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ASIC v Citigroup- Case Analysis

Question :

The Australian Securities and Investment Commission is a regulator of Australia's integrated corporate, financial service, consumer credit and market regulator. It is an independent body of government which is entrusted with the task to regulate the national corporation and its financial service. The case of ASIC v. CitiGroup has determined the true essence of insider trading and the role of ASIC in finding out the liability of the corporations.

  • Whether the investment banks can take the defence of Chinese wall to escape any fine or damage?
  • How the case of ASIC v. CitiGroup changed the compliance system and helped the companies to escape from liability of insider trading?
  • What is the procedure for effective Chinese Wall defence?
Answer :

Background

The case of Australian Securities and Investment Commission (ASIC) v. CitiGroup Global Markets Australia Pty Ltd states the relationship between the investment bank and the client who is taking advice on the proposed takeover bid which came under an equitable microscope. This case had considerable attention both in Australia and overseas. There is the proposition which is advanced by Australia's financial services regulator where the bank was placed in the situation that its personal interest conflicted with its duty towards the bidder client and resulted in a breach of fiduciary duty which was owed by bank toward its client.

Facts of the case

CitiGroup Global Markets Australia Pty Ltd have various divisions through which it conducts the business which includes Investment banking which involves private side employees and the Equities trading which involves public side employees. The private employees of the investment banking were exposed to the confidential information which were also market sensitive and the public side employees were not exposed to it. In order to restrict the flow of information between different business divisions, the company CitiGroup set up the Chinese walls.

The proceedings were initiated when the public side employees of the CitiGroup purchased 1 million shares in Patrick corporation Limited and at that time the private side employees who were working in the business division called Investment banking and acted as the client of CitiGroup, namely Toll holdings Ltd on the proposed takeover bid for the corporation of Patrick. The proprietary trader (Equity Trading) for the CitiGroup purchased the shares on its own account on the last day of trading just before the Toll Holdings Ltd announced its bid for the Patrick Corporation Limited.

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When private side employees (investment banking) get aware of this, many steps were taken by the private side employees which resulted in the instruction to a trader to stop further purchase of the shares in Patrick corporation Limited. The Equity trading stopped purchasing further shares but in a span of half an hour before the closing of the trade, the Equity trading sold 20,000 shares which were purchased on that day at the profit. On the following date, Toll Holdings Limited announced its takeover bid for the Patrick corporation Limited.

Issue raised in the case

Whether Equity Trading was in possession of the insider information when it purchased the shares?

Contention of ASIC

CitiGroup was an advisor to Toll Holdings Limited and occupied the relationship which is fiduciary in nature. When the shares were purchased in Patrick Corporation Limited, the company CitiGroup breached the fiduciary duty and also the fiduciary obligation under Section 912A(1) of the Corporations Act of 2001.

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Also Citigroup breached Section 1043H and 12DA of the ASIC Act which states the prohibition of the deceptive and misleading conduct.

Decision of court

The court held that the fiduciary claim failed at outset as a letter of engagement through which Toll Holdings Limited was retained by the company CitiGroup have excluded the existence of the fiduciary relationship. Moreover the law did not prohibit the investment bank from contracting out of the fiduciary obligation at a commencement of relationship.

In order to succeed the first insider trading claim, the employee have to be in the possession of the insider information and its knowledge has to be attributable to the CitiGroup. But under section 1042G(1), the knowledge of employee was not attributable to the corporation CitiGroup unless and until it is an officer as per Section 9 of the said Act. Further the court also held that an employee has not made supposition as pleaded by ASIC as CitiGroup was acting for the company Toll Holdings Limited in context to takeover of Patrick Corporation Limited. Hence it does not breached provision of Section 12DA and 1043H which prohibits deceptive and misleading conduct.

For the seconding insider trading claim, it also failed as CitiGroup have claimed the defence of the Chinese wall as per section 1043F of Corporation act, 2001. The court upheld the defence of Chinese wall and endorsed the warning that the Chinese walls need to insulate the trader from the information in order to satisfy the essential requirement of the section. The court also outlined relevant procedure which are required for the effective Chinese wall as mentioned below-

  • Physical separation of the department.
  • Educational programmes.
  • Procedures which are necessary to deal with crossing the wall.
  • Monitoring by the compliance officer.
  • Disciplinary sanctions.

Conclusion of the case

The case of ASIC v. CitiGroup have demonstrated as to how a adequate compliance system can protect the company and its owners from the liability of insider trading specified under the Corporations Act, 2001. The defence of Chinese Walls restrict the flow of information between different business divisions but the same time it helps the company to escape from damage of goodwill and fines. This case have worked as a timely reminder and a warning which shows the importance of complying with the measures especially in reference to the Chinese wall defence.

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