The prosecutors also arrested Akio Nakagawa, cited in a December panel report as having aided Olympus in structuring its loss-hiding schemes. Nobumasa Yokoo, who was also named in the report, Taku Hada and Hiroshi Ono, were arrested by the Tokyo Metropolitan Police, according to the statement.

“We take the situation seriously,” Yoshiaki Yamada, a spokesman for Olympus, said by phone today. “We will cooperate fully with investigators.”

“It may take time for Olympus to regain its reputation,” said Yoshihiro Ito, chief strategist at Okasan Online Securities Co. in Tokyo. “The company is trying to show it's making an effort to rebuild its management and balance sheet.”

Founded in 1919 as a microscope and thermometer business, Olympus produced its first camera in 1936 and a predecessor to the modern-day endoscope in 1950, according to its website. Olympus now controls 75 percent of the global market for endoscopes, instruments doctors use to look inside the body cavity to help detect disease.

In 1987, President Toshiro Shimoyama announced a strategy to strengthen the company's investments after operating profit fell by half due to the yen's gain, according to a panel report disclosed in December. Investment losses began to swell after the Japanese stock market crashed in 1989 and reached about 100 billion yen ($1.3 billion) in 1998, when Yamada and Mori resorted to financial trickery to hide them, the report said.

Former bankers

The company inflated takeover costs of London-listed Gyrus Group Plc and three Japanese companies with the intention of boosting goodwill, according to the Dec. 6 panel report. Yamada and Mori planned to write down the goodwill over years to cancel out losses that were kept off Olympus's balance sheet.

At a press conference in London this morning, former president Woodford said, while the arrests were encouraging, “there are still many important issues which are not covered by today's announcement.” He called for further investigation into the role of banks and accounting firms in the fraud, and said three directors at the company — Masataka Suzuki, Kazuhiro Watanabe and Shinichi Nishigaki — should be replaced.

Nakagawa, 61, helped to create paper companies which bought impaired assets from Olympus, while Yokoo, 57, who ran a Tokyo-based consulting firm Global Company where Hada and Ono worked, helped Olympus set overseas bank accounts to provide funds to such paper companies, according to the panel report. Yokoo's venture fund was used by Olympus to inflate costs of acquisitions of three Japanese companies, the report said.

Nakagawa, who's based in Hong Kong, worked at Merrill Lynch, Pierce, Fenner & Smith, Shearson Lehman Hutton Inc., Drexel Burnham Lambert Inc. and PaineWebber Inc. from the 1970s to the 1990s, according to Financial Industry Regulatory Authority records in the U.S. He started a boutique brokerage firm Axes (Japan) Securities Co. in 1998.

Olympus fell 2.4 percent to close at 1,273 yen in Tokyo trading. The stock is up 26 percent this year, compared with a 9 percent gain by Japan's benchmark Nikkei 225 Stock Average.

Olympus's case “is getting more attention from foreign media than Japanese,” Toshiyuki Shiga, chief operating officer of Nissan Motor Co., said at a conference today. “Looking at their articles make me concerned that it would lead to a view that Japanese corporate governance overall is weak.”

Olympus sued 19 current and former executives, including current President Shuichi Takayama and five corporate auditors, in January over their roles in concealing losses. The company formed panels to reform management and nominate a new board.

The company plans to hold an emergency shareholder meeting on April 20 at which investors will vote on new management.

The company is seeking as much as 3.6 billion yen in damages from executives, including Kikukawa, and a combined 1 billion yen in damages from corporate auditors.

The Tokyo exchange last month allowed Olympus to keep its stock market listing after fining the company 10 million yen and telling it to report on efforts to improve management.

Kikukawa, born in 1941 in Japan's southwestern Shikoku island, joined Olympus in 1964 after working for a trading company. Under Kikukawa's leadership from 2001, Olympus's revenue jumped 82 percent to 847 billion yen, while operating profit remained almost unchanged at about 35 billion yen.

He oversaw about $4.3 billion in 31 acquisitions of companies, including Gyrus, according to data compiled by Bloomberg.

Olympus earlier this week predicted an annual loss of 32 billion yen for the year ending in March as it wrote off equipment damaged by Thailand's record floods. The accounting fraud hasn't had a major impact on its business, Takayama said.

The company is considering ways to boost capital including alliances, he said.

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