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January 30, 2007 11:50 pm

Fraud inquiry implicates Nikko Cordial bosses

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Citigroup suffered another potential blow to its business in Japan on Tuesday after the top mangers of its investment banking joint venture partner, Nikko Cordial, were accused of involvement in an accounting fraud at Japan’s third-largest broker.

An outside investigation commissioned by Nikko Cordial concluded that Junichi Arimura, its former president, who resigned last month over the scandal, must bear “grave managerial responsibility” for the accounting fraud, which padded the broker’s net profits by 33 per cent in the year to March 2005.

Nikko Cordial has persistently denied involvement by top management in the fraud.

The scandal had already affected business at Nikko Citigroup, the investment bank which is 49 per cent owned by Citigroup and 51 per cent by Nikko Cordial, Mr Arimura said last month.

Nikko’s problems are the latest setback for Citigroup in Japan. In 2004, regulators forced Citigroup to close its private bank in Japan following a series of regulatory breaches. It recently announced a $415m charge to cover massive restructuring of its consumer finance business after the government capped lending rates.

However, earlier this week, Douglas Peterson, Citibank’s chief executive in Japan, said it was planning a big expansion of its retail and corporate banking operations.

The findings of the investigation into Nikko Cordial, in which Citigroup has a 4.85 per cent stake, are likely to put pressure on prosecutors to look into what happened at one of Japan’s most high-profile financial groups.

The Tokyo Stock Exchange on Tuesday placed Nikko Cordial on alert for possible de-listing.

According to the independent panel headed by Masaharu Hino, a former commissioner of Japan’s Financial Services Agency, Mr Arimura met two of the executives behind the accounting scheme at crucial times and gave instructions on several occasions.

The panel also found that Nikko Cordial failed to consolidate NPIH, a special-purpose vehicle set up to invest in private equity deals, even though it was 100 per cent owned by Nikko Principal Investments, itself 100 per cent owned by Nikko Cordial.

Nikko Cordial then falsified information on the timing of a derivatives deal that, together with its failure to consolidate NPIH, allowed it to book a profit of Y14.5bn ($119m), which it should not have booked, according to the Securities and Exchange Surveillance Commission.

The fraud prompted a Y500m fine by the Financial Services Agency, the largest financial penalty the regulator has handed out.

The panel concluded that NPI planned the scheme to boost profits. “My view is that there needs to be a massive overhaul of this company [Nikko Cordial]; otherwise, it cannot be revived,” one of the panel members said.

Shoji Kuwashima, Nikko Cordial’s president, who took over after the scandal prompted the resignation of the company’s two top executives, said: “We will accept the committee’s indications as the objective facts.”

It was Mr Kuwashima who commissioned Mr Hino to chair the inquiry into the affair.

The scandal, which has cast a cloud over the future of the broker, could also spur industry consolidation, analysts believe.

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