Citibank court ruling sets precedent on ‘Chinese walls’
SYDNEY: The global financial company Citigroup was cleared Thursday of insider trading and conflict-of-interest charges in Australia, in a case that challenged measures used by investment banks around the world to separate their share trading and corporate advisory departments.
Judge Peter Jacobson rejected allegations by the Australian governments corporate regulator that Citigroup broke the law when it bought and sold shares in a company that was also a takeover target for another company the bank was advising.
The judge also rejected the regulators charge that actions stemming from a traders conversation with his boss during a cigarette break on the street amounted to insider trading - and by extension that so-called corporate Chinese walls do not work.
The civil case, the first of its kind in Australia, was closely watched by regulators and investment banks around the world.
It was considered a test case on conflict-of-interest laws and the effectiveness of Chinese walls, which separate a brokerage firms trading activities from its corporate advisory and finance operations.
Citigroup and investor groups welcomed the ruling, saying it removed uncertainty that had been hanging over the industry..
But other analysts said the ruling raised concern that the law still allowed suspect practices to occur.
“It is certainly an enormous setback for the regulator, which staked its reputation in taking a case which had a strong moral foundation but a weak legal one,” said Justin OBrien, an expert in corporate governance and ethics at the Australian National University.
The Australian Securities and Investment Commission, which launched the case, did not immediately comment on the ruling.
The case centered on two Australian transport logistics companies and a single days trading.
Citigroup was advising one of the companies, Toll Holdings, on the possible takeover of the other, Patrick Corp.
On August 19, 2005, a Citigroup trader, Andrew Manchee, bought more than 1 million Patrick shares, helping to drive the price higher, the court heard.
Manchees supervisor, Paul Darwell, then invited Manchee to join him for a cigarette outside, where he told Manchee to stop buying Patrick shares. When he returned to the office, Manchee sold 193,000 Patrick shares before trading closed.
The next business day, Toll launched a hostile $5 billion bid for Patrick.
The regulator alleged that Darwell had supposed that Citigroup was advising Toll after hearing a comment from another executive, Malcolm Sinclair. Citigroup argued there was no evidence that important information had crossed from Sinclair to Darwell, and then to Manchee.
The regulator alleged that Darwell and Manchees actions were clumsy attempts to resolve a conflict of interest, and that Citigroup did not have adequate measures to deal with the situation.
Central to the regulators case was its claim that Citigroup had a fiduciary relationship with Toll that obligated the bank to get permission from the company before trading in Patrick shares.
Citigroups defense was that the letter of engagement Toll used to hire Citigroup as its adviser “specifically excluded the existence” of a fiduciary relationship.
“The court held that the law doesnt prevent an investment bank from contracting out of a fiduciary capacity; whether it should be able to do so is a matter for the legislature, not the courts,” Jacobson said.
He added that the insider trading charges failed because Manchee could not be considered an officer of Citicorp under the Corporations Act, and that Citigroups measures to prevent key information being communicated were adequate under the law.
Citigroup said in a statement that it “looks forward to continuing to work with ASIC and the industry to develop and uphold a well-regulated market for financial services in Australia.”
