosecution represents a landmark case for the Serious Fraud Squad, which has never prosecuted a whole company before. The lack of precedent makes it difficult to predict the level of fine the organisation will impose on Olympus; however, we expect that the company will accept whatever fine the UK Court imposes on it as a further expression of Olympus' new executive team's regret at the company's past activities, as well as President Hiroyuki Sasa's strategy to promote transparency and win back customer and investor confidence.
The UK Serious Fraud Office (SFO) has completed an investigation of Olympus and its subsidiaries. In October 2011, it was discovered that the company had been engaged in deferring the posting of losses on investment securities since around the 1990s. Additionally, both fees paid to advisors and funds used to buy back preferred shares in relation to Olympus' February 2008 acquisition of UK-based Gyrus, as well as the purchase funds for the acquisition of three domestic new business companies, had been used to resolve unrealised losses on investment securities by deferral in the posting of losses.
The Olympus-Gyrus scandal was uncovered when Olympus' British CEO, Michael Woodford, blew the whistle on the Japanese company regarding the high amount of money being spent on acquisitions. Woodford raised questions over a US$687mn advisory fee that was paid to a third party, relating to Olympus' US$2.7bn acquisition of Gyrus. Three former Olympus executives were prosecuted in July 2013, and the company was fined US$7mn by the Tokyo District Public Prosecutors' Office, which Olympus has stated it will not appeal.
The SFO began its investigation into the activity in October 2011, and Olympus has stated that it has fully cooperated with the organisation. Having completed its investigation, the SFO has decided to bring a prosecution against Olympus and Gyrus, on charges of breaching Section 501 of the UK Companies Act of 2006. Section 501 provides the charges against certain persons who made misleading or deceptive explanation to the auditors in connection with financial accounting of a UK company. The charges against Olympus and Gyrus allege that certain representations made to the auditors of Gyrus in the documents related to Gyrus' financial accounts for FY2009 and FY10 were misleading, false or deceptive in a material particular. Olympus' shares fell by more than 6% on September 4, the day the SFO's prosecution intentions came to light.
However, due to the leadership of its new executive team, which is keen to promote transparency within Olympus' operations, the company is currently operating at profit, with a share value matching that of pre-scandal rates. The company's confidence was further bolstered in September 2012, when Sony invested approximately US$500mn in exchange for an 11.46% stake. The investment made Sony Olympus' largest shareholder.
Olympus has stated that the SFO's prosecution marks the first time the organisation has prosecuted a company for fraud, rather than an individual. Court proceedings are scheduled to begin in September, and after a hearing before the Magistrates' Court, it is expected that the matter will be transferred to the Crown Court.