On June 28th, 2007, the verdict in ASIC v Citigroup Global Markets Australia Pty Limited [2007] FCA 963 was given by the Federal Court and this judgment was not only awaited in the nation, but across the globe as well (Hanrahan, 2008). In this case, the claims which were brought forward by the ASIC were dismissed by the Federal Court, which was a victory for the investment banks’ existing practices. Two major principles were given through this verdict and these two stated that the investment banks were not prevented by the law from contracting out the fiduciary relationships in particular situations; and that the information barriers could easily determine the insider trading liability. Hence, it was held by the court that the company was not engaged in insider trading and that the conflict of interest provisions were not contravened by the Citigroup (ASIC, 2017).
In the following parts, the details of this case have been discussed, which include the facts of the case, the duties which were claimed to be breached and the decision given by the court.
In this case, the facts were quite multifarious; however, an attempt has been made to present the same in a simplified manner. In this case, Citigroup Global Markets Australia Pty Ltd (Citigroup) undertook its business by different divisions which included the investment banking, i.e., IB, and the equities trading, i.e., ET. Here the private side employees, which were the IB, had been exposed to market sensitive and confidential information (O’Brien, 2007). On the other hand, the public employees, which were the ET, were not exposed to this particular information. Citigroup had set up Chinese Walls in this case so that the flow of information could be restricted between the business divisions. The proceedings were raised in this matter after the shares of the Patrick Corporation Limited (Patrick) were purchased by the ET division (Seeto, 2008).
The timing of this was also controversial as that the same time the IB division was acting on the proposed takeover bid of Patrick for Toll Holdings (Toll). Before the bid for Patrick was announced by Toll, the shares were purchased on the very last trading day. When the purchase came to the knowledge of IB, steps were initiated it caused the ET to be told to halt the purchase of any more shares of Patrick. And this direction was adhered by ET and they did not buy any more Patrick’s shares. However, just half an hour before the trading was set to close, 200,000 shares were sold by ET which had been purchased at the very same day for a profit. The next day, the takeover bid for Patrick was announced by Toll (Seeto, 2008).
In this case, it was contended by the ASIC that numerous sections of the Corporations Act, 2001 (Cth) had been breached in this case. Section 912(1)(aa) of this act was claimed to have been breached on five different points. As per this section, the person who holds the AFSL, i.e., the Australian financial services licence had to put in place certain sufficient arrangements so that the conflict of interest could be managed, which relates to the provisions of financial services (WIPO, 2015). The base of these claims was on the existent fiduciary relationship between Toll and the Citigroup (Stringer & Harkness, 2007). It was also claimed by the ASIC that due to these fiduciary duties which were owed by Citigroup to Toll, the Citigroup had been engaged in unconscionable conduct, due to which the provisions of the Australian Securities and Investments Commission Act 2001, section 12CA(1) were breached, along with the breach of common law due to the allowance of conflict of interest and the duty to be raised (Jacobson, 2007).
In addition to this, Citigroup failed to inform Toll that the shares in Patrick had been acquired by them, it was alleged that the Citigroup had been engaged in both misleading and deceptive conduct, which was a breach of section 12DA of the ASIC Act and of section 1041H of the Corporation Act. The breach of these sections was based on the fiduciary duty of the Citigroup to make appropriate disclosure to Toll with regards to all of the information which was relevant to the bid. Hence, two claims were made against the company by ASIC with regards to insider trading. The first one was related to the shares of Patrick which were sold by the company through the proprietary trader, when they had insider information. And the second one was based on the company trading in the shares of Patrick when the private side employees had this insider information (Stringer & Harkness, 2007).
While deciding the conflict of interest and the related issues, the court stated that in this situation, there was an absence of fiduciary relationship of Citigroup with Toll. The reason behind this is that the mandate letter which was present between the two provided in an express manner that Citigroup was retained by Toll as an independent contractor and there was no other capacity here, specially the fiduciary. Hence, to exclude the fiduciary relation was deemed as effective. It was also noted by the court that the mandate letter contained the express terms, where the pre-contract dealings between the two would have easily highlighted the existence of such relationship, had it been the case (Allens, 2007).
The basis of this finding was also given by the court. The relationship between a client and its adviser is not a fiduciary relationship inherently, unless the same belongs to the special category of attorney and client. Instead, the existence and scope of fiduciary relationship depends on the factual situation, as well as, the terms of the contract drawn between the parties (McCabe, 2007). Also, when the contractual relationship clearly provides the base for such a relationship, the rights and the liabilities of the contractual parties are regulated through the contract and the operation of fiduciary duties can be excluded or modified by the contracting parties. Even though, under section 912(1)(aa) of the Corporations Act does not require that a fiduciary relationship has to be established, it had been argued by the ASIC in this case (ICNL, 2017). And so, the finding of existence of such relationship was crucial to the claims made by the ASIC with regards to the conflicting management arrangements’ adequacy on part of Citigroup. Further, the misleading and deceptive conduct and the unconscionable conduct claims were also framed on similar basis so they were again dependent upon fiduciary relationship’s existence (The Sydney Morning Herald, 2007).
The claims of insider trading were also thoroughly discussed by the court. In the first claim, the insider trading was alleged to be the proprietary trader’s supposition that Citigroup was action with regards to Patrick’s takeover for Toll. The validity of these claims was dependent upon the attribution of proprietary trader’s knowledge to Citigroup. Under section 1042G of the Corporations Act, 2001, the knowledge of the officers of the company, are in specific situations, attributed to the body corporate (Federal Register of Legislation, 2017). It was contended by the ASIC that on the basis of the authorization given to the proprietary trader, for trading an amount up to $10 million each day, he fell under this category and this could have an impact over the Citigroup’s financial standing (Stringer & Harkness, 2007).
The court stated that this was not at all sufficient. For this condition to be fulfilled, the court stated that there had to be an involvement or indulgence in the decision and policy making which would substantially or wholly have an impact over the company’s business. Reliance was not placed by the ASIC over the section 769B of the Corporations Act (Stringer & Harkness, 2007). And this particular section was attributed to the employee’s state of mind to a body corporate and this denotes the knowledge of the employee, which goes beyond simply the officers of the company (Australian Government, 2017).
With regards to the second claim of the inside information, it was alleged that there was knowledge with regards to the Patrick’s bid and its launch in immediate future. This claim was also defended in a successful manner by the Citigroup as they had placed the Chinese walls in adequate places as was required pursuant to the section 1043F of the Corporations Act. The court, with regards to the Chinese walls, held that under section 1043F(b) of the governing act, there was no need for a standard of absolute perfection to be shown (Jade, 2007). And so the arrangements which had been established by the company had been sufficient to comply with the requirements given under this particular section. In the view of the court, the arrangements which Citigroup adopted did not anticipate the situation which took place in express terms; though, the same had stated the general procedure which was expected in a reasonable manner for making certain that the compliance or legal officers of the company had vetted any such communication which could potentially contain a price sensitive information, so that the crossing of Chinese Wall could be prevented (Australasian Legal Information Institute, 2007).
The court stated that if the defenses which had been set out in section 1043F of this act had to be used, it had to be shown that along with the Chinese walls were placed properly, but the relevant information was communicated properly to the individual who undertook the decision with regards to trade. Due to the oblique terms of where the Head of Equities was spoken to by the private side employees, along with the terms of conversation between the proprietary trader and Head of Equities, it was concluded by the court that the information which was relevant, was not communicated. This shows that it is crucial that the Chinese walls are placed adequately, and that it is made sure that these procedures address the actual situations which are raised (Euromoney, 2007). It was stated by the court that the test which was contained under section 1043 of this act was an objective test and so, the arrangements were required which could be excepted in a reasonable manner to make certain that there had been an absence of the communication of the information. The relevant procedure was also outlined by the court for effective Chinese walls, where it was crucial that there was presence of disciplinary sanctions; physical separation by departments; compliance officers’ monitoring; education programs and the procedures which could deal with the crossing of these walls (Seeto, 2008).
It was also held by the court that with regards to the compliance procedures and the written policies of Citigroup, adequate procedures had been in place. The written policy prohibited the IBs from commutating such information which was material and non-public to the people belonging to the ET side without the involvement of compliance or legal personal for accessing the information’s materiality and to implement the Chinese wall crossing procedures where appropriate. These written policies of Citigroup had been properly made available to all the employees and in addition to this, regular trainings were also provided in this regard. This enabled the employees to steer clear of possible conflicting situations (Seeto, 2008).
Conclusion
The case of ASIC v Citigroup was a crucial case as it showed that if the sufficient compliance system had been placed properly for the protection of the company and the people responsible for running the same, the liability under the insider trading provisions of the Corporations Act would be complied with. This case demonstrated the purpose of the Chinese Walls, which is to restrict the flow of information amongst the different divisions within a single organization. And a company can easily escape the possible damage to its reputation and the large fines by applying proper schemes and the adherence of Chinese wall requirements. This case acts as a timely reminder, as well as, a warning with regards to the significance of the proper compliance measures to be put in place, with a special regards to the Chinese walls.
References
Allens. (2007). Client Update: Commercial Litigation – ASIC Fails In Conflict Of Interest And Insider Trading Case Against Citigroup. Retrieved from: https://www.allens.com.au/pubs/ldr/cucljun07.htm
ASIC. (2017). 07-171 Decision in ASIC v Citigroup. Retrieved from: https://asic.gov.au/about-asic/media-centre/find-a-media-release/2007-releases/07-171-decision-in-asic-v-citigroup/
Australasian Legal Information Institute. (2007). Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (ACN 113 114832) (No. 4) [2007] FCA 963 (28 June 2007). Retrieved from: https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2007/963.html?stem=0&synonyms=0&query=Citigroup
Australian Government. (2017). Corporations Act 2001. Retrieved from: https://www.legislation.gov.au/Details/C2013C00605
Euromoney. (2007). A big win for the banks: The impact of ASIC v Citigroup. Retrieved from: https://www.euromoney.com/Article/1407811/A-big-win-for-the-banks-The-impact-of-ASIC-v-Citigroup.html
Federal Register of Legislation. (2017). Corporations Act 2001. Retrieved from: https://www.legislation.gov.au/Details/C2013C00605
Hanrahan, P.F. (2008). ASIC v Citigroup: Investment banks, conflicts of interest, and Chinese walls. Retrieved from: https://law.unimelb.edu.au/__data/assets/pdf_file/0008/1709837/67-Hanrahan_-_ASIC_v_Citigroup1.pdf
ICNL. (2017). Corporations Act 2001. Retrieved from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf
Jacobson, D. (2007). ASIC v Citigroup Decision: No Conflict And No Insider Trading. Retrieved from: http https://www.brightlaw.com.au/asic-v-citigroup-decision-no-conflict-and-no-insider-trading/
Jade. (2007). Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (ACN 113 114832) (No. 4). Retrieved from: https://jade.io/article/11171
McCabe, B. (2007). ASIC v Citigroup and fiduciary obligations. Retrieved from: https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1007&context=cgej
O’Brien, J. (2007). Private Equity, Corporate Governance and the Dynamics of Capital Market Regulation. London: Imperial College Press.
Seeto, G. (2008). ASIC v Citigroup – The compliance implications. Retrieved from: https://www.claytonutz.com/knowledge/2008/january/asic-v-citigroup-the-compliance-implications
Stringer, R., & Harkness, J. (2007). Citigroup — what does it tell us that we didn’t already know?. Retrieved from: https://www.governanceinstitute.com.au/media/409666/citigroup_conflict_management_august2007.pdf
The Sydney Morning Herald. (2007). Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (ACN 113 114 832) (No. 4) [2007] FCA 963. Retrieved from: https://www.smh.com.au/pdf/ASICvCitigroup.pdf
WIPO. (2015). Corporations Act 2001. Retrieved from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817
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