Japan's Itochu Attacked by short-seller Glaucus

Glaucus questions how Itochu's classifies some investments.

Japan's Itochu Corp became the target of short-seller Glaucus Research Group on Wednesday with a report criticising the trading company's accounting practices, sending its shares tumbling as much as 10 percent.

The report highlighted Itochu's investments in a Colombian coal mining joint venture and China's CITIC Ltd, arguing that the Japanese firm had classified its investments in a way that inflated profits.

Itochu countered that it follows proper accounting procedures, that its financial statements had been audited by Deloitte Touche Tohmatsu, and said its views stand in stark contrast to the Glaucus report.

It is the latest Asian commodity-related firm to come under attack for its accounting practices.

Singapore-listed Noble Group (NOBGF)'s accounts were questioned by research firm Iceberg last year and although Noble rejected the allegations, it ordered up a new audit and sold key assets after the report and a rout in commodity prices. Singapore-based Olam International rejected allegations in 2012 by Muddy Waters but ended up gaining financial support from state investor Temasek.

Some analysts came to Itochu's defence, saying that while the trading firm had raised eyebrows with its use of accounting methods that were open to interpretation, it had stayed within the rules.

"We have all raised these issues, and the share price has reflected all these concerns. This is not new information to any of us," said Thanh Ha Pham, an analyst at Jefferies in Tokyo.

But others said that Glaucus had raised valid points about why Itochu did not include some investments in its consolidated accounts when it appeared to have material influence such as the case with mining venture but did include others when it did not have material influence such as the CITIC investment.

"It may not be a smoking gun, but (is) a legitimate cause for concern," said Laurent Bernut, a short seller and founder of Alpha Secure Capital.

Itochu's shares fell as much as 10 percent on Wednesday to their lowest levels in more than two years. They later pared some of their losses to end down 6.3 percent.

Under CEO Masahiro Okafuji, widely seen as a strong and charismatic leader, Itochu has diversified aggressively into non-resource related businesses and last financial year it booked 240 billion yen ($2.3 billion) in net profit - the most among Japan's top five trading companies.

By contrast, rivals Mitsubishi Corp and Mitsui & Co reported their first-ever net losses due to huge writedowns on their energy and metals assets.

Itochu, a company with $48 billion in annual revenue and a market value of $18.6 billion, has become best known for its 10 percent stake in CITIC Ltd, part of one of China's biggest conglomerates.

Itochu's interests span energy and chemicals, metals and minerals while its non-resource interests include retail, textile and machinery businesses.

Itochu has said its pivot to non-resource businesses will help it reap record profits in the current financial year to March.

Reporting by Thomas Wilson and Yuka Obayashi