Australian Insider Trading Case against Citigroup

There has been a lot of discussion in the press and in the blogs about an insider trading case launched by the Australian Securities and Investments Commission (ASIC) against Citigroup Global Markets Australia Pty Ltd. ASIC’s press release provides some details and soxfirst.com has published the full text of ASIC’s Statement of Claim

The facts are that while Citi’s investment bankers were advising a potential acquirer, its proprietary trading desk was buying the target’s stock. When the investment bankers came to know about this, they informally communicated to the traders that they should not be buying. The traders then stopped buying and in fact sold some shares. Since the shares rose sharply when the bid was announced, the traders would have made more money if they had continued buying or held on to what they had already bought.

Much of the comments that I have read are sceptical about whether ASIC has any case at all. Several authors have pointed out that Citi did not profit from its selling and that the client actually gained. But after reading the statutes that ASIC cites, it appears to me that ASIC has framed its claim very well.

• Section 912A(1)(aa)of the Australian Corporations Act states that a licensee must “have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business of the licensee or the representative”.
• Subsection 1043A(1) states that “the insider must not ... apply for, acquire, or dispose of, relevant ... financial products”. This is an absolute ban that does not refer to the direction of the trade, the profitability of the trade or even whether the trade was based on the inside information.
• Section 1043F provides a Chinese wall exemption to the absolute ban imposed by subsection 1043A(1). The requirements for obtaining this exemption are that:
  • (a) the decision to enter into the transaction or agreement was taken on its behalf by a person or persons other than [the officer or employee possessing inside information]; and
  • (b) it had in operation at that time arrangements that could reasonably be expected to ensure that the information was not communicated to the person or persons who made the decision and that no advice with respect to the transaction or agreement was given to that person or any of those persons by a person in possession of the information; and
  • (c) the information was not so communicated and no such advice was so given.

These statutory provisions seem to imply that in the absence of adequate Chinese Walls any trading in the securities concerned becomes insider trading regardless of whether Citi benefited from such trading or whether anybody suffered due to it.

Some commentators have suggested that modern financial conglomerates would find it impossible to function in such a situation. I think this is totally wrong. Conglomerates can still function freely provided they ensure that they have strong Chinese Walls and adequate mechanisms for managing conflicts of interest. If ASIC has its facts right, Citi’s systems were simply inadequate.

Posted at 2:39 pm IST on Tue, 4 Apr 2006         permanent link

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