Bloomberg News

Olympus Sees Violation of Laws Possible With U.S. Disclosure

July 31, 2012

Olympus Chairman Yasuyuki Kimoto

Yasuyuki Kimoto, chairman of Olympus Corp. Photographer: Akio Kon/Bloomberg

Olympus Corp. (7733), the world’s largest maker of endoscopes, uncovered “irregularities” at a doctor- training program in Brazil that may have violated U.S. law and reported them to the Department of Justice, Chairman Yasuyuki Kimoto said. The DOJ is also examining the company’s marketing operations in the U.S., he said.

“We might agree to some sort of violation of the Foreign Corrupt Practices Act in Brazil,” Kimoto said in his first interview since becoming chairman in April. “We understand DOJ is trying to gather lots of information on us.”

At issue in Brazil may be the way the company handled doctors’ expenses for travel, meals or entertainment, Kimoto said in a July 23 interview. The country accounts for less than 2.5 percent of the company’s sales. The two enquiries come after revelations of a 13-year accounting fraud sparked a sell-off that wiped about $3.7 billion off its market value last year.

Tokyo-based Olympus restated earnings last year after admitting it paid inflated fees on takeovers and overpaid for three Japanese companies to conceal past investment losses. That may be why the U.S. Food and Drug Administration and the Justice Department, which oversee compliance in the medical industry, are asking about the company’s marketing operations, Kimoto said.

“It’s quite natural if they think how to protect themselves from this kind of situation,” said Kimoto, a former banker at Sumitomo Mitsui Financial Group Inc. (8316), Olympus’s main lender. “It is not surprising if they pay their attention or take more scrutiny against us.”

Justice Department

Olympus shares plunged as much as 9.5 percent in Tokyo today, the biggest intraday drop in more than two months, to 1,340 yen and changed hands at 1,399 yen as of 10:33 a.m. The shares have gained 38 percent this year.

The enquiries into Olympus’ U.S. marketing operations may be part of a wider probe, according to Kimoto.

“We don’t know yet whether it’s just for us or the medical industry as a whole,” he said.

Gina Talamona, a spokeswoman for the Justice Department, declined to comment on Kimoto’s statements. Sarah Clark-Lynn, a spokeswoman for FDA, didn’t respond to requests for comment.

The Justice Department has already conducted an investigation into other medical-device companies. In March, Biomet Inc., a closely held maker of medical devices, agreed to pay $22.9 million to settle U.S. accusations it bribed foreign doctors to win business.

Smith & Nephew Plc, Europe’s biggest maker of artificial hips and knees, agreed in February to pay $22.2 million to settle allegations by the Justice Department and the U.S. Securities and Exchange Commission that it engaged in a scheme to pay bribes in Greece.

Brazil “Irregularities”

The company discovered “some irregularities in our activities” at its Brazilian training center and reported the incidents to the Justice Department “four to five months ago,” said Kimoto, who joined the company’s board in April. The way training services were provided may have violated regulations, he said.

“I’m not saying we paid them cash or bribes. If we give them some sort of a training course and not expensively, then that might cause a problem, right?”

North America is Olympus’ biggest overseas market, accounting for about 19 percent of revenue in the year ended March 31, according to data compiled by Bloomberg. The company made 2.5 percent of its revenue in Central America, South America and Africa, according to the data.

Internal Compliance

Olympus, which replaced its entire board in April, is strengthening its internal compliance measures by adding channels for whistle-blowers and setting up a compliance committee led by an external director, the company said May 22.

The medical unit is Olympus’s biggest profit generator, accounting for 68 billion yen of operating income in the year ended March 31, according to the company. The imaging systems unit, which makes Olympus PEN cameras, lost 10.8 billion yen during the year, according to a company financial statement.

The FCPA bars corporate employees or their agents from paying bribes to government officials to obtain or retain business or to secure an improper advantage.

The law applies to certain foreign issuers of securities. U.S. investors can purchase American depositary receipts in the company. Olympus also has a subsidiary based in Center Valley, Pennsylvania.

Jurisdiction

The Justice Department may have jurisdiction to investigate Olympus if it concludes that a U.S.-based subsidiary is a “domestic concern” with a principal place of business in the United States, said Cheryl Scarboro, a partner at Simpson Thacher & Bartlett LLP in Washington.

“Having a subsidiary in the U.S. that was involved in potential illegal conduct may be sufficient to give the Justice Department jurisdiction under the FCPA,” said Scarboro, former chief of the FCPA unit at the SEC.

The law also may apply if acts to further a bribery scheme occurred in the United States, such as using a U.S. bank account or having e-mails or faxes pass through the U.S., said Mike Koehler, assistant professor at Southern Illinois University School of Law in Carbondale, Illinois.

The company is trying to expand its endoscope market in Latin America, India and Eastern Europe, Kimoto said.

The company is cutting 2,700 jobs, about 7 percent of its workforce, by March 2014, it said in June. Most of the jobs being eliminated are in overseas manufacturing, President Hiroyuki Sasa said in June. The company will close a plant in the Philippines this year and reorganize others, it said June 8.

Olympus is projecting net income of 7 billion yen for the year started April 1, compared with a 49 billion-yen loss a year earlier. Operating profit may be 50 billion yen, up from 35.5 billion yen a year earlier, the company said June 8.

The stock rallied the most in six months on July 26 after Terumo Corp. (4543) disclosed that it made a merger offer to Olympus. Terumo, Asia’s biggest maker of medical devices, also plans to invest 50 billion yen in Olympus.

Terumo currently is the 10th-largest shareholder of Olympus with a 2 percent stake, according to data compiled by Bloomberg.

Olympus is also in discussions with Sony Corp. (6758) and Fujifilm Holdings Corp. (4901) about possible capital tie-ups, Kimoto said.

To contact the reporters on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net; Takashi Amano in Tokyo at tamano6@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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