Feb. 26 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank, may lift its stake in Nikko Cordial Corp. to shore up its investment-banking partner in Japan after an accounting scandal forced out six executives, three people with knowledge of the talks said.

Citigroup may raise its ownership to 33.4 percent from 4.9 percent to gain a management veto at Nikko Cordial, said the people, who declined to be identified before an agreement is reached. The purchase would cost the New York-based bank about 380 billion yen ($3.1 billion) based on Nikko's market value.

Shares of Nikko, which faces a possible delisting from the Tokyo exchange after former executives were accused of inflating profit, jumped 13 percent. Mizuho Financial Group Inc., which owns 4.8 percent, today said it may compete for control of Nikko with Citigroup, which was forced to shut its Japanese private- banking business in 2004 because of regulatory breaches.

``The acquisition would work as a contingency plan for Nikko in case of a delisting,'' said Makoto Haga, who helps oversee 40 billion yen at STB Asset Management Co. in Tokyo. ``Citigroup wants to expand in Japan.''

Nikko's shares rose 153 yen to 1,364 yen, posting the biggest percentage gain among stocks on the MSCI World Index and taking the company's market value to 1.3 trillion yen. Citigroup in past years has trimmed its ownership in Nikko Cordial from more than 20 percent.

The stock, which lost 28 percent of its value in two days after an inquiry led by Japan's former stock market regulator on Jan. 30 said former managers padded earnings in 2004, has now almost completely reversed that decline.

Mizuho `Interested'

Nikko Cordial had about 12,000 employees and 109 branches as of Dec. 31. It manages about 30 trillion yen of clients' assets. The brokerage posted net income of 30.9 billion yen in the quarter ended Dec. 31, almost double the median estimate among analysts surveyed by Bloomberg News.

Citigroup and Nikko Cordial have a Tokyo-based investment- banking joint venture. Citigroup has considered acquiring all of Nikko Cordial or buying out Nikko's 51 percent of the venture, a person with direct knowledge of the talks said.

Nikko Cordial spokesman Shinichi Wada yesterday said the company is in talks with Citigroup, Mizuho and ``other firms,'' declining to elaborate. Atsuko Yoshitsugu, a Citigroup spokeswoman in Tokyo, declined to comment.

``Mizuho is interested in Nikko,'' Tokyo-based spokeswoman Masako Shiono said in a phone interview today. ``We have an intention to support it if we are asked.'' She declined to say if Mizuho is in talks with Nikko.

Perceived Risk

The perceived risk of owning Nikko Cordial bonds almost halved today.

Credit default swaps based on 1 billion yen ($8.27 million) of Nikko's debt fell to 4.8 million yen from 9.3 million yen on Feb. 23, according to data compiled by Bloomberg. The five-year contracts, used to speculate on Nikko Cordial's ability to repay its debt, declined as perceptions of creditworthiness improved.

Citigroup already is taking steps to expand in Japan. The bank may seek approval from the Tokyo Stock Exchange to have its shares trade locally, Yoshitsugu said Feb. 19. Citigroup also plans to incorporate its Japanese bank by July.

Douglas Peterson, 48, Citigroup's CEO in Japan, said last month that the company expects to double its retail outlets in Japan to 50 in the next few years to increase lending and services to individuals.

Executives Ousted

``Nikko's client network must be attractive to Citigroup,'' said Toru Komatsu, who advises fund managers in Europe and Japan as chief executive officer of Komatsu Portfolio Advisors Co. ``It would be a plus for Nikko's financial credit,'' he said, adding that Citigroup's earlier regulatory problems in Japan may be an obstacle.

Japanese regulators in 2004 ordered Citigroup to shut its private banking operations in the country because it failed to comply with money-laundering rules.

Six top executives have been forced out since the securities watchdog on Dec. 18 said Nikko overstated earnings for the year ended March 2005. Moody's Investors Service, Standard & Poor's and Fitch Ratings have cut Nikko's credit ratings and the Tokyo Stock Exchange is investigating whether the wrongdoings are serious enough to warrant removing the stock.

A report by an outside panel released Jan. 30 singled out Nikko's former Chief Financial Officer Hajime Yamamoto, 48, for ignoring an audit committee's objections to the treatment of transactions that boosted Nikko's earnings by 13.7 billion yen.

Shoji Kuwashima, 52, took over as Nikko Cordial's CEO in December and in January said he accepted the panel's findings. Nikko may take legal action against former managers to recoup financial damage, he has said.

Separately, Citigroup yesterday named American Express Co.'s Gary Crittenden, 53, as chief financial officer, succeeding Sallie Krawcheck, 42, who's moving to head the brokerage and private-banking unit.

To contact the reporter on this story: Takahiko Hyuga in Tokyo at thyuga@bloomberg.net;

Last Updated: February 26, 2007 02:43 EST