ASIC v Citigroup

13 July 2007

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On 28 June 2007 Jacobson J handed down judgment in the matter of ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963.

In this case ASIC alleged that Citigroup Global Markets Australia Pty Limited (Citigroup) breached s912A(aa) of the Corporations Act 2001 (the Act) by not having in place adequate arrangements for the management of conflicts of interest concerning its client Toll Holdings Limited (Toll). ASIC also claimed that Citigroup committed insider trading in breach of s1043A of the Act.

The facts

Like many global financial services companies, Citigroup operates various businesses which may be described as private side operations, and other businesses which may be described as public side. The private side businesses consist of investment banking services including advising on mergers and acquisitions. Toll was one such client for whom Citigroup was providing a full range of services pertinent to its proposed acquisition of Patrick Corporation Limited (Patrick). The public side businesses consist largely of trading operations with employee brokers buying and selling shares both on behalf of Citigroup and for public clients. There is scope for considerable conflict of interest to arise within firms which operate both kinds of business, and for this reason firms adopt “Chinese walls” – with varying degrees of success.

Throughout the period of its retainer with Toll, Citibank continued to trade normally in the shares of the proposed target Patrick through its public side business. However, on the final day of trading before Toll’s offer was made public, a senior manager of the team working on the acquisition on the private side noticed that large purchases of Patrick shares being made by the public side were raising Patrick’s share price. A higher share price would make the Toll offer less attractive. Through a chain of conversations, a trading supervisor on the public side business was instructed by a senior staff member on the private side to find the trader responsible and to order him to cease buying Patrick shares. This he duly did.

Issues, decision and implications

ASIC’s allegation that Citigroup failed to have in place adequate arrangements for the management of conflicts of interest was predicated on Citigroup owing fiduciary duties to Toll. By continuing to trade in Patrick shares whilst advising Toll on takeover prospects and strategies, ASIC argued that Citibank had a conflict of interest which was not adequately managed by arrangements within the firm. Toll denied the existence of any such fiduciary duties and maintained that it was as such free to trade in Patrick shares and therefore that no inadequacies in managing conflicts existed within the firm. Jacobson J confirmed that the existence and scope of fiduciary duties that are imposed by contract can be removed by contract. The mandate letter which defined the relationship between Citigroup and Toll stated that Citigroup was engaged as an “independent contractor and not in any other capacity including as a fiduciary”. His Honour found no reason why these words should be given anything but their plain meaning. Fiduciary duties were hence effectively excluded from the relationship and Citigroup was free to trade in Patrick shares.

ASIC’s allegations concerning insider trading were brought on two bases. First, it was alleged that the trader (in the public side business who was responsible for buying Patrick shares) was an “officer” of Citigroup (as defined under the Act) who, from the order given to him to “stop buying Patrick shares”, allegedly made a supposition that Citigroup was acting for Toll on a takeover of Patrick. ASIC claimed that this constituted “inside information” which could therefore be imputed to Citibank as a company trading shares under s 1042G of the Act. Jacobson J found that the definition of an “officer” for the purposes of the Act is concerned with someone with a management role, and not merely employees. His Honour also found that the actions of the trader in selling Patrick shares after the discussion with his supervisor (rather than buying shares) suggested that he did not draw any supposition from the order given to him to stop buying shares. To buy would have been the more profitable course of action in light of a takeover bid.

The second basis for the insider trading allegation was simply that officers from Citigroup’s private side business were aware of inside information which would likely be price sensitive (this was not disputed) and trades were subsequently made by Citigroup (albeit by the public side business). Jacobson J found that Citigroup successfully made out the Chinese wall defence in s1043G of the Act as they had laid down general procedures which could reasonably be expected to ensure that legal or compliance officers of the firm vetted any communication of potentially price sensitive information to prevent it crossing the Chinese wall. Further, these procedures seemed to work because the public side supervisor who gave the trader the order to stop buying Patrick shares was not himself made aware by the private side business of the reasons for doing so.

The case suggests that the law will protect investment firms which run multiple businesses from claims of breach of fiduciary duty and insider trading provided that sufficient safeguards are maintained. In this case, those safeguards included establishing the nature of the retainer with the client to avoid the imposition of fiduciary of duties, as well as quarantining information within the firm.

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