A 1978 report by a New York law firm that apparently exonerated Citibank of widespread allegations that it was laundering overseas profits to avoid tax payments did "more to conceal . . . wrongdoing that disclose it," according to a lawyer in the firm, quoted in a story to be published in the upcoming issue of The American Lawyer magazine.

The report was made for Citicorp, parent of Citibank, by the firm of Shearman and Sterling to explain allegations by a former Citibank employe who was fired from his European post in the bank after questioning internal practices allegedly designed to avoid tax payments overseas.

The employe, David Edwards, alleged in a lawsuit against the bank challenging his dismissal that various Citibank European offices created bogus foreign currency transactions between other Citibank offices around the world--transactions known in the industry as "parking." These transactions, allowed the bank to declare paper losses in high-tax countries and paper profits in low-tax nations, Edwards charged.

The Securities and Exchange Commission began looking into the allegations after they were made public in several published accounts. The bank's board of directors said in response that it would have Shearman and Sterling conduct an independant internal investigation to determine Citibank's position in the matter.

An internal SEC document, portions of which are reprinted in the American Lawyer story and in an earlier New York Times article, said the law firm's report "did not reveal the magnitude of 'parking' in Citibank, nor that it was done pursuant to management direction, knowledge and approval." The SEC investigation reportedly found the law firm's study incomplete, false and misleading.

The American Lawyer account quotes unidentified sources within Shearman and Sterling as saying that they were told not to investigate in any way the specific allegations made by Edwards in his lawsuit, but rather to "investigate the bank's foreign exchange-trading practices generally." The report also contends that Shearman and Sterling misrepresented the reports made to it by foreign law firms hired to investigate the allegations overseas.

The bank went about hiring the local law firms to conduct investigations in the several European countries where illegalities had been alleged. It was on the basis of these supposedly independent law firms' reports that Shearman and Sterling, in turn, reported to the Securities and Exchange Commission and the public that its client, Citibank, had not violated any laws. But the U.S. law firm never reported the names of the foreign firms or the contents of their reports.

The American Lawyer report says, however, that the five of the seven European firms retained by Shearman and Sterling that the magazine could identify already had working relationships with either Citicorp or Shearman and Sterling, and thus were far from independent observers.

The magazine reports that, nevertheless, at least some of the foreign law firms involved balked at the general scenarios of currency trading activities they were asked to investigate (rather than the specific allegations Edwards had raised). In one country, the first law firm retained had to be replaced because it refused to write an opinion "based on the ambiguious scenario offered," the American Lawyer report states.

In two other countries, the local counsel demanded more facts and then wrote opinions "substantially more qualified than the Shearman and Sterling report states." In another country, "Shearman and Sterling's description in its report of local counsel's opinion seems nothing less than deceptive," the story said.

The author of the American Lawyer article, Steven Brill, wrote that he could not be more specific in describing which countries he was referring to because he would place his confidential sources in jeopardy. In addition, Brill wrote, "Shearman and Sterling has told the SEC and me that these opinions, on which it bases its disclosure document, are protected by attorney-client privilege. In fact, the firm has refused to provide the SEC with even the names of the local counsel who wrote them."

Shearman and Sterling partner David McCabe said late yesterday in a telephone interview that the firm had not yet seen the American Lawyer story, and therefore he did not feel comfortable responding to it. But, he added, "The firm's actions and its role in connection with this matter were entirely proper, and subsequent events have confirmed the accuracy of our analysis." He cited the fact that 18 different government agencies here and abroad had investigated the matter, and pointed out that both the Comptroller of the Currency and the Securities and Exchange Commission had decided to take no action following their "rather extensive" inquries, with the Comptroller calling the Shearman and Sterling report a "fair and accurate presentation."

Asked about published reports that the bank had paid several million dollars in fines and back taxes overseas following foreign investigations, McCabe declined to discuss the subject because the matter was the subject of a shareholder's lawsuit and a pending congresssional investigation. He said that, as the bank's lawyers, it was "absolutely fundamental for us Shearman and Sterling ethically and professionally to preserve our client's confidences and not to engage in dialogues . . . about client's affairs."