People walk past a sign of Olympus Corp outside the company's showroom in Tokyo
People walk past a sign of Olympus Corp outside the company's showroom in Tokyo November 10, 2011. REUTERS

An investment banker raised concerns about dubious accounting at Japan's disgraced Olympus Corp. as long ago as the 1990s, after he discovered it was using Bermuda-based funds to invent assets and patch up its balance sheet, he told Reuters.

The banker's concerns, which he says were discussed inside Wall Street bank PaineWebber, his employer at the time and the arranger of Bermuda schemes for Olympus, is one of the earliest red flags known to have been raised over the Japanese company's accounting irregularities, which continued for two more decades.

The Japanese accounting regiment at that time was very strange, said the banker, explaining he had raised questions because Olympus was exploiting a loophole in accounting rules that mislead investors about its real financial health.

He said the Bermuda investments had been arranged for Olympus by two Japanese bankers then working for PaineWebber and who remain at the center of the Olympus accounting scandal.

I think when they started they were taking advantage of some crazy Japanese accounting rules, so what they did at the beginning may well have been to the letter of the law, if not to the spirit of the law.

Those rules allowed Japanese companies to avoid valuing unlisted investment funds at market values, in common with other nations back then, but the practice flouted overriding accounting principles, in force in Japan and elsewhere, that demanded firms present a true and fair view of their financial position.

Olympus, a once-proud maker of cameras and medical equipment, last week admitted to hiding losses since the 1990s and using part of $1.3 billion in unusual M&A payments to aid the cover-up. But the firm still has not said how much it concealed or how it managed to do this for so long.

Since the scandal burst out into the open a month ago, the company has lost 80 percent of its market value on concerns over its future. Japanese police and regulators are investigating the case along with the U.S. Federal Bureau of Investigation.

The banker, who kept documents related to Olympus's Bermuda investments from the time and gave copies to Reuters last week, said he was working at PaineWebber in 1994 when he first became concerned. He said he alerted the bank's compliance officers.

He left PaineWebber in 1996, partly because he no longer wanted any involvement in the Olympus account. Around that time, the bank shut its Japanese equity business, a move the banker said was related to growing unease within PaineWebber about its role in helping Japanese firms like Olympus to mislead investors.

In the mid-1990s, PaineWebber was among several investment banks that crafted such techniques to hide investment losses, banking sources have told Reuters. Known as tobashi schemes, they were eventually outlawed in 2000, at the same time Japan adopted fair-value accounting rules.

We had a pretty clear indication that this was the sort of business we didn't want to be in, the banker said.

He declined to be identified. He still works in the financial industry, but is not authorized by his employer to talk about Olympus.

UBS bought PaineWebber in 2000, and a Tokyo-based spokesman for the Swiss bank said it had no knowledge of any Olympus fund investments that had been brokered by PaineWebber before the acquisition.

Olympus was not alone is its accounting practices. In the 1990s, many Japanese firms such as Olympus had suffered heavy losses on investment portfolios after the collapse of Japan's bubble economy of the 1980s, and some of these firms used accounting loopholes to hide the losses.


The former PaineWebber banker said Olympus's Bermuda investments, brokered by PaineWebber and managed by Bermuda-based hedge fund Olympia Capital International, were used to inflate the book value of assets on the company's balance sheet and obscure the impact of its existing portfolio losses.

Olympia Capital founder Oskar Lewnowski, 80, who is Austria's honorary consul to Bermuda, told Reuters his fund had done business with Olympus, but he did not recall the details.

There is no suggestion Olympia knew how Olympus was accounting for its investments in the Olympia funds.

The PaineWebber bankers who directly handled the investments for Olympus were Akio Nakagawa and Hajime Sagawa, now central figures in the scandal. The pair left PaineWebber after it closed its equity business in Tokyo and went on to run their own boutique operation which secured a whopping $687 million advisory fee from Olympus a decade later.

Olympus has admitted using part of that fee, which Thomson Reuters data shows was the world's most generous advisory fee, to disguise the recognition of some long-standing losses. Reuters has been unable to reach Nakagawa or Sagawa for comment. Olympus has said it does not know of their whereabouts.

The Bermuda investments involved hundreds of millions of dollars, according to a document provided by the ex-PaineWebber source that details the value of Olympus's fund investments as of March 1994 and March 1995.

The Nikkei newspaper has said the Olympus concealment could have exceeded 130 billion yen ($1.68 billion) at its peak.

The Bermuda schemes usually involved Olympus investing in an Olympia Capital fund in the final days of Olympus's financial year, the banker source said. The fund typically returned a 33 percent dividend, which was deducted from the fund just before Olympus closed its books, he added.

Olympus booked the investment at cost and took the dividend as a profit, the banker said. In this way, he said, it could use the contrived investment profit to offset the recognition of some older investment losses.

When asked if he knew Olympus had invested in Olympia Capital funds as an accounting ploy designed to offset its investment losses, Lewnowski said: That doesn't sound right at all. I don't think this was ever done.

Lewnowski spent 23 years at Drexel Burnham, where Nakagawa and Sagawa also worked, records held by FINRA, the U.S. securities industry regulator, show. The U.S. securities firm went bust in 1990, after which the two Japanese bankers joined PaineWebber and Lewnowski set up Olympia.

Lewnowski said he did not remember Nakagawa, but vaguely recalled having heard of Sagawa's name.

Olympia, one of the world's biggest fund administrators, was acquired in 2007 by CACEIS Investor Services, part of France's Credit Agricole Group.

The document provided by the ex-PaineWebber source shows Olympus investments totaling 84.2 billion yen ($1.1 billion) at end-March 1995, including 10 billion yen in three funds which the source says were all Olympia Capital funds.

They are listed as Phoenix Global Strategy Fund, Winsted Capital Corporation and Zenith Capital Appreciation Fund.

Lewnowski said he could not recall them after so many years. At the time, Olympia Capital was administrating several hundred funds, he said.

($1=77.52 yen)

(Additional reporting by Nathan Layne; Editing by Mark Bendeich)