2 Japanese Bankers at Heart of Olympus Fee Inquiry

Michael C. Woodford, the former Olympus chief, has said he was forced out because he planned to expose the huge advisory fee the company paid.

For two decades, a pair of Japanese bankers toiled away in relative anonymity on Wall Street, hopping from firm to firm.

Now the two — Hajime Sagawa and Akio Nakagawa — are at the center of a growing firestorm over a mysterious $687 million payout by Olympus, the Japanese company that runs a lucrative medical equipment business and a less successful, if better known, digital camera business. The money has been described as a fee for advising Olympus on the 2008 takeover of a British company, the Gyrus Group.

But the fee amount was more than 30 times the norm on Wall Street. And it went, in part, to a tiny unknown firm run by Mr. Sagawa and Mr. Nakagawa, a review of public records shows. The bulk of the fee later went to a Cayman Islands company that also had ties to at least one of the men. After the deal closed and the fees were paid, both firms closed up shop.

The F.B.I. is now investigating the $687 million payment, according to two people briefed on the case. The focus of the investigation is not yet clear, and a spokesman for the F.B.I. in New York, James M. Margolin, declined to comment.

“We are not aware of any investigation” in the United States over the Gyrus deal, said Yoshiaki Yamada, a spokesman for Olympus in Tokyo. He said he could not comment further, including whether Olympus had been contacted by United States authorities.

During the last week, shareholders and analysts questioned why a public multinational company like Olympus would award such an outsize payment for advisory fees. According to securities lawyers and corporate governance experts, federal authorities will probably examine whether the steep fees point to deeper ties between Olympus and the bankers, or even kickbacks to Olympus officials involved in the deal.

“This is about following the money,” said Jonathan R. Macey, a professor of corporate law and governance at Yale. “It’s very unusual and raises a classic red flag, pointing to either a waste of company assets or corruption.”

Olympus has said its payments were “appropriate.” On Friday, the company said it would set up an independent panel to examine its past merger payments — a week after the company fired its chief executive, who said he had questioned the eye-popping fee.

The firing of Michael C. Woodford, who is British, and his subsequent accusation that he was forced out because he planned to expose the fees, has rocked the company. Its shares have fallen 50 percent since Oct. 14. Many analysts have suspended their outlook for Olympus, saying the company’s future had been thrown into disarray by the seriousness of the matter.

Olympus has been trying to recover since losing almost 115 billion yen ($1.5 billion) during the 12 months ended March 31, 2009. At the time, the loss was widely attributed to the effects of the global financial crisis, but it has now been linked to a sharp write-down in the value of three companies acquired earlier that year.

Mr. Woodford has raised questions about those acquisitions, saying Olympus paid $773 million for the three companies with no due diligence, and later wrote down 76 percent of their value.

Mr. Sagawa and Mr. Nakagawa have not been accused of wrongdoing, and they have no apparent ties to the three other deals. A lawyer for Mr. Sagawa did not respond to requests for comment. Efforts to locate a valid address or phone number for Mr. Nakagawa in Japan were unsuccessful.

The two Japanese bankers, according to interviews and regulatory records, appear to have first become colleagues in 1988 at Drexel Burnham Lambert, the investment house where Michael R. Milken helped pioneer the market for high-yield bonds. Over the years, the careers of the two Wall Street journeymen traced very similar paths.

Mr. Sagawa, who lives in Boca Raton, Fla., was traveling on Friday, but his wife, Ellen, came to his defense. “My husband is a straight arrow,” she said from the family’s waterside home, which is assessed at $1.3 million.

Mrs. Sagawa said she met her husband in the 1970s, when she was teaching English in Japan. Mr. Sagawa, or Jim as he is known in America, was a young and rising star at Nomura, the Japanese securities firm.

Over the years, Mr. Sagawa climbed the ranks of finance, soon landing in New York at Drexel, then a much-envied firm that came to represent the Wall Street boom of the 1980s. Mr. Sagawa, according to court papers in an unrelated matter, earned $360,000 in his final year at the firm, a tidy sum in 1989.

At Drexel, Mr. Sagawa crossed paths with another up-and-coming banker, Mr. Nakagawa, who had started in the brokerage business at Merrill Lynch. The pair left Drexel in the spring of 1990 as it was falling apart.

Both men soon landed at PaineWebber, and departed after Mr. Sagawa was laid off in 1996, regulatory records show.

Mr. Sagawa toyed with the idea of retirement, but instead began a brokerage venture of his own, Axes America. He set up shop in Stamford, Conn., while also renting space in the Graybar Building overlooking Grand Central Terminal in Manhattan.

Mr. Sagawa was finally his own boss, president and chief executive of Axes America, regulatory records show. Mr. Nakagawa, at least for a time, was chairman of the firm’s global operations, according to an archived version of the firm’s Web site.

“We have entered a major revolutionary period of the Japanese financial and securities industries in wave of deregulation and globalization,” Mr. Nakagawa wrote on the Axes Web site. “We sincerely hope that we can contribute to society and its prosperity through our customers’ prosperity.”
The firm owed its name, Mr. Nakagawa said, to an aspiration to “become the axes of global capital markets.”

For years, the two men ran a sleepy operation arranging private securities transactions and advising on mergers. Mr. Sagawa even found time to sail around the world. And in late 2002, Axes reconnected with its Drexel roots, organizing a conference in Tokyo that featured Mr. Milken, the former Drexel executive who pleaded guilty to securities law violations in 1990 and now runs an economic research institute.

In the United States, meanwhile, Axes generated mediocre revenue and hired only a handful of employees. In 2008, its final year, the firm reported a modest $8 million profit, according to a securities filing. During its years of operation, the firm generated sporadic business and never set off regulatory alarm bells.

Mr. Sagawa “was a nice guy” and “he seemed O.K. to me,” said Howard Spindel, a consultant who advised Axes when it opened its doors.
By 2006, as the firm began to quietly fade into the annals of Wall Street, a lucrative opportunity presented itself.

An Olympus official familiar with Axes sought the firm’s counsel. It is unclear who at Olympus made the gesture, and whether this person approached Mr. Sagawa or Mr. Nakagawa.

“We understand that members of the board may have had previous dealings with Sagawa prior to his involvement with Axes,” said a recent PricewaterhouseCoopers report that examined the relationship between Olympus and Axes using a trove of internal documents and letters. Mr. Woodford, the ousted Olympus chief, had commissioned the report earlier this year.

Under the guidance of Axes, Olympus was examining several targets, including Tyco, records show. Olympus later settled on a British medical device company, the Gyrus Group, agreeing to buy it for $2 billion.

The advice did not come cheaply. While Olympus agreed to pay Axes 5 percent of the deal’s value, the contract was not truly capped at 5 percent.

The fee also included an unusual option for Axes to buy shares of Gyrus. “An arrangement whereby a financial adviser received a mixture of cash, share options and warrants is surprising,” the PricewaterhouseCoopers report noted, as advisers tend to be paid solely in cash.

The law firm Weil, Gotschal & The New York Times, that cash payouts were preferable, but that an unnamed financial adviser “strongly resisted the cash payment on the grounds that this will crystallize an immediate tax liability.” Weil Gotschal only reviewed the options for paying the fee, not the legality of the fee itself. The unnamed adviser was apparently Axes.&Manges told Olympus in a 2008 document, recently provided to

While the report did not lay out possible motivations or describe the actions as “improper conduct,” PricewaterhouseCoopers added that “given the sums of money involved and some of the unusual decisions that have been made, it cannot be ruled out at this stage.”

On Feb. 1, 2008, the Gyrus deal was officially done. Weeks later, on March 5, Axes notified American regulators it was shutting down, records show. Mr. Nakagawa stopped registering with American regulators even earlier, though he continued to represent Axes in Japan. The firm’s lease in the Graybar Building in New York ran until April 2011, according to a securities filing, so Axes paid about $85,000 to end it. And with that, the 11-year-old firm disappeared, even as its stake in Gyrus continued.

Axes assigned its Gyrus shares to a new Cayman Islands operation with a somewhat similar name, Axam Investments, according to a securities filing. Details on Axam and its owners are fuzzy, but Mr. Sagawa signed documents as a director, according to PricewaterhouseCoopers. No public records link Mr. Nakagawa to Axam.

Mr. Sagawa also ran an obscure firm in Florida, Sagawa Capital, which was in the business of “proprietary investing,” among other things, according to a filing with local officials.

Both Axam and Sagawa Capital drew little notice for two years. Then, in early 2010, Axam moved to unload its Gyrus shares, selling them to Olympus for $620 million.

Ultimately, Olympus spent $687 million on fees, or 36 percent of the value of the Gyrus deal, according to PricewaterhouseCoopers. An adviser’s fee typically amounts to about 1 percent.

“This is such an extraordinary deviation from normal fees,” said Jeffrey Manns, an associate professor at George Washington University Law School who is an expert in securities law. “No one would have entered into this transaction if they were showing good business judgment,” he added, as most countries prohibit corporate boards from “rubber-stamping” such large fees.

After the payout in March 2010, Mr. Sagawa shut down his businesses one by one. In June 2010, Axam was removed from the Cayman Islands company registry “for nonpayment of license fees,” according to PricewaterhouseCoopers.

And by December, Sagawa Capital, too, was extinct.