September 20, 2020

Cooperation by broker mitigates SEC sanctions

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SECActionsHeaderBy Thomas Gorman Dorsey & Whitney LLP From JDSupra Business Advisor

Cooperation was a key factor in the resolution of an action involving a minority owner of a broker-dealer that is alleged to have facilitated a fraudulent scheme to conceal losses at a major Japanese company. In the Matter of Hajime Sagawa, Adm. Proc. File No. 3-16412 (February 27, 2015).

Hajime Sagawa was a registered representative, a founding member, minority owner and a director of Axes America, LLC, from 1997 through 2008. The firm was a Commission registered broker-dealer from 1997 through 2008 when it voluntarily withdrew its registration.

This proceeding centers on efforts to conceal millions of dollars in losses at Olympus Corporation, a manufacturer and seller of cameras, microscopes, endoscopes and other medical equipment. Shares of Olympus are listed on the Tokyo Stock Exchange.

To conceal certain operating looses sustained in the mid-1980s Olympus supplemented its income with speculative investments. When the Japanese economy took a down turn in 1990 Olympus sustained significant losses on those investments. Executives 1 and 2 then moved the investments into trusts constructed under Japanese law. Those trusts were managed in such a way that write-downs could be avoided for a time.

Eventually the losses in the trusts reached the point where write-downs loomed. At that time the two executives moved the asses to off-balance sheet entities in the Cayman Islands and British Virgin Isles. Through a series of transactions Olympus claimed to have “sold” the poor investments to the off-balance sheet entities. The complexity of the transactions resulted in advisory, legal and banking fees that eclipsed the investment losses.

Following the completion of the transactions, Olympus needed to create a mechanism to repay the banking entities that financed the sales. The two executives planned to accomplish this by diverting portions of the payments that would be made for the next acquisition by Olympus to the banks.

To implement the scheme, one of the two executives executed an investment banking agreement with Axes after meeting with Mr. Sagawa. Under the terms of the agreement Axes would serve as financial adviser for the acquisition of two possible targets. The agreement called for an outsized investment banking fee.

Talks with one possible acquisition target broke down. Olympus then identified Gyrus Group PLC, a U.K firm that specialized in endoscopes as a possible target. Following the closing of that deal in February 2008 Olympus paid Axes an advisory fee in the form of cash and Gyrus preference shares valued at about 38% of the purchase price. Two years later Olympus purchased those shares from Axes and an affiliate. The $662 million purchase price, along with other portions of the fees paid to the broker-dealer, were channeled to the off-balance sheet entities to repay the bank loans.

The Order alleges violations of Securities Act Sections 17(a) and (c) and Exchange Act Sections 15(c)(1)(A). It also acknowledged the cooperation of Respondent.

Mr. Sagawa resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. He will also be barred from the securities business and from participating in any penny stock offering. No penalty was imposed in view of Respondent’s cooperation.

For more on this story go to: http://www.jdsupra.com/legalnews/cooperation-by-broker-mitigates-sec-sanc-07410/

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