Whistleblower Settlement Raises Doubts about Management’s Intentions
On March 2, 2016, it was announced that John Slowik, a whistleblower formerly of Olympus corporation, was awarded $51 million as part of the settlement of his qui tam action under the False Claims Act. The FCA permits private parties to sue for false claims against government entities and to share in any recovery.
"The whistleblower became Olympus's first compliance officer in company history in 2009," according to his attorney. "The newly-minted compliance officer quickly discovered that kickbacks formed the fabric from which Olympus's sales and marketing success was woven".
Olympus settled three separate bribery-related federal cases on March 1. In the first case, the company's Latin America unit paid a criminal fine of $22.8 million for Foreign Corrupt Practices Act (FCPA) violations. The U.S. Department of Justice said Olympus employees bribed doctors across Latin America to buy Olympus endoscopes, a device usually used to examine the digestive tract.
In the second case, Olympus Corporation of the Americas (OCA) paid a $312.4 million criminal penalty for violating the federal Anti-Kickback Statute. The DOJ said the company bribed doctors in the U.S. to increase sales.
In the third case, based on Slowik's whistleblower lawsuit, OCA paid an additional $310.8 million to settle civil state and federal charges under the False Claims Act. For that settlement Slowik was awarded the $51 million -- $44 million from the federal share of the settlement amount and $7 million from the state share.
"Our client offered Olympus the chance for redemption by reporting internally first," Slowik's lawyers said. "Unfortunately, Olympus chose to elevate profits above corporate responsibility." They said Slowik's court filings revealed a corporate culture of fraud and herd mentality at Olympus. Olympus fired Slowik in 2010.
Slowik's allegations included:
- Olympus giving key customers "permanent loans" of Olympus medical equipment whenever requested by Olympus sales and marketing personnel to maintain customer loyalty and promote more sales.
- Funneling cash payments of up to $100,000 a year to certain "VIP" doctors for "consulting services" at the discretion of Olympus sales and marketing representatives.
- Annual cash payments of hundreds of thousands of dollars characterized as "grants" to fund educational or research programs made at the discretion of a grant committee comprised solely of Olympus sales and marketing personnel and based on sales potential.
- Funding luxury, all-expense paid vacations to Japan and other international destinations for "VIP" doctors and sometimes their spouses in exchange for purchases and promotion of Olympus medical products.
In my view Olympus is a corrupt organization. In 2011, Olympus's Japanese corporate parent, Olympus Corporation, ousted the second executive whistleblower in as many years: President and CEO Michael Woodford. According to court documents, the Olympus Corporation board fired Woodford after he refused to perpetuate the cover up of a massive accounting scandal. As the new President of Olympus, Woodford uncovered accounting irregularities and suspicious deals involving the acquisition of UK medical equipment manufacturer Gyrus.
Olympus initially said that it fired Woodford, one of a handful of foreign executives at top Japanese companies, over what it called his aggressive Western management style. Woodford disclosed internal documents to show he was dismissed after he raised questions about irregular payouts related to mergers and acquisitions.
The accounting for acquisitions was unusual to say the least. Olympus indirectly loaned money to an off-the-books subsidiary and then sold the investments that had the huge losses to the subsidiary at historical cost, eventually paying a huge premium to buy some other small companies and writing off underwater investments resulting from the financial recession as if they were goodwill impairments.
Back in March 2015, Olympus said it agreed to pay as much as $92 million to resolve 2 civil lawsuits arising from the 2011 accounting scandal. Olympus admitted the allegations as part of the settlements.
The governance and ethics lesson to be learned from the Olympus affair is that a lack of underlying ethical values trumps full disclosure even in the post-Enron era of transparency. In fact, underlying cultural values such as secrecy may continue to rule the day in countries like Japan that seem to place not “losing face” ahead of ethical values such as full disclosure and the rights of investors and creditors to be fully informed about both good and bad financial dealings. Moreover, the cultural value of placing the interests of the group/team/work unit ahead of that of other stakeholders meant the company looked out for its own interests above all else.
The Olympus scandal and whistleblower settlement is instructive in that it shows what can happen when a corporate culture is infected with non-ethical values, such as power, wealth, and a sense of doing it the Japanese way. Olympus failed in its ethical responsibility of honesty, trustworthiness, integrity, and an obligation to serve the public interest as well as those of its shareholders.
Blog posted by Dr. Steven Mintz, aka Ethics Sage, on March 15, 2016. Professor Mintz is on the faculty of the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: www.ethicssage.com.