An independent panel issued a damning report on a $1.7 billion accounting scandal at Japan's disgraced Olympus Corp on Tuesday, urging legal action against rotten executives responsible for the cover-up and the replacement of other board members.

The six-man panel found no link with organized crime, however, an outcome that might help the 92-year-old maker of cameras and endoscopes remain listed on the Tokyo stock exchange and survive a scandal that ranks among Japan's worst.

The core part of management was rotten and the parts around it were also contaminated by the rot, the panel said in its report, which was commissioned by the company and ran to more than 200 pages.

In the worst possible sense, the situation was that of the tribal culture of the Japanese salaryman, it added, referring to a culture of absolute corporate loyalty.

The panel put the blame squarely on the executive management and also criticized external auditors who signed off on the books of the once venerable company.

Olympus has lost about half its market value since it fired British CEO Michael Woodford on October 14 for querying shady deals. Woodford promptly blew the whistle publicly to shed light on murky accounting and expensive and questionable acquisitions.

Woodford, who is seeking shareholder and would-be investor support to oust the board and return to his job, said he was pleasantly surprised at how explicitly condemning of the existing board the panel was.

The report might force the board to hold an extraordinary meeting which could dismiss the remaining top management and reinstate him, Woodford said.

Big, big, big names are travelling the world to see me, he told Reuters in London on Tuesday.

He declined to identify his contacts, saying only they were potential shareholders.

One large western shareholder, who declined to be named, said he was impressed by the report for not pulling its punches although it had had too little time to shed light on the money trail.

That process is going to take a year, he said. That is why you need a new management and board in place to oversee that. Those people are the ones who can sort that out.

Olympus planned a news conference at 0600 GMT on Wednesday.


Speculation of yakuza gangster involvement quickly surfaced as criminal outfits have a history of extorting cash from Japanese companies by threatening to expose their secrets. Woodford fled Japan after he was fired, fearing for his safety.

Doubts persist over whether the panel, headed by a former Supreme Court judge, had the expertise or authority to dig into gangster involvement.

That's really up to the police, said Jamie Allen, secretary-general of the Asian Corporate Governance Association, whose members include institutional investors who collectively manage assets of more than $10 trillion.

The panel blamed two former executives for cooking the books over 13 years to flatter the company's financial performance, and said three ex-presidents had known about the scheme.

It found no evidence to suggest any executives personally profited from the scandal.

A factor in the longevity of the cover-up was the existence of external players who advised, helped and assisted in the concealment while knowing full well that such accounting practices were illegal, the report said.

Olympus must take this opportunity to extract the tumor that centers around its former management group, and literally aim to renew its body and soul.


Olympus will set up a special committee and begin pursuing the responsibility of those involved, senior management told employees in an internal memo obtained by Reuters on Tuesday.

The current president, Shuichi Takayama, has said he was ready to take legal steps, including filing criminal complaints, against those found to be at the root of the scandal.

The panel said former executive vice president Hisashi Mori and ex-internal auditor Hideo Yamada had crafted a scheme as long ago as 1998, along with investment bankers, to hide investment losses suffered earlier in that decade.

It also criticized Olympus's auditors over the years under investigation, KPMG AZSA and Ernst & Young ShinNihon, and said the concealment of losses amounted to 134.8 billion yen ($1.73 billion) at its peak.

Past (Olympus) presidents had low esteem for transparency and governance, and standing up to them to speak the truth meant you risked being put out to pasture, which is apparent from what happened to Woodford, the report said.

The report drew a picture of how Olympus -- like many blue chip Japanese firms faced with a strong yen -- made risky zaitech securities investments during the heady days of Japan's late 1980s bubble economy of soaring asset prices, only to be left with huge losses when the bubble burst.

The company then embarked on an elaborate money-shifting scheme to hide those losses, using a myriad of bank accounts, funds and special purpose vehicles in Japan, Singapore and Europe, including a secret M&A account in Liechtenstein.

Yamada and Mori sought the help of Akio Nakagawa and Hajime Sagawa, the heads of boutique investment firms Axes Japan and Axes America, for overseas deals and paid them a massive advisory fee for acquiring British medical equipment maker Gyrus, circulating the money back through a maze of funds.

Axes America ultimately pocketed 2.4 billion yen, while a Nakagawa-related fund should have about 1.1 billion yen left, panel head Tatsuo Kainaka told a news conference.

Nobumasa Yokoo, a former banker at Nomura Securities, introduced Yamada and Mori to senior personnel at a Liechtenstein bank and helped steer investment into three domestic companies at inflated prices. The fees and high prices were later partly written off as goodwill.


Olympus shares had jumped as much as 15 percent earlier on Tuesday, extending a three-week rally fuelled by growing hopes that the stock would not be delisted.

Leading shareholders said they wanted more time to digest the report, although Sumitomo Mitsui Banking Corp, the core unit of SMFG and a main lender to Olympus, called it very regrettable that Olympus had put off booking losses for years.

It said it would continue to support Olympus.

The company remains under joint investigation by Japanese police, prosecutors and the markets regulator, as well as the U.S. Federal Bureau of Investigation and the UK Serious Fraud Office.

Olympus faces automatic delisting if it misses a December 14 deadline for posting results and may still have its shares bumped off the exchange depending on the scale of its past misreporting.

($1 = 77.8200 Japanese yen)

(Additional reporting by Mari Saito, Maki Shiraki, Tim Kelly, Abi Sekimitsu, Nathan Layne, Taiga Uranaka, and Sumio Ito in Tokyo, Kirstin Ridley and Sinead Cruise in London; Writing by Mark Bendeich and Linda Sieg; Editing by Ian Geoghegan and David Cowell.)