At Olympus, a drama with plenty of twists

October 21, 2011, 3:59 PM UTC

By Kevin Kelleher, contributor

Update: The saga continues. On Tuesday, Oct. 26, Olympus chairman Tsuyoshi Kikukawa stepped down, vacating the posts of chairman, CEO and president. Shuichi Takayama, a 41-year veteran of Olympus who ran the company’s imaging business, assumed the role of president.

It’s not clear how much is changing at Olympus. Kikukawa remains on the board, and Takayama was one of the board members who voted to fire ex-CEO Michael Woodford. Meanwhile, Woodford said he would meet with FBI officials to discuss matters concerning Olympus.

FORTUNE — A company in turmoil is never a pretty sight. But few corporate crises are as ugly — and strange — as the one afflicting Olympus Corp.

Olympus is a global brand, but its company usually doesn’t make headlines. Over the years, most of us have bought at least one of its cameras, binoculars or digital voice recorders, without much thought to its executives and board. All that changed last week, when the firing of the company’s CEO only two weeks into the job precipitated what is surely the biggest crisis in the Japanese company’s 92 years.

The drama to date has had a Michael Clayton element to it. And, it appears nowhere near finished. Olympus’ revenue had fallen for three straight years so that its fiscal 2010 revenue was three quarters of the 2007 figure. To counter a slump in consumer products, Olympus had expanded aggressively into medical and life-science equipment, which now make up more than half its net profit.

In February, Olympus promoted Michael Woodford from head of European operations to company president. On Oct. 1, Woodford was also named CEO, taking over both positions from Tsuyoshi Kikukawa, who became the board’s chairman. At first, Woodford was cast as an executive who could strengthen Olympus’ global presence. He had a 30-year working relationship with Kikukawa, and the two men openly praised each other. Woodford called Kikukawa “radical and adventurous” with a “determination for drastic change.” Plus, he said, the two men shared the same sense of humor.

Neither man is laughing today. Last Friday, Woodford went to Olympus’ board to demand Kikukawa’s resignation as chairman, citing serious governance concerns. The meeting lasted 10 minutes, seven of which were spent waiting for Kikukawa to arrive. Then, 14 of the 15 board members voted to fire Woodford as president and CEO (although he remains a director). The 15th, Woodford himself, wasn’t allowed to speak at the meeting. But he has spoken since — loudly and repeatedly.

In interviews, Woodford said he grew concerned after reading magazine stories that questioned acquisitions Olympus made in recent years, notably the November 2007 purchase of U.K. medical-equipment maker Gyrus Group for $1.92 billion. Woodford then discovered that two advisory companies — Axes America of New York and its Cayman Islands subsidiary Axam Investments — received $687 million in fees through cash, warrants and preferred shares. That figure is equal to 36% of the deal’s value. Woodford said a $2 billion deal would normally pay a 1% fee to advisers. At first, Olympus disputed the fee amount, then backpedaled and acknowledged it was accurate.

Woodford is still stirring up trouble for Olympus, calling for Japanese regulators to investigate the advisory fees, clamoring for shareholders to also demand an investigation and all but daring Olympus to try to sue him. Japan’s securities regulators are notoriously toothless, but shareholders — including those with the largest stakes in Olympus – are starting to speak up. Already, the scandal has nearly halved Olympus’ stock price, since the deals in question could force the company to restate its earnings significantly.

What’s more, the scandal is far from passing. Many questions remain, starting with just where all that money went. Axes America, the advisory company in question, set up business in 1997 and worked out of a midtown office for years. In 2008, the company withdrew its broker-dealer registrations. Then, according to a report by PriceWaterhouseCoopers, Axam was stricken from the Cayman Islands registry earlier this year, not long after receiving its last payment from Olympus.

Both companies appear to have been controlled by a Boca Raton, Fla., firm called Sagawa & Co., whose president and owner is Hajime Sagawa, Fortune has learned. Sagawa, 64, is an old hand on Wall Street. According to 1991 profile in Securities Week, Sagawa worked at Nomura Securities and Drexel Burnham Lambert in the 1980s before heading up M&A at Sanyo Securities America and later becoming a managing partner at PaineWebber. But little information on Sagawa exists beyond that. Sagawa did not respond to requests for an interview.

According to a 2008 filing by Axes America with the SEC, the firm paid $6.5 million in cash to Perella Weinberg Partners, a financial advisory firm based in New York. The filing noted that Perella Weinberg acted as a subadvisor to Olympus’ acquisition of Gyrus. Perella Weinberg declined to comment for this story. But its involvement seems limited to the merger talks in 2007, well before Axes’ fees ballooned into the hundreds of millions of dollars.

Whatever the outcome of the Olympus scandal, it’s not likely to favor Kikukawa or his board. If Olympus can escape a hostile takeover from a buyer who sees its shares are cheap, then it will need new leadership. For his part Woodford, is remaining vocal. On Thursday, he hinted that the total amount of “irregular payments” could total $1.5 billion, and that he was seeking police protection as he agitates for Olympus to clean its house.