Feb. 22 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank, may seek to take over its Japanese investment-banking venture with Nikko Cordial Corp. after an accounting scandal led to the resignation of six top Nikko executives, two people with direct knowledge of the plan said.

Nikko, Japan's third-biggest securities firm, admitted to overstating earnings in 2004. An outside panel found evidence of fraud and the Tokyo-based company, whose shares have dropped 19 percent since Dec. 15, may lose its stock-market listing.

Citigroup is weighing a buyout of Nikko Citigroup, Japan's No. 4 equity underwriter last year, in part to ensure the scandal won't jeopardize the bank's ties to local companies and investors, said the people, who declined to be identified because a decision hasn't been made.

``As Nikko's reputation worsens, Citigroup may want to buy Nikko's stake in the joint venture to continue investment-banking operations in Japan on its own,'' said Shinsuke Amiya, former head of investment banking at Merrill Lynch & Co. in Japan, who now runs Japanese lender NIS Group Co. ``It would be a waste just to sell the business to someone else.''

Citigroup spokeswoman Shannon Bell in New York declined to comment. Shinichi Wada, Nikko Cordial's spokesman in Tokyo, said he couldn't comment on any specific negotiations.

Citigroup would prefer to keep the venture intact, maintaining its link to one of Japan's largest networks of brokers, the people said. The bank may step in with an offer to buy Nikko's controlling stake should the regulatory scrutiny cost the firm business or force it to seek new sources of capital, they said.

Nikko Cordial can't sell the stake to anyone else without approval from Citigroup, according to the people.

Studying Ownership

Shares of Nikko rose 2.7 percent to 1,240 yen in Tokyo today, reducing this year's decline to 9 percent. Credit-default swaps based on Nikko's debt dropped as perceptions of the company's creditworthiness improved. Five-year contracts based on 1 billion yen ($8.3 million) of debt fell to 8.8 million yen from 12.5 million yen at the Feb. 2 close, data compiled by Bloomberg show.

The chance of Nikko defaulting in the next five years fell to 7 percent from 10 percent, according to a valuation model from New York-based JPMorgan Chase & Co. that gauges swap prices.

Standard & Poor's downgraded Nikko's credit rating to the lowest investment grade earlier this month.

Nikko Cordial Stake

Citigroup's shares slipped 16 cents to $53.59 in composite trading on the New York Stock Exchange.

The bank owns 4.9 percent of Nikko Cordial's shares and 49 percent of the eight-year-old Nikko Citigroup partnership. Its corporate and investment bank earned $272 million in Japan last year on revenue of $1.05 billion, including its share of results from Nikko Citigroup.

Nikko Citigroup's recent deals include an underwriting role together with Goldman Sachs Group Inc. and Morgan Stanley in the $2.97 billion share sale by Japan's Aozora Bank Ltd. in November. It also was hired in April by Bain Capital LLC and Japan's Advantage Partners LLP to arrange with Citigroup $500 million to $600 million of loans for the buyout of a Mars Inc. vending unit.

``There has been some negative impact on the joint venture because of the publicity surrounding Nikko Cordial,'' Citigroup Chief Executive Officer Charles Prince said during a Jan. 31 presentation to investors. ``In terms of our ownership, that is something we have to continue to study.''

Nikko's Accounting

Citigroup became Nikko Cordial's largest shareholder in 1998, taking a 25 percent stake. The $1.59 billion investment boosted Nikko's capital following losses and a seven-year slump in the Japanese economy, and provided Citigroup with access to corporate clients increasingly open to hiring foreign advisers.

The two companies formed the investment-banking venture a year later. Citigroup reduced its stake in Nikko Cordial, which ranks behind Nomura Holdings Inc. and Daiwa Securities Group Inc. among Japanese brokerages, as the shares more than doubled from 2002 to 2005.

``Citigroup may leave Nikko Cordial because the company has built a sales network and obtained the `know-how' to access Japanese investors,'' said Hisakazu Amano, who helps oversee about $16 billion at T&D Asset Management Co. in Tokyo.

Citigroup said earlier this week that it may seek to list its shares on the Tokyo Stock Exchange, and the company's consumer-banking arm plans to incorporate in Japan in 2007 and double its number of branches there to 50.

Ignored Objections

An independent panel, led by former Financial Services Agency Commissioner Masaharu Hino, last month singled out former Nikko Chief Financial Officer Hajime Yamamoto, 48. It found he ignored an audit committee's objections in 2004 to the accounting for transactions that boosted Nikko's profit by 13.7 billion yen. Citigroup had a representative on Nikko's board of directors at the time.

Shoji Kuwashima, who became Nikko's chief executive officer in December, has said he accepts the panel's findings. The firm plans to hire 50 people to tighten its internal controls.

Citigroup has endured setbacks of its own in Japan. Three years ago, regulators ordered the company to close its local private bank for failing to police fraud and money laundering. Last month, Citigroup moved to shut about 80 percent of its consumer-finance outlets in the country after new laws capped the interest rate non-bank lenders may charge.

To contact the reporter on this story: Justin Baer in New York at jbaer1@bloomberg.net.

Last Updated: February 22, 2007 18:41 EST