In ASIC v Citigroup Global, the two main principles that were stated by the Federal Court of Austria were; (i) the law does not require that an investment bank should not contract out of a fiduciary relationship under some circumstances and (ii) the sufficiency of “Chinese walls” which were sometimes also called "information barriers", can fix responsibility for insider trading. Apart from it, the efficiency of the compliance program of the company is also better that will be considered by the court while considering the allegations related with the breach of insider trading provisions.
The facts of this case were rather intricate however for the purpose of the assignment at hand, these facts can be described briefly in the following words. The Citygroup Global Markets was engaged in business by several business divisions which included Investment Banking (Private Side Employees) and Equities trading (Public Side Employees). The Private Side staff have to deal with classified and market sensitive information while in contrast the Public Employees did not have access to this information. In order to restrict the information flow between the various business divisions of the company, "Chinese walls" were set up by Citigroup.
The present proceedings were the result of the five that the ET division of the company had purchased shares in Patrick Corp. Ltd. These shares were purchased when the IB division of the company was working on behalf of Toll Holdings regarding a future takeover bid of Patrick. These shares were procured by the ET division on the last trading day before the bid for Patrick was announced by Toll. When IB division came to know regarding the purchase, it took steps due to which ET was prevented from going further with the purchase of any more shares of Patrick. ET stopped the purchase of any mo you re shares, however how an hour before the the closing time for trading, ET sold 200,000 shares of Patrick that were purchased by it on that day at a profit. Subsequently, Toll came forward with its takeover bid for Patrick on the next day
Outline the duties / responsibilities breached
The main issues that were present in this case, were as follows. Although it was not alleged by the Australian Securities and Investment Commission (ASIC) that ET was aware of inside info when it took the decision of achieving the shares but it asserted that as an advisor to Toll Holdings, Citigroup was in a relationship with Toll that can be described as a fiduciary relationship. By purchasing the shares of Patrick, this fiduciary duty has been breached by Citigroup. In this way, ASIC alleged that Citigroup has breached its obligations that were imposed on the company by section 912A(1), Corporations Act, 2001. Moreover, ASIC also alleged that the requirements of section 1043H and 12DA of the ASIC Act had also been breached by Citigroup has these provisions restricted any misleading or deceptive conduct.
It was also blessed by the ASIC that the insider trading provisions that have been mentioned in section 1043A, Corporations Act have been breached by Citigroup due to the following reasons. Due to what was said to ET after it was found by IB that there was a potential conflict of interest, it was supposed by ET that Citigroup was acting on behalf of Toll Holdings regarding the proposed takeover bid for Patrick. Hence, it was alleged by the ASIC that this supposition amounted to “information” as mentioned in section 1042A. as a result, it was alleged that the sale of 200,000 shares amounted to insider trading by the Citigroup (Aequitas v AEFC, 2001).
In case of the second claim, the ASIC challenged the "Chinese walls" that were in position in Citigroup. It was alleged by the ASIC that as the senior IB management were aware of the fact that it was substantially probable that Toll is going to commence the takeover bid, such knowledge can be attributed to the Citigroup as a whole (McGhee, 2000). Consequently, it was alleged by the ASIC that Citigroup had been involved in insider trading as the ET division of Citigroup had purchased the shares (Hadid v Lengest Communications Inc., 1999).
The findings of the court in this case were as follows. The fiduciary claim brought by the ASIC was unsuccessful at the outset because the letter of engagement through which Citigroup was retained by Toll particularly excluded the presence of a fiduciary relationship. In this regard, the court stated that the law does not stop the investment banks from contracting out of the fiduciary obligations by entering into a commercial relationship.
For the purpose of the success of the first insider-trading claim, it was required that the employee who had made the trade, should not only hold the inside info but such knowledge and also be attributable to the company. According to s 1042G(1)(a), the knowledge of the member of staff cannot be attributed to Citigroup unless such employee was an officer of Citigroup as mentioned in section 9, Corporations Act. In the present case, the claim of the ASIC could not succeed as the particular employee was not an officer (Tuch, 2005). The court arrived at the conclusion that for the purpose of the Act, an "officer" was someone who had a role to play in the senior management of the company, which was not played by the employee in this case. Moreover, it was also stated by the court the above-mentioned supposition was not made by the particular employee, as alleged by the ASIC, namely that Citigroup was acting on behalf of Toll regarding the takeover bid for Patrick. In this way, the second insider-trading claim also could not succeed on the ground that the Chinese wall defense, that has been mentioned in section 1043F of the Act was successfully raised by Citigroup (Hollander and Salzedo, 2004). Or in other words, it was successfully established before the court by Citigroup that the company had put in position, compliance measures that can be reasonably anticipated to make sure that the price sensitive information that was in possession of IB did not reach its other division, ET. As has been mentioned in this section, the decision of the chasing the shares has been made by a person apart from the persons who were holding such information and IB had not provided any information or given any advice to such person regarding the purchase.
Discuss and critically ANALYSE the court/ tribunal decision
There are certain significant implications of this decision. While examining the adequacy of the Chinese walls put in place by the Citigroup, it was noted by the court that such measures have to fulfill the provisions of the Act but they do not require absolute perfection. Instead the only requirement is that the company should have taken reasonable steps. The best that has been mentioned in section 1043F was an objective test. According to this test, the requirement was that arrangements should be in place due to which it can be reasonably expected to make sure that the information has not been communicated. For this purpose, the following relevant procedures were outlined by the court that was necessary in case of defective Chinese walls. These were physical separation by departments, the presence of the procedures to deal with passing the wall, educational programs, effective supervision by the compliance officers and disciplinary sanction. Although in this case, the court upheld the defense provided by section 1043F, however the court also warned that the Chinese walls should be able to insulat the trader (ET) from the and information so that the necessities of this section can be satisfied.
The court arrived at the conclusion that in the present case, adequate procedures had been put in place. For this purpose, the court referred to the region policies of Citigroup as well as its compliance procedures. Among others, the written policy of Citigroup and quiet that the private side employees (IB) should not have provided any significant non-public information to the employees who were on the public side (ET) without the involvement of legal or compliance personnel for the purpose of evaluating the significance of the information, and when necessary, for implementing the wall crossing procedures.
The written policies adopted by the Citigroup were accessible to all its employees, the company also gave regular training to its employees in this regard and it was clearly mentioned in these policies that the employees of the company should be alert regarding any possibility of conflicts. There were also required to escalate any issue dealing with an actual, potential or apparent conflicts of interest. Moreover, retail policies and procedures had been put in place by the Citigroup according to which the considerations have been set out that had to be applying if a public side employee needs to be brought over the Chinese wall. But at this point it is worth mentioning that in this case, it has also been stated by the court that the ample measures need in excess of the written procedures and policies (Farah Constructions Pty Limited v Say-Dee Pty Ltd., 2007). It was mentioned by the court that it needs a comprehensive understanding of such measures by the employees of the company and also the willingness and the ability for applying these procedures and policies to a number of possible conflicts (Consul Developments Pty Ltd v DPC Estates Ltd., 1975).
The fact was also noted by the court in this case that a clear escalation policy was present according to which, IB could give advice to the appropriate personnel regarding the probable conflict, which included the Compliance Department as well as the General Counsel of Citigroup and its Chief Executive Officer. In this way, the in-house compliance division of Citigroup was in a position to give proper advice to IB and ET regarding what could or what should not be disclosed by these divisions of each other and in this way, maintain the protection that has been provided by the Chinese wall that has been put in place among various divisions of the company. It was also found by the court that in view of such escalation procedure present in the company, it can be said that adequate Chinese walls have been placed in Citigroup.
In the end, it can be said that the case title ASIC v Citigroup remains how a company can achieve protection if it has put in place adequate compliance system and how it can be protected from the liability under the insider-trading provisions of the Act. The purpose of installing the Chinese walls in the company is to forget the flow of information among various divisions of the company. As it has been shown in ASIC v Citigroup, if the Chinese wall requirements and the appropriate compliance schemes are followed by a corporation, it can save itself from likely huge fines as well as from any damage to the reputation of the company. In the same way, ASIC v Citigroup also serves as a reminder and a warning related with the significance of putting in place, adequate compliance measures, particularly related with Chinese walls.
Hollander C and Salzedo, S (2004) Conflicts of Interest and Chinese Walls, Sweet & Maxwell, London, (4th ed).
McGhee, J., (2000), Snell’s Equity, Sweet & Maxwell, London, (30th ed).
Tuch, A., (2005) ‘Investment Banks as Fiduciaries: Implications for Conflicts of Interest’, 29 Melbourne University Law Review 478
Aequitas v AEFC (2001) 19 ACLC 1006
ASIC v Citigroup Global Markets Australia Pty Ltd (No 4)  FCA 963
Consul Developments Pty Ltd v DPC Estates Ltd (1975) 132 CLR 373
Farah Constructions Pty Limited v Say-Dee Pty Limited  HCA 22
Hadid v Lengest Communications Inc  FCA 1798