On 28 June 2007, the Federal Court dismissed all of the claims alleged against Citigroup Global Markets Australia Pty Limited (Citigroup) in an action brought by the Australian Securities and Investments Commission (ASIC).
Freehills acted for Citigroup in the proceeding.
The case is significant in that it deals with several important issues, including:
- whether investment banking advisers are fiduciaries
- whether parties can successfully agree that their relationship is not fiduciary
- whether the ‘informed consent’ of a party is required before such an agreement is effective
- whether an individual’s own ‘supposition’ is capable of constituting ‘information’ for the purposes of the insider trading laws, and
- the effectiveness of Chinese walls as a means of managing conflicts and as a defence to an allegation of insider trading.
These issues arose when a proprietary trader who was a ‘public side’ employee of Citigroup bought over one million shares in Patrick Corporation Limited (Patrick), and on the same day sold approximately 200,000 Patrick shares. These transactions occurred at a time when ‘private side’ employees working in the investment banking division of Citigroup were acting for Citigroup’s client, Toll Holdings Ltd (Toll), on a proposed takeover bid for Patrick. The shares were traded by the proprietary trader for Citigroup’s own account on the last trading day before Toll announced its bid for Patrick. Citigroup operated a ‘Chinese wall’ between its private and public side functions.
ASIC alleged in the proceeding that Citigroup:
- failed to adequately manage conflicts of interest as required under section 912A(1)(aa) of the Corporations Act
- engaged in misleading conduct under section 1041H of the Corporations Act and section 12DA of the ASIC Act
- engaged in unconscionable conduct under section 12CA(1) of the ASIC Act, and
- engaged in insider trading under section 1043A of the Corporations Act.
In dismissing ASIC’s claims, his Honour Justice Jacobson found that all of the conflicts-based claims failed because they were premised on the establishment of a fiduciary relationship between Citigroup and Toll. In that regard, his Honour held that:
- the relationship between a financial adviser and its client may be fiduciary if the adviser holds itself out as an expert on financial matters and undertakes to perform a financial advisory role for the client
- where a relationship is outside the established categories of fiduciary relationship (eg solicitor/client), the nature of the relationship must conform to the contract which creates it, so that it is open to parties to exclude or modify the operation of fiduciary duties. In this case, there was no fiduciary relationship between Citigroup and Toll because the mandate letter entered into between Citigroup and Toll specifically excluded such a relationship. It is not necessary for the client to give ‘fully informed’ consent for a term of a mandate which excludes a fiduciary relationship to be effective, but in this case Toll had sufficient knowledge of the real possibility of proprietary trading by Citigroup, to amount to ‘informed consent’.
Justice Jacobson also held that the provision of corporate advice by Citigroup to Toll in relation to the takeover of Patrick was not a ‘financial service’ because of the operation of sub-regulation 7.1.29(3) of the Corporations Regulations, so that section 912A(1)(aa) could have no operation in this case.
In dismissing the insider trading claims, Justice Jacobson stated that:
- an individual’s own supposition and internal thought processes are capable of constituting ‘information’ for the purposes of the insider trading laws. However, the Citigroup proprietary trader did not make the supposition alleged by ASIC, namely that Citigroup was acting for Toll in relation to a takeover bid for Patrick, and
- the type of organisational arrangements which would ordinarily be effective for a Chinese wall defence include physical separation, training of employees, wall crossing procedures and records, monitoring by compliance, and sanctions for breach. Justice Jacobson, however, cautioned that Chinese walls may not be as solid as the name implies.
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