Australian court rules that Chinese walls need not be perfect

I am not a lawyer and the judgement of the Federal Court of Australia dismissing insider trading and conflict of interest charges against Citigroup is 120 pages long, but the sum and substance of the judgement seems to be that absolute perfection is not required in Chinese wall arrangements. The judgement says:

But what the unscripted actions of Mr Sinclair and Mr Darwell show is the practical impossibility of ensuring that every conceivable risk is covered by written procedures and followed by employees.

However, the arrangements required to satisfy s 1043F(b) of the Corporations Act do not require a standard of absolute perfection. The test stated in the section is an objective one. It is, “arrangements that could reasonably be expected to ensure that the information was not communicated”.

In my view, the arrangements referred to by Mr Monaci in his written statement were sufficient to meet the requirements of s 1043F(b). They did not, in express terms, anticipate the situation which arose on 19 August 2005 but they laid down general procedures which could reasonably be expected to ensure that legal or compliance officers of Citigroup vetted any communication of potentially price sensitive information to prevent it crossing the Chinese wall.

The other important part of the judgement is that parties can contract out of a fiduciary relationship. The acquirer’s mandate letter stated that Citigroup was engaged “as an independent contractor and not in any other capacity including as a fiduciary”. With the court holding that this clause absolved Citigroup of all fiduciary (conflict of interest) responsibilities, language of this kind will probably become even more commonplace than it is now.

Posted at 2:10 pm IST on Thu, 28 Jun 2007         permanent link

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