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Olympus investors may find courthouse door closed


NEW YORK (Reuters)—Olympus Corp. shareholders burned by the Japanese company's accounting scandal are unlikely to recover investment losses in U.S. courts and might not fare much better suing in Japan.

Stockholders and bondholders often turn to U.S. courts in hopes of winning damages from companies, banding together in class action lawsuits that let them sue as a group.

But two recent court decisions may have essentially shut U.S. courthouse doors to shareholders of the 92-year-old company, whose stock plunged in the wake of revelations that it hid losses since the 1990s.

Last year, the U.S. Supreme Court, in a case known as Morrison vs. National Australia Bank Ltd., curbed investors' ability to sue in U.S. courts over their purchases of securities on non-U.S. exchanges.

"Post-Morrison, American investors including institutional investors have effectively no remedy for this type of blatant securities fraud," said Thomas Dubbs, a partner at Labaton Sucharow L.L.P., who argued on behalf of the Morrison plaintiffs in the Supreme Court. "They can try to go to Japan—but good luck."

Olympus shares are listed in Japan. The maker of cameras and medical imaging equipment also has American depositary receipts that trade on the Pink Sheets, but these account for only about 1% of its float.

No institutional investor owned even as much as $1 million of the ADRs as of Tuesday, according to BNY Mellon Depositary Receipts. This makes it unlikely that ADR investors could collectively seek a big recovery by suing.

The Morrison decision scuttled a longtime standard that let U.S. and non-U.S. investors who bought non-U.S. stocks on non-U.S. exchanges invoke federal securities fraud laws if significant wrongful conduct took place in the United States.

Since then, U.S. courts have thrown out similar investor claims against companies such as Switzerland's Credit Suisse Group A.G. and UBS A.G. and Germany's Porsche S.E.

In the other case that could limit Olympus lawsuits, a California federal judge in July struck claims by pension fund and individual shareholders who lost money after Japanese automaker Toyota Motor Corp. recalled millions of vehicles linked to unintended acceleration.

This week, Olympus admitted that it hid investment losses dating to the 1990s and in 2008 used a series of overpriced acquisitions, some of which were quickly written down, to cover up the losses. One of those purchases also involved exorbitant payments to financial advisers.

Shares have fallen 76% in Tokyo since Oct. 14, when the company fired Chief Executive Michael Woodford. He later publicly campaigned to get Olympus to explain its deal-making, leading to this week's revelations.

The stock decline has wiped out more than $6 billion of market value at the company, Reuters data show.

Southeastern Asset Management Inc., a Tennessee-based firm founded by investor Mason Hawkins, is Olympus' largest U.S. shareholder with a 5.1% stake as of June 30, Reuters data show. A spokesman declined to comment on any litigation plans.

Under the Supreme Court's Morrison decision, the Pink Sheets "probably" count as a U.S. exchange, which would enable an Olympus ADR investor to bring claims, Mr. Dubbs said.

But, he said, the issue may be academic because of the low market value of securities involved.

There may be other ways to hold Olympus responsible for ADR losses, said Keith Fleischman, founder of The Fleischman Law Firm in New York. He represents many institutional and individual investors, and is also a former federal prosecutor handling financial fraud cases.

"You have to establish the actors had minimal ties with the United States, perhaps with money being transferred or part of a scheme being conducted in the country," he said. "It would be a challenge, and it would be difficult."

Investors could pursue claims in Japan under the Financial Instruments and Exchange Act, adopted after some corporate scandals. That 2006 law is sometimes known as "J-SOX" for its resemblance to the 2002 U.S. law, Sarbanes-Oxley, which was passed after Enron Corp.'s failure.

But unlike in the United States, there is no class action litigation in Japan. Shareholders must actively band together to sue—they must opt into a lawsuit rather than opt out. This makes it harder to get large groups of plaintiffs together to seek bigger recoveries and keeps legal costs down.

Damages in the Olympus scandal under Japanese law are also unclear, said Makoto Ikeya, a vice president at NERA Economic Consulting who studies Japanese securities litigation.

He said statutory damages would be based on the difference between the average Olympus stock price in the month before and month after the company made a "corrective disclosure."

"In the case of Olympus, the corrective disclosure date may be an issue, since the company has not yet made any formal correction," he said.

Still, shareholders may fare better in Japan after the Toyota ruling. In that case, U.S. District Judge Dale Fischer in Los Angeles said that Japanese law claims "substantially" predominated over U.S. claims and that it made more sense for Japanese courts to interpret that country's own securities laws.

"Foreign governments have the right to decide how to regulate their own markets," Judge Fischer wrote. "This respect for foreign law would be completely subverted if foreign claims were allowed to be piggybacked into virtually every American securities fraud case, imposing American procedures, requirements, and interpretations likely never contemplated by the drafters of the foreign law."

Another possibility for Olympus investors could be to sue in U.S. state courts, invoking state rather than federal law to get around the Morrison and Toyota decisions. But lawyers said Olympus defendants likely would succeed in arguing that such cases belong in federal court.

"Judges will still likely view this as a controversy involving a Japanese company over conduct that occurred in Japan," said Adam Savett, a securities lawyer who studies class action litigation. "They are likely to look at it through a 'Toyota' lens."

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