FBI Probes $700 Mil. Payout to 2 Japanese Bankers
The FBI is investigating a $687 mil. fee paid by Olympus to a pair of Japanese bankers who operated a sleepy investment banking firm on Wall Street. The firm closed out its operations soon after receiving the fee.
The fee paid to Axes America — the firm founded by Hajime Sagawa and Akio Nakagawa — was presumably for abvisory services in connection with Olympus’ $2 bil. takeover of the Gyrus Group, a British medical equipment company, in February of 2008. One reason for the probe is that the fee is unusually large for such services — over 30 times the usual 1% of transaction value which, in this case, would have been only $20 mil.
The fee to Axes included cash payments of 5 percent of the deal’s value and an option for Axes to buy shares of Gyrus. The option was used to avoid crystallizing an immediate tax liability to Axes, according to Olympus’s attorneys.
On March 5, barely five weeks after the Gyrus deal was concluded, Axes notified U.S. regulators that it was shutting down and paid $85,000 to liquidate the long-term lease for its office space. Before shutting down, Axes assigned its Gyrus shares — which appears to have been purchased at a fraction of its actual value under its option — to a new Cayman Islands firm called Axam Investments. Axam sold its Gyrus shares to Olympus in early 2010 for $620 million. That brought the total value of Olympus’s fee to Axes to $687 mil.
The FBI’s decision to investigate the fee is also triggered in part by the sharp disparity between that outsize fee and the $1.5 billion loss posted by Olympus for the fiscal year ending March 31, 2009. Contrary to an earlier assumption that the loss was attributable to the global financial crisis, later examination showed that it resulted largely from big write-downs in the value of three companies acquired earlier that year for $773 million without due diligence. Olympus wrote down 76 percent of their value.
The immediate trigger for the FBI probe appears to have been the departure of Olympus CEO Michael C. Woodford in early October, followed by his allegations that he was forced out because he planned to expose the fees paid to Axes. Olympus shares lost half their value since October 14 on suspicion that the board may have engaged in major improprieties.
So far neither Sagawa nor Nakagawa have not been accused of wrongdoing, and they have not even been linked to the three later deals under suspicion. However, the recent publicity about their huge fees on the Gyrus deal has raised suspicions that some members of the Olympus board may have used that buyout and others as a way to siphon money out of the firm.
Before being hired on the Gyrus deal Sagawa and Nakagawa had not established Axes as the kind of heavy hitter that could attract a $2 bil. buyout deal or warrant an unusually generous fee arrangement. Adding to the suspicion of impropriety is a recent PricewaterhouseCoopers report finding that Sagawa had had prior relationships with several members of the Olympus board before Axes was retained for the Gyrus deal.
Sagawa, known as Jim among Americans, entered the investment banking business at Nomura Securities. While still working in Japan in the 1970s he met his American wife Ellen who was teaching English there. The couple eventually moved to the U.S. and Sagawa began working for Drexel Burnham Lambert in 1988. Sagawa met Nakagawa at Drexel. Both left the firm in 1990 as it descended into bankruptcy following charges of insider trading and stock manipulation.
Sagawa and Nakagawa went to work for PaineWebber until leaving together in 1996 when Sagawa was laid off. Sagawa founded Axes America which Nakagawa later joined as chairman of global operations. Axes appears to have handled a series of small private equity deals. Its operations were sporadic enough to give Sagawa time even to sail around the world.
The circumstances surrounding Olympus’s retainer of Axes for the Gyrus buyout remains obscure, but that appears to have been the sole noteworthy transaction during the firm’s 13-year history.