Is Citigroup Cooking the Books

An all-out war has broken out between Citigroup CEO Vikram Pandit and a prominent securities analyst who is saying that the big bank may be cooking the books by inflating its earnings through an accounting gimmick.

The analyst, Mike Mayo, of the securities firm CLSA, has been telling investors that Citigroup (NYSE:C) should take a writedown, or a loss on some $50 billion of “deferred-tax assets,” or DTAs. That is a tax credit the firm has on its financial statement that Mayo says is inflating profits at the big bank by as much as $10 billion.

For that critique, Mayo has been denied one-on-one meetings with top players of the firm, including CEO Vikram Pandit, Chief Financial Officer John Gerspach, and any other member of management, while other analysts enjoy full access to the bank’s top executives.  In fact, Mayo hasn’t had a meeting with Pandit or anyone in Citigroup management since around the time of the financial crisis, in the fall of 2008, when Citigroup was on the verge of extinction and needed an unprecedented series of government bailouts to survive.

Since then Citigroup has been profitable, albeit marginally. Though it posted a loss for the full year of 2009, after it repaid a government bailout loan during the fourth quarter and began to unwind Uncle Sam’s ownership stake. One reason Citigroup may be unwilling to write off its DTAs: to do so may sink the troubled bank back into unprofitability.

Now, Mayo’s continued criticism of the firm’s accounting has turned a testy relationship between Pandit and Mayo into one of the most-bitter analyst-CEO confrontations seen on Wall Street for some time. When asked about the matter, a spokeswoman for Citigroup would only say “I have no comment on Mike Mayo.”

Mayo told Fox Business Network: “I’d like to know why all my competitors get meetings with Pandit and the key people there and I don’t.”

Stock research has been among the most controversial—and some would say—conflicted businesses on Wall Street. Companies employ a number of methods to force analysts to hype their shares, including as Mayo is charging, withholding access to key executives who can provide insight into the company’s operations. In 2003, big firms like Citigroup and others paid billions of dollars in penalties to settle regulatory charges that their analysts inflated stock ratings in order to win lucrative stock underwriting business from the companies they cover, leading to billions of dollars in losses for investors who relied on the dubious analysis to buy stock.

Mayo, meanwhile, has had a sometimes-testy relationship with the various companies he covers. While other securities analysts look to curry favor with management in order to gain access, or so their firm’s could do business with the companies they cover, Mayo is often confrontational during meetings and on analyst conference calls.

In September 2000, Mayo was let go from Credit Suisse, people close to the firm have said, because of his history of downgrading the big banks which made no secret of their displeasure with his work, even though it won him a No. 2 spot in the coveted Institutional Investor rankings of bank analysts.

In September 2002, Mayo launched a major broadside against Citigroup, slamming the bank for its regulatory problems, namely its relationship helping to prop up scandal-plagued companies like Enron and WorldCom, as well as the management style of then CEO Sandy Weill. Mayo referred to Citigroup as “Noah’s Ark ” because Weill kept packing layers of management into the bank, including appointing two senior executives to run each business when only one was necessary.

People close to Citigroup say one of the current problems between the company and Mayo is the analyst’s insistence that Citigroup is possibly violating securities laws by failing to take losses on its DTAs. During conference calls, Citigroup has maintained that its accounting is in full compliance with the law, though Mayo has told investors the Securities and Exchange Commission should investigate the matter.

An SEC spokesman had no immediate comment.

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