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SYDNEY—Citigroup
Inc., the world’s biggest bank, was cleared in
Australia’s first prosecution of a company for insider
trading.
The
Federal Court in
Sydney dismissed a claim by regulators, who said the bank breached
a duty to a client and was guilty of insider trading by
telling an employee during a cigarette break to stop
buying shares in Patrick Corp., a port-cargo handler. At
the time, Citigroup was advising Toll Holdings Ltd., the
nation’s biggest freight company, on a hostile bid for
Patrick.
The
trial was the first test of an Australian law governing
how securities firms manage conflicts between trading
securities on their own account and advising investment
banking clients. The lawsuit, filed by the nation’s
securities watchdog, said Citigroup failed to keep
market-moving information known by its investment
bankers away from traders who could profit from it.
“There
is no question this is a bad result for the regulator,’’
Justin O’Brien, professor of corporate governance at the
Australian National University, said in an interview.
“It took a morally strong, but legally weak, case.’’
Judge
Peter Jacobson ruled that “the claims failed at the
outset’’ because Toll’s contract with Citigroup
specifically excluded any fiduciary relationship.
“It
allows the investment banking industry to proceed
confidently in providing advisory services to corporate
clients,’’ Duncan Fairweather, executive director of the
Australian Financial Markets Association, said in an
interview. “Regulators in the
US
and UK, and global investment banks, have been following
this case.’’ Citigroup said in a statement it welcomed
the ruling.
The case
stemmed from trades made by a Citigroup worker on
August 19, 2005, the last business day before
Melbourne-based Toll made a A$5.2 billion ($4.4 billion)
bid for Patrick.
A breach
in Citigroup’s Chinese wall was alleged to have occurred
when Paul Darwell, head of equity derivatives, met with
trader Andrew Manchee outside the firm’s Sydney office
for a cigarette break and told him to stop buying
Patrick shares.
Manchee,
who then sold 192,353 Patrick shares, had bought more
than 1 million earlier in the day. His trades triggered
a probe into whether he knew Citigroup was advising Toll
on its bid for Patrick, whose shares surged 13 percent
on August 19.
Judge
Jacobson ruled Wednesday that Manchee didn’t make “the
supposition’’ that Citigroup was advising Toll on a bid
for Patrick. He also said in his judgment the bank had
in place Chinese walls “which insulated’’ Manchee from
this information.
“The
conflict of interest and duty claims were misconceived
and the facts didn’t support the insider-trading
claims,’’ said Paul Meadows, a lawyer at Allens Arthur
Robinson in
Melbourne.
The
Australian Securities & Investments Commission said in a
statement it will assess the implications of the case
and hasn’t decided whether to appeal.
The
regulator had sought a fine of as much as A$1 million
and orders for Citigroup to keep price-sensitive
information on deals away from its proprietary traders.
“The
case had the potential to set legal precedent about
whether Chinese walls are an effective way of managing
potential conflicts of interest,’’ Fairweather said.
Citigroup Chief Executive Officer Charles Prince has
overhauled internal controls in the past four years to
limit chances of the firm becoming embroiled in
financial scandals.
Citigroup was forced to pay $4.7 billion in the past
three-and-a-half years after being accused of helping to
bankrupt Enron Corp. and aiding WorldCom Inc. in
defrauding shareholders. The bank has also settled
claims that its research was biased and that it
misappropriated mutual fund fees. Citigroup shut its
private bank in
Japan
in 2004 amid money laundering charges.
The bank
denied any wrongdoing in the Australian trial and none
of its employees were defendants. The insider trading
case was Australia’s first against a company, rather
than individuals. The case in Sydney was Australian
Securities & Investments Commission v. Citigroup Global
Markets Australia Pty. No. NSD 651 of 2006.
--Bloomberg |
