Three former executives at Olympus Corp., including ex-chairmanTsuyoshi Kikukawa, and four others were arrested for suspectedviolation of Japan's Financial Instruments and Exchange Act.

The camera maker is facing shareholder lawsuits and may besubject to further criminal investigation after admitting to a13-year cover-up. The company restated past securities reports andtook a $1.3 billion reduction in net assets in December.

Olympus's Tokyo headquarters and its affiliated offices wereraided in December by prosecutors after the company said Kikukawaand two others colluded to hide investment losses from the 1990s.The stock has plunged 49 percent since the Oct. 14 dismissal of itsfirst non-Japanese president, Michael Woodford, who later publiclyquestioned inflated takeover costs.

Kikukawa, 70, who headed Olympus for 10 years until last year,Hideo Yamada, 67, who led the investment unit since the 1980s andlater became an auditing officer, and former Executive VicePresident Hisashi Mori concealed losses, booked overstated goodwilland falsified financial statements, the prosecutors said in astatement.

The prosecutors also arrested Akio Nakagawa, cited in a Decemberpanel report as having aided Olympus in structuring its loss-hidingschemes. Nobumasa Yokoo, who was also named in the report, TakuHada and Hiroshi Ono, were arrested by the Tokyo MetropolitanPolice, according to the statement.

“We take the situation seriously,” Yoshiaki Yamada, a spokesmanfor Olympus, said by phone today. “We will cooperate fully withinvestigators.”

“It may take time for Olympus to regain its reputation,” saidYoshihiro Ito, chief strategist at Okasan Online Securities Co. inTokyo. “The company is trying to show it's making an effort torebuild its management and balance sheet.”

Founded in 1919 as a microscope and thermometer business,Olympus produced its first camera in 1936 and a predecessor to themodern-day endoscope in 1950, according to its website. Olympus nowcontrols 75 percent of the global market for endoscopes,instruments doctors use to look inside the body cavity to helpdetect disease.

In 1987, President Toshiro Shimoyama announced a strategy tostrengthen the company's investments after operating profit fell byhalf due to the yen's gain, according to a panel report disclosedin December. Investment losses began to swell after the Japanesestock market crashed in 1989 and reached about 100 billion yen($1.3 billion) in 1998, when Yamada and Mori resorted to financialtrickery to hide them, the report said.

Former bankers

The company inflated takeover costs of London-listed Gyrus GroupPlc and three Japanese companies with the intention of boostinggoodwill, according to the Dec. 6 panel report. Yamada and Moriplanned to write down the goodwill over years to cancel out lossesthat were kept off Olympus's balance sheet.

At a press conference in London this morning, former presidentWoodford said, while the arrests were encouraging, “there are stillmany important issues which are not covered by today'sannouncement.” He called for further investigation into the role ofbanks and accounting firms in the fraud, and said three directorsat the company — Masataka Suzuki, Kazuhiro Watanabe and ShinichiNishigaki — should be replaced.

Nakagawa, 61, helped to create paper companies which boughtimpaired assets from Olympus, while Yokoo, 57, who ran aTokyo-based consulting firm Global Company where Hada and Onoworked, helped Olympus set overseas bank accounts to provide fundsto such paper companies, according to the panel report. Yokoo'sventure fund was used by Olympus to inflate costs of acquisitionsof three Japanese companies, the report said.

Nakagawa, who's based in Hong Kong, worked at Merrill Lynch,Pierce, Fenner & Smith, Shearson Lehman Hutton Inc., DrexelBurnham Lambert Inc. and PaineWebber Inc. from the 1970s to the1990s, according to Financial Industry Regulatory Authority recordsin the U.S. He started a boutique brokerage firm Axes (Japan)Securities Co. in 1998.

Olympus fell 2.4 percent to close at 1,273 yen in Tokyo trading.The stock is up 26 percent this year, compared with a 9 percentgain by Japan's benchmark Nikkei 225 Stock Average.

Olympus's case “is getting more attention from foreign mediathan Japanese,” Toshiyuki Shiga, chief operating officer of NissanMotor Co., said at a conference today. “Looking at their articlesmake me concerned that it would lead to a view that Japanesecorporate governance overall is weak.”

Olympus sued 19 current and former executives, including currentPresident Shuichi Takayama and five corporate auditors, in Januaryover their roles in concealing losses. The company formed panels toreform management and nominate a new board.

The company plans to hold an emergency shareholder meeting onApril 20 at which investors will vote on new management.

The company is seeking as much as 3.6 billion yen in damagesfrom executives, including Kikukawa, and a combined 1 billion yenin damages from corporate auditors.

The Tokyo exchange last month allowed Olympus to keep its stockmarket listing after fining the company 10 million yen and tellingit to report on efforts to improve management.

Kikukawa, born in 1941 in Japan's southwestern Shikoku island,joined Olympus in 1964 after working for a trading company. UnderKikukawa's leadership from 2001, Olympus's revenue jumped 82percent to 847 billion yen, while operating profit remained almostunchanged at about 35 billion yen.

He oversaw about $4.3 billion in 31 acquisitions of companies,including Gyrus, according to data compiled by Bloomberg.

Olympus earlier this week predicted an annual loss of 32 billionyen for the year ending in March as it wrote off equipment damagedby Thailand's record floods. The accounting fraud hasn't had amajor impact on its business, Takayama said.

The company is considering ways to boost capital includingalliances, he said.

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