Discuss about the Securities and Investments Commission v Citigroup Global Markets.
Citigroup Global Market is a financial services company operating in Australia and carries out its business in circa 100 countries. It is the defendant in the proceedings of Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (Citigroup). Citigroup Inc. participates on various businesses in Australia. For example, it participates in the Corporate and Investment Bank (CIB), which is a company known internally. In turn, CIB has many operating divisions such as the Investment Banking Division (IBD) and Equities, among many others. The IBD delivers advisory and investment banking services. Equities, on the other hand, engage in proprietary security trading (Liptak & Goldstein, 2016). The issue in the ASIC v Citigroup, therefore, is how the association between a customer and the investment bank came under an equitable microscope. The bank was giving advisory services based on a planned purchasing bid to this client. However, the primary question in the case is if the letter of engagement for retaining a bank by a great public organization to talk about the takeover bid left out the presence of any fiduciary association between the bank and its customers (Black, Mills & Cox, 2007). Following the issue in this proceeding, this paper begins with an overview of the ASIC v Citigroup case, outlines the breached duties, and goes on to look into some more details of the Court’s decision and the reasons for it given the Corporation Act.
On August 8, 2005, the Investment Banking Division got reserved by a subsidiary of an Australia firm known as Toll Holdings Limited (Toll) to be able to offer banking and commercial services. These services were to take place in connection with proposed takeover of another listed company known as Patrick Corporation Limited by Toll Holdings. Toll wanted to use Patrick as means through which it can use to access ports logistic market. It was a significant transaction that traded at AUD 4.5 billion. The parties that got involved were highly sophisticated. In response to these services, Toll selected two venture banks to provide it with advice in connection with the bid. One of the banks was Citigroup while the other one was the Carnegie & Co Pty Limited. According to the terms of retainer execution done on 8th August, the charges for the fruitful completion of the purchase from the Citigroup IBD were likely to range between AUD 10 to 18 Million.
On the other hand, Equities and IBD of the Citigroup divisions got detached by the precise data and other obstacles recognized in the commercial segment as the Chinese walls (Kennedy, 2009). Those staffs who got employed on the IBD side were working in the private department of the Chinese walls due to being routinely possessing a secret sensitive information concerning securities such as information about the intentions of Toll in connection to Patrick. Additionally, those employees who were operating in the public department of the wall were in the Equities division. The main reason for the Chinese wall was to prevent Citigroup from breaching the rules regarded as insider trading laws in Australia, by doing business with the Equities section of the Patrick shares through the IBD department. Such activity was considered as private information about Patrick. On Friday 19th August 2005, a trader in Citigroup’s equities section obtained a huge part of Patrick’s share. Nobody suggested that, when he purchased the shares, the buyer already had information about the proposed bid of Toll on behalf Patrick. Instead, the buyer appears to have been following how the price was moving in relation to Patrick’s price. The trader’s response to the movements of the price reflected broad market assumption concerning the possibility of Patrick as the topic of a purchaser. When it reaches mid-day of the same day, the broker had already had a long, considerable share in Patrick. On the other hand, Patrick’s value had reasonably appreciated. At 3.30pm, somebody who was guiding the broker called him aside and discussed with him shortly telling him to stop purchasing the shares of Patrick. After that discussion, the dealer went back in the dealing and put on sale some of his positions. As the events unfold, the bid that Toll had for Patrick got announced on subsequent following business day, in this case, on Monday 22 August 2005.
Otherwise, under standard practice, Toll trading in Patrick shares bid got inspected by the investigation department of the Australian Security Exchange Limited, in which they witnessed the exchange on which the bid got listed (Standen & Angus-Smith, 2009, p.607). The Australia Security Exchange checked whether there was a likelihood of any insider trading in Patrick by the Citigroup. After that, they forwarded the concern to ASIC for further investigation. ASIC started its investigations touching Citigroup towards the end of 2005 but completed early 2006. ASIC began the trials touching Citigroup in 2006.
Though the ASIC did not claim that Equities Trading was aware of the insider information as it was buying the shares, its stand was that; the Citigroup as Toll’s advisor was in a fiduciary affiliation in one way or the other (Benard, 2007). ASIC alleged that it breached its fiduciary duty when it purchased shares in Patrick, thus contravened its responsibilities under 912A(1) provision of the Corporations Act. Moreover, Citigroup violated the rules of section 12DA of the ASIC Act together with Section 1043 of the Corporation Act. These sections prohibit false and deceiving behavior referred as Fiduciary Claim (Hanrahan, n.d.). The further allegation was that Citigroup contravened the insider trading laws that are in section 1043A of the Corporation Act. First, the Equities Trading had an assumption that alleged that Citigroup was representing Toll in the anticipated buyout of Patrick (Hastings & Marjoribanks, 2012, p.544). This assumption came out due to what ET heard after Investment Bank realized the potential conflict (Citigroup Inc. 2008).
On the other hand, ASIC suspected that this assumption composed of information in the definition of ‘Division 3 financial products under section 1042A of the Corporative Act. It got argued that the sale of the 200,000 shares had constituted insider business by Citigroup, thus making it the first Insider Trading Claim (Hastings & Marjoribanks, 2012, p.542). It was also because the ASIC realized the challenges in the second claim that Chinese Walls Citigroup had in place. ASIC allegation was that, because the senior IB staff had the knowledge about a substantial likelihood that Toll was going to launch its tender, that acquaintance was accredited to the entire Citigroup. Therefore, ASIC suspected Citigroup to have engaged in insider trading since its shares got purchased by the Citigroup’s Equities division, thus making the allegation to be additional Insider Trading Claim.
According to the Federal Court of Australia on Thursday 28 June 2007 about ASIC v. Citigroup case, was that Citigroup did not take part in insider trading and did not contravene the conflict of interest laws according to the Corporations Act (Jacobson, 2007; ‘Australia Banking’ 2015, p.104). It found that Citigroup did not contravene its responsibilities under s 1043A, s 1043H and s 912A(1)(aa) of the Corporations Act and s 12DA of the ASIC Act. Therefore, the Court dismisses the claims by ASIC about Citigroup’s breach of duties.
The first Insider Trading Claim failed. This claim could only do well if the trading employee possessed the insider information and attributed his knowledge to the company. According to section 1042G(1)(a), the awareness of the staff got not associated to the enterprise unless the employee was an officer defined by section 9 of the law (Jacobson, 2007). Therefore, the Court did not come to an agreement with ASIC because the employee in question was not an officer of Citigroup (Seeto, 2008). According to the Act, an officer was a person with a senior role in management, unlike the employee in the ASIC v Citigroup case. Moreover, the Court found that the employee did not make the supposition of the takeover bid according to what ASIC claimed that Citigroup acted in place of Toll regarding Patrick’s acquisition.
The second Insider Trading Claim also did not succeed. According to the Court’s findings, Citigroup adhered to section 1043F of the Act. It proved to the Court that it had put in place some compliance arrangements. It raised the Chinese Wall Defense in a satisfactory manner (Jacobson, 2007). It implies that the Company complied as it would be anticipated to make sure that the price sensitive data according to IB got not revealed to the Public Side employees or communicated with ET (Lumsden & Bridgen, 2007, p.37). Besides, the choice to buy shares came from a person rather than the individuals who held the information and no communication of it concerning the purchase got given by IB (Seeto, 2008).
The Fiduciary Claim also failed right at the beginning. This finding was so, because, the letter of engagement did not involve the existence of the fiduciary association. According to the Court, the Corporation Act did not hinder the bank from having a fiduciary duty when it started its connection with its clients (07-171 Decision, 2007; ‘Australia Banking’ 2015, p.62).
In addition to these findings, there were also compliance implications regarding the Chinese walls, written policies and procedures for training, and the escalation procedures. In relation to the issue of the Chinese Walls, the verdict was that the arrangements to fulfill the law did not call for total perfection. Instead, it needed only the necessary steps. As a result, it came up with the following steps for an efficient Chinese wall: department’s physical separation, educational programs, crossing the wall, observation from acquiescence officers, and finally the corrective sanctions. Besides, the Court found that Citigroup had its procedures in place (Citigroup Inc. 2007). For example, the company called for the IB not to spread the material information that is not meant for the public to the ET without having the right individuals to assess the information’s materiality. In addition to that, Citigroup had a precise escalation policy to help IB advice the necessary people of the potential conflict.
However, Jacobson’s decision does not alter the people’s recognition of the right stand of how banks that do investment provide advisory services to its customers. Nonetheless, the findings are meant to be of significance to everyone including the corporate advisers. For example, the decision allows likeness on the fiduciary obligations and how they are related to the other unbiased and entrepreneurial law requirements such as the requirement of good faith and confidence (Batten & Pearson, 2013, p.520; Benard, 2007). If the Honour’s decision had been otherwise, the international investment banking community’s concerns that the Australian controller had distressed many entities by merging consulting businesses with those of equities trading could also get noticed (‘Australia Banking’ 2015, p.84). Rather, Jacobson’s findings have proven that his act is not forbidden by equity, as long as the bank’s and the customer’s association with that of the company of the conglomerate’s business kowtows to some particular convictions.
Conclusion
Therefore, the case ASIC v Citigroup is relevant to advisers and Australia’s commercial services regulation. When the case against Citigroup started, it appears as if ASIC did not care about protecting Toll’s interests. If it wanted to protest about the copyrighted trading of Citigroup in the shares of Patrick, Toll would presumably do so on its own due to the sufficient resources. In fact, the Court’s judgment shows that Toll did not have any complaint to present to Court. The CFO of Toll revealed that Toll comprehended that Citigroup would take part in copyrighted trading without opposition so long as the company did not employ Toll’s private data wrongfully. Thus, it illustrates that according to the provisions of the insider trading; an adequate compliance system is relevant since it can help a company and its members from being held liable for a claim. Aside from that, the fact that Chinese Walls restrain the information from flowing between different divisions in a company, an organization can avoid damaging its reputation and substantial fines if it complies with to the requirements of the Chinese wall.
References
07-171 Decision in ASIC v Citigroup | ASIC – Australian Securities and Investments Commission. (2007). Asic.gov.au. Retrieved 6 January 2017, from https://asic.gov.au/about-asic/media-centre/find-a-media-release/2007-releases/07-171-decision-in-asic-v-citigroup/
‘AUSTRALIA BANKING’ 2015, Acquisdata Industry Snapshots: Australia Banking, 3601, pp. 1-87.
‘AUSTRALIA BANKING’ 2016, Acquisdata Industry Snapshots: Australia Banking, 6604, pp. 1-108.
Batten, R, & Pearson, G 2013, ‘Financial Advice In Australia: Principles To Proscription; Managing To Banning,’ St. John’s Law Review, 87, 2/3, pp. 511-559.
Benard, M. (2007). McCabe, Bernard — “ASIC v Citigroup and fiduciary obligations” [2007] BondCGeJl 5; (2007) Corporate Governance eJournal (Bond). [online] Austlii.edu.au. Available at: https://www.austlii.edu.au/au/journals/ElderLRev/2007/5.html [Accessed 14 Jan. 2017].
Black, A, Mills, K, & Cox, B 2007, ‘A big win for banks,’ International Financial Law Review, 26, 9, p. 12.
Citigroup Inc. (2007). Mergent’s Dividend Achievers, 4(4), pp.60.
Citigroup Inc. (2008). Mergent’s Dividend Achievers, 5(2), pp.60.
Hanrahan, P. (n.d.). ASIC v Citigroup: Investment banks, conflicts of interest, and Chinese walls. 1st ed. [ebook] unimelb.edu, pp.1 – 25. Available at: https://law.unimelb.edu.au/__data/assets/pdf_file/0008/1709837/67-Hanrahan_-_ASIC_v_Citigroup1.pdf [Accessed 14 Jan. 2017].
Hastings, L, & Marjoribanks, G 2012, ‘Tough on crime — insider trading enforcement and its relevance to you,’ Keeping Good Companies (14447614), 64, 9, pp. 542-544.
Jacobson, J. (2007). Australian Securities and Investments Commission v Citigroup Global Markets. Australia Pty Limited (ACN 113 114 832) 2007 (pp. 1-130). Sydney. Retrieved from https://www.smh.com.au/pdf/ASICvCitigroup.pdf
Kennedy, C 2009, ‘ASIC holds Citigroup to account for credit products,’ Money Management, 23, 46, p. 4.
Liptak, A, & Goldstein, M 2016, ‘Supreme Court Sides With Prosecutors in an Insider Trading Case,’ New York Times.
Lumsden, A, & Bridges, V 2007, ‘Chinese Walls Lessons from the Citigroup case,’ In finance, 121, 4, pp. 36-38.
Seeto, G. (2008). ASIC v Citigroup – The compliance implications – Knowledge – Clayton Utz. Claytonutz.com. Retrieved 6 January 2017, from https://www.claytonutz.com/knowledge/2008/january/asic-v-citigroup-the-compliance-implications
Standen, M, & Angus-Smith, R 2009, ‘ASX and ASIC — the changing of the guard,’ Keeping Good Companies (14447614), 61, 10, pp. 606-608.
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