Foreign Olympus had a market capitalization of 1.5 trillion Japanese Yen equivalent to about 20 billion US Dollars making it one of the largest and most successful corporations in Japan. They became a household name throughout the 1990s and 2000s due to its extremely successful line of digital cameras under the leadership of longtime chairman to Yoshi Kikawa. Olympus Diversified Well, Beyond Digital Cameras through a series of mergers and Acquisitions Olympus also became a leader in the medical device industry, becoming world renowned for their digital endoscopes in 2001. Kiku Kawa approached Michael Woodford a British national who was in charge of Olympus's European operations and asked if he would be willing to move to Tokyo to take a new role as the company's Chief Operating Officer Excited by the opportunity, Woodford agreed.

In a heartbeat, six months later, he was promoted again to CEO of the entire company. The appointment of Woodford was noteworthy as it is extremely rare for Japanese companies to hire foreigners to senior leadership positions, let alone CEO When first taking the job, Woodford thought he had his life made. Who wouldn't want to be the CEO of a 20 billion dollar company and take home a multi-million dollar salary? But when he moved to Tokyo Woodford had no way of knowing what he was getting into. Woodford was appointed as CEO on October 1st 2011.

at the time, Olympus's share price was around 600. Yen Just two weeks later, he was fired by the middle of November the share price had declined by 80 to 115. Yen during his 14-day stint as CEO Woodford uncovered a 1.7 Billion Dollar corporate fraud as well as apparent connections to organized crime groups within. Japan After being fired, he immediately flew back to London as he claimed that he feared for his life.

So what happened? How could one of Japan's most valuable and well-respected corporations collapse so quickly? Thank you! To understand the Olympus fraud, we have to go all the way back to the 1980s. Following monetary reforms in 1985, the Japanese Yen appreciated significantly almost doubling in value against the US dollar. By the end of the decade, this was a major disaster for export-focused companies. including: Olympus Their revenue from selling cameras and other products overseas was effectively cut in half, but all of their expenses within Japan remained unchanged.

Facing dwindling profits in their core exporting businesses, many Japanese companies started investing in the financial markets in an attempt to boost their profits. They speculated on the value of stocks, bonds, real estate, and in some cases even Financial derivatives. Olympus was one of the most aggressive Japanese companies in this regard. By the late 1980s, the company had basically morphed into a hedge fund that sold a few cameras on the side.

They started off buying safe Investments like government bonds, but as their core businesses continue to decline, they began making increasingly risky Investments including stock market Futures contracts, interest rate swaps, currency swaps in just about every other exotic Financial instrument they could get their hands on. The problem was: well: Olympus was great at making cameras. they weren't very good at investing. As an example of just how bad Olympus's investing Acumen was, in the 1990s, they invested 2.9 billion yen into a fund called Princeton Economics International run by The self-taught Economist Martin Armstrong Armstrong Claimed that economic catastrophes happened every 3141 days which is 1 000 times the number Pi He formed investment strategies based on his understanding of this economic cycle.

As you've probably already guessed, Armstrong's economic predictions were little more than pseudoscience as investment fund turned out to be a Ponzi scheme. Olympus's 2.9 billion yen investment was a near total loss. but this was just the beginning of Olympus's investment failures. In 1991, the Japanese stock and real estate markets collapsed.

Olympus had massive leverage derivatives positions which incurred huge losses. As a result, by 1995, Olympus had already lost tens of billions of Yen on his speculations. Instead of facing up to the reality, they doubled down in an attempt to make back their losses. They put on new positions and complicated interest rate derivatives, which also ended in disaster.

During the 1990s, Olympus's shareholders had no idea about the company's growing losses. This is because they use cost-based accounting, meaning that they recognized the value of their financial assets as the price they paid for them. They would only have to recognize a loss if they sold their positions. Thus, even if their derivatives positions had become worthless, so long as they didn't sell, they didn't have to recognize the laws.

In 1998, the Japanese Regulators announced new accounting standards whereby companies had to Value their assets on a mark to Market basis. This was a massive disaster for Olympus. By this point, they had accumulated 95 billion yen of unrealized losses, which would have to be recognized all at once. If they reported such a massive loss.

the entire executive team and board of directors would probably be fired. Olympus's senior management team needed some way to cover up the losses. Two members of Olympus's financial Planning Group Hideo Yamada and Hisashi Mori were tasked with formulating a cover-up. They reported directly to Olympus's President Masatoshi, Kishimoto who was aware and approved of their activities foreign.

In order to avoid reporting the losses, they need to remove the financial assets from Olympus's balance sheet. So Yamada and Hisashi created a shell company in the Cayman Islands called Central Forest Corporation Central Forest would buy the financial assets from Olympus at Book value. so Olympus would not have to recognize a loss to do this. Central Forest somehow needs to come up with huge amounts of money.

Luckily, they were able to find a bank in Lichtenstein called LGT bank which was willing to help. Here's how this game worked: Central Forest Corporation Buys Olympus's near worthless Financial assets for 21 billion yen Central Force Funded this purchase with a 21 billion yen loan from LGT Bank in Liechtenstein. Remember that Central Forest is a shell company with no revenues or real operations. It has no way of paying back the loan.

The only reason that LGT was willing to lend so much money to Central Forest is because Olympus posted 21 billion yen worth of government bonds as collateral. Central Forests would inevitably default on the loan because it has no Revenue. Thus, Olympus will eventually have to recognize a loss when LGT seizes their collateral. but with this method, they were able to Kick the Can down the road.

Even after this game, there was still roughly another 75 billion yen worth of losses that he needed to cover up. To do this, they made a number of seemingly strange Acquisitions including a company called News Chef which made microwavable cookware quite a strange acquisition. For a company whose core businesses are cameras and medical devices, they artificially inflated the purchase price for these Acquisitions so that they could gradually hide their prior losses in the inflated amortization charges. Basically, they were creating an extremely complicated house of Cards, using just about every trick in the book to hide the losses.

In 2001, company president Kishimoto stepped down and was replaced by two Yoshikawa, a longtime employee of Olympus who had risen through the ranks over the years. Kiku Kawa was initially not involved in covering up the company's losses, but when he became president, he was informed about everything and helped facilitate the fraud going forward. A lot of the financial tricks that Yamada and Mori employed to cover up the losses amounted to kicking the can down the road. For example, the 21 billion yen of collateral that they pledged to LGT was eventually called and they needed a way to explain their decrease in cash if they wanted to resolve the issue once and for all, they needed a way to discreetly recognize losses at the level of the parent company.

In 2007, Olympus acquired a British medical device company called Gyrus for 630 Pence per share, amounting to a total purchase price of 935 million pounds. At the time, 935 million pounds was equivalent to about 2 billion. US Dollars Olympus Hired a company called Aksam as their financial advisor and paid them a 675 million dollar fee for advising on the acquisition. When a company does an acquisition, it's common for them to hire an external advisor to perform due diligence and help structure the deal.

Typically, The Advisory fee would amount to around one percent of the transaction value. For the two billion acquisition of Gyrus, a reasonable feat would have been around 20 million dollars. The 675 million dollar fee paid to Aksam was extremely unusual to say the least. For a large deal like this one, you would normally hire well-established Investment Bank like Goldman Sachs or JP Morgan But instead Olympus hired a firm called Aksam that nobody had ever heard of and was registered in the Cayman Islands.

So what was going on? Axam was shell company that Olympus had set up to launder the money. The almost 700 million dollars that they paid to Aksam was ultimately used to pay off the debts that they had incurred previously to cover up their losses from the 90s. So the whole Gyrus acquisition and advisory fee was just an extremely convoluted way to recognize a 700 million dollar loss that they should have recognized 15 years prior. Foreign was a longtime employee of Olympus and eventually worked his way up to become the head of their European division.

Impressed by his performance. Kiku Kawa promoted him to become Group CEO. Six months later, he was promoted again to become group CEO on October 1st, 2011.. Woodford Thought that he was on top of the world.

In the span of less than one year, he went from a regional head to becoming CEO of the entire company, but he would soon find out that things were not how they seemed. Within days of becoming CEO somebody forwarded Woodward an article from a Japanese magazine called Facta talking about the suspicious 700 million advisory payment in relation to the Gyrus acquisition. The article also alleged that Olympus had connections to organized crime groups within. Japan.

These claims were never substantiated and were probably just the case of tabloid speculation, but Woodford looked at the records and confirmed that Olympus had indeed paid almost 700 million dollars in advisory fees to came an island-based accent he could see that this was very suspicious, so he immediately called Kiyukawa to ask him what was going on. Kishukawa said that there is nothing to worry about. Still unsatisfied, he set up a meeting with Kihikawa, but Kikawa refused to tell him anything, not getting any answers. Woodford instead went to Hisashi Mori to demand answers but Mori also refused to talk with him Mori even said to Woodford I worked for Kikawa Not You By this point, Woodford realized that he wielded no real power despite the fact that he was technically CEO Kiyukawa still had absolute control on October 14th just two weeks after taking over as CEO Woodford sent a letter to the company's board of directors explaining his concerns.

He was promptly fired by Kikawa. he was the chairman of the board Woodford started giving interviews and making public statements about a suspicious 700 million dollar transaction. Investors completely lost confidence in Olympus and its share price started falling Like a Rock losing 80 percent of its value over the next month. While Kikawa initially denied any wrongdoing, an independent investigative committee uncovered the entirety of the fraud and the cover-up going all the way back to the 1990s.

Kikawa, Yamada and Mori all resigned in disgrace and pled guilty to their involvement. They were each given suspended prison sentences, which effectively amounts to probation. None of them ever served time in prison. While the exposure of the fraud initially caused Olympus's share price to tank, the entire board of directors was replaced and the company made an impressive comeback thereafter.

Most of the losses from the 1990s had already been recognized over the years, so the actual cash shortfall they had wasn't that big. Long story short, Olympus made huge losses in the 1990s from their financial speculations. Instead of taking the hit all at once, they employed an extremely complicated scheme to discreetly spread the losses out over many years. But during this same time, their core medical device business was actually doing quite well and the company was profitable.

This allowed them to recover after the fraud was exposed foreign. The scale of the Olympus cover-up and the fact that it took more than a decade to be uncovered raises questions about Japanese business culture. It's common for large Japanese corporations to hire new workers right out of college. These graduates work their way up the ranks over decades to eventually attain leadership roles in Japan.

The concept of Lifetime employment is still common, with many workers spending their entire careers within a single employer. This creates a strong sense of loyalty and obligation to the company, which can make it difficult for employees to speak out against wrongdoing or to challenge the decisions of senior. Executives. In the case of Olympus, all three of the key players Yamada Mori and Kibukawa were all long-time employees who had spent the majority of their careers at Olympus.

Kikawa wasn't even involved in the fraud at the beginning. Once he was promoted to President in 2001, he learned about the fraud. Instead of becoming a whistleblower, he went along with it and aided in the cover-up going forward. While we don't know exactly what his motivations were, a sense of loyalty to the company and his predecessors probably played a role.

Alright guys, that wraps it up for this video. What do you think about the Olympus Scandal Let us know in the comments section below. As always, thank you so much for watching and we'll see in the next one. Wall Street Millennial Signing out.