The Tokyo District Court handed suspended prison terms Monday to former Kanebo Ltd. President Takashi Hoashi and ex-Vice President Takashi Miyahara for colluding with auditors to cover up over 160 billion yen in capital deficits in fiscal 2001 and 2002.

The court sentenced Hoashi, 70, to two years in prison and Miyahara, 64, to 18 months. Both terms were suspended for three years.

Presiding Judge Hidetaka Watanabe condemned the fraud at what was then a major cosmetics and textile maker as malicious, and said it harmed shareholder faith in Japan’s stock market. But he suspended both sentences, saying the firm was already heavily in debt when Hoashi and Miyahara assumed their posts in 1998.

“The company had already been (hiding losses at its subsidiaries) since the latter half of the 1970s, but even after such action, its group liabilities still exceeded its assets,” the judge said.

“The defendants did their best to restructure, seek debt forgiveness and write off loss-making assets,” he said. “They are repentant, and society has already punished them to an extent, through severe criticism in the media.”

Both defendants have indicated they will not appeal.

Hoashi oversaw strong growth in Kanebo’s core cosmetics operations, while Miyahara made efforts in training personnel, he said. The court suspended their sentences due to these factors, and also because both have resigned, are elderly and in poor health.

The two had pleaded guilty to colluding with auditors at ChuoAoyama PricewaterhouseCoopers to hide deficits of 81.9 billion yen in fiscal 2001 and 80.6 billion yen in fiscal 2002 on consolidated earnings reports, in violation of the Securities and Exchange Law.

Prosecutors had demanded a two-year prison term for Hoashi and an 18-month term for Miyahara. They said the defendants acted out of a desire to protect their positions in the company and to fool bankers into extending more credit.

The court acknowledged those claims.

“Hoashi held an unchallenged position of power in the firm,” Judge Watanabe said. Armed with knowledge from his banking background, Hoashi oversaw a companywide effort to cover up losses and debt, and made it seem as if Kanebo had a chance at recovery, the court said.

When accountants from ChuoAoyama demurred, Hoashi and Miyahara pointed out that the auditors would also pay for failing to catch Kanebo’s falsified earnings in the past, and persuaded them to approve the cooked books.

The trial of three ChuoAoyama auditors charged for their involvement in the Kanebo fraud starts Thursday.

Kanebo, which at one time had over 10,000 employees and over 61 subsidiaries, was delisted from the Tokyo Stock Exchange last June after the window-dressing came to light.

The government-backed Industrial Revitalization Corp. of Japan took the company under its wing in 2004, and the firm has since pulled out of the textile business, while its cosmetics division, Kanebo Cosmetics Inc., has been spun off to let the company concentrate on pharmaceutical products, foods and sundries.

IRCJ sold off Kanebo Cosmetics to household products maker Kao Corp. last year, while it chose a consortium of domestic investment funds — Advantage Partners Inc., MKS Partners Ltd. and Unison Capital Inc. — to sponsor Kanebo’s recovery.

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