ASIC v Citigroup decision: no conflict and no insider trading

In Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited
(ACN 113 114 832) (No. 4) [2007] FCA 963, the Federal Court has dismissed ASIC's claims and decided that :

(a)     Citigroup did not contravene its obligations under s 912A(1)(aa) of the Corporations Act to have in place adequate arrangements for the management of conflicts of interest (as it did not have a conflict); and

(b)     Citigroup did not breach the provisions of s 1043H of the Corporations Act and s 12DA of the ASIC Act which prohibit misleading and deceptive conduct; and

(c)     Citigroup did not contravene the insider trading provisions contained in s 1043A of the Corporations Act (firstly because the trader was not an "officer" of Citigroup and because he did not make the supposition alleged by ASIC as a result of a discussion with his superior (that Citigroup was acting for Toll in relation to the proposed takeover of Patrick) and secondly because the Chinese walls defence contained in s 1043F of the Corporations Act was engaged.)

As discussed here, the proceedings arose out of the purchase by a public side employee of Citigroup of over 1 million shares in Patrick Corporation Limited (‘Patrick’) at a time when private side employees working in the Investment Banking Division were acting for Citigroup’s client, Toll Holdings Ltd (‘Toll’) on a proposed takeover bid for Patrick.  The shares were purchased by the proprietary trader for Citigroup’s own account on the last trading day before Toll announced its bid for Patrick. When private side employees became aware of the proprietary trader’s purchase of the shares, steps were taken from within the private side that resulted in an instruction to the trader to stop buying any more shares in Patrick.  The trader did not buy more shares but in the half hour before the close of trading, he sold nearly 200,000 of the parcel of Patrick shares that he had purchased earlier that day.

The Court accepted Citigroup's  argument that  the terms of its letter of engagement with Toll excluded the existence of any fiduciary relationship between the investment bank and its client. ASIC contended that, notwithstanding the existence of a clause in the letter which excluded the existence of such a relationship, the investment bank breached certain fiduciary duties to its client by failing to obtain the client’s informed consent to proprietary trading in the takeover target’s shares by another division of the bank.The Court decided that the law does not prevent an investment bank from contracting out of, or modifying, any fiduciary obligations. In the absence of proof of a fiduciary relationship, ASIC's main claims failed.

The judgment contains useful discussions about conflicts of interest, insider trading and Chinese walls.

UPDATE 29 June: ASIC comments: "The Court has clarified important aspects of insider trading law, for example the operation of ‘Chinese Walls’ and the passing of sensitive information. These clarifications will assist ASIC in pursuing insider trading actions." 

UPDATE 18 July 2007: ASIC will not appeal