Olympus Adviser Axes Closed Brokerage Soon After SEC, FINRA Examinations

By David Glovin and John Helyar - Nov 22, 2011 4:04 PM GMT+0700

Axes America LLC, the now-defunct brokerage firm that advised Olympus Corp. in a transaction being investigated by the FBI, ceased operations in March 2008 soon after U.S. regulators began examining its books, records show.

Beginning in 2006, New York-based Axes America served as adviser to Olympus in its $2.1 billion acquisition (7733) of Gyrus Group Plc, a British medical device manufacturer, in 2008. PriceWaterhouseCoopers LLP, which examined the transaction for the Olympus board, reported last month that the Tokyo-based company paid $687 million in fees to Axes America and a related Cayman Islands fund, Axam Investments Ltd.

Olympus, which subsequently said it paid inflated fees to advisers to hide losses, is under investigation in the U.S., U.K. and Japan.

Axes America disclosed in a Feb. 28, 2008 filing with the U.S. Securities and Exchange Commission that the SEC had examined its books and records in November 2007 and FINRA -- the Financial Industry Regulatory Authority -- had done so in January 2008. The firm described both actions as “routine” and said it was “confident of a favorable outcome.”

Axes withdrew its registration as a broker-dealer on March 5, 2008 -- six days after its disclosure of the SEC and FINRA reviews, according to SEC records.

“The timing of the two is too coincidental,” said Anthony Catanach, who teaches accounting at the Villanova University School of Business, in a phone interview. “It’s extremely suspicious.”

Gyrus Probe

Investigators including the Federal Bureau of Investigation and the SEC have begun an examination of the Gyrus deal and three other acquisitions by Olympus, according to a person familiar with the matter. Part of the probe of the camera and endoscope maker centers on fees paid to Axam Investments, according to another person familiar with the matter.

Former Olympus President Michael C. Woodford, who was fired after he questioned the fees and other transactions, will return to Tokyo tomorrow. He is due to meet prosecutors and attend his first board meeting since his Oct. 14 dismissal. Woodford remains a member of the board, as does former Chairman Tsuyoshi Kikukawa, who stepped down over the scandal.

Japanese banker Hajime Sagawa served as a director of Axam Investments and headed Axes America. Axam Investments, described in corporate records as an investment and holding company, was struck from the Cayman Islands registry in June 2010 for non- payment of license fees, PriceWaterhouseCoopers said.

SEC Criticisms

Michelle Ong, a FINRA spokeswoman, declined to comment on Axes America’s disclosure of the agency’s 2008 examination. John Nester, an SEC spokesman, declined to comment on whether the Axes America examination differed from periodic reviews the agency conducts on all broker-dealers to evaluate compliance systems.

The SEC has been criticized for failing to uncover the decades-long fraud of Bernard Madoff. More recently, the agency has come under fire for destroying some enforcement documents and bungling a $557 million lease for new office space.

Axes America was formed in Delaware in 1997 and registered as a broker-dealer in 1998, according to its SEC filings. The firm dissolved on Dec. 3, 2008, nine months after it withdrew its registration. In 2007, all of its revenue was earned from a single company, Axes America said in an SEC filing.

By the time of Axes America’s February 2008 SEC filing, the agency hadn’t issued a final determination letter and the FINRA review was “ongoing,” according to the brokerage.

Fraud Risk

Of the $687 million in fees to Axes America and Axam Investments from 2006 to 2010, Olympus had paid $17 million to Axes America by Nov. 26, 2007, including $14 million in 2007 alone, PriceWaterhouseCoopers said in its report.

The remainder of fee -- a total $670 million -- was paid to Axam Investments from September 2008 to March 2010, PriceWaterhouseCoopers said.

Berson & Corrado LLC, an accounting firm in New York and Ramsey, New Jersey, served as Axes America’s auditor. Mark Corrado, a partner at that firm, didn’t respond to e-mails or phone calls about Axes America’s audited filings.

Catanach questioned whether the audits of Axes America in 2006, 2007 and 2008 were sufficient to find that the brokerage complied with Generally Accepted Accounting Principles, the standard typically used to review company finances, as auditors had found.

Axes America’s advisory fee revenue jumped from $324,000 in 2005 to $3.2 million in 2006, signaling that the nature of its business had “dramatically changed,” said Catanach, who is also the Cary M. Maguire Fellow at the American College Center for Ethics in Financial Services in Bryn Mawr, Pennsylvania.

That should have triggered a new review of internal controls, the “underlying economics” of the transaction, and the role of related parties, he said.

“One big fraud risk factor is that 100 percent of revenue comes from one source,” he said. “This puts huge pressure on the client to succumb to ‘customer’ wishes.”

To contact the reporters on this story: David Glovin in New York at dglovin@bloomberg.net; John Helyar in Atlanta at jhelyar@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net