ASIC v Citigroup Case Analysis

This assignment requires a thorough analysis of the landmark case *ASIC v Citigroup*. Students must examine the legal arguments, the court's decision, and the wider implications of the case for financial regulation, corporate governance, and ethical conduct in investment banking. The analysis should consider conflicts of interest, fiduciary duties, insider trading allegations, and the role of ASIC as a regulatory body.

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Corporate Law
ASIC v Citigroup (2007)
27-Sep-17
(Student Details: )

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Introduction
The Federal Court handed down its landmark and most awaited decisions on 28th June
2007 in ASIC v Citigroup Global Markets Australia Pty Limited [2007] FCA 963 (Hanrahan, 2008).
This was a case in which the ASIC, i.e., the Australian Securities and Investments Commission
initiated claim against Citigroup and these were dismissed by the court which was seen as a
huge triumph for the existing practices of the investment banks. There were two key highlights
which came through this decision; the first one was that the law did not restrict or stop the
investment banks from contracting out on the fiduciary relationships in certain circumstances,
and the second one was that the information barriers could be used easily in order to
determine the liability arising out of insider trading. And so, the court stated that the company,
which was the defendant in this case, was not indulged in insider trading and there was no
contravention of the conflict of interest related provisions (ASIC, 2017).
Through this report, an attempt has been made whereby the details of this case have
been highlighted. This was a diversified case, but it has been discussed in a very simplified
manner here. In this regard, a brief background of this case has been given, along with the
duties contravened and the court decision.
Background
The case of ASIC v Citigroup involved Citigroup, which is short for Citigroup Global
Markets Australia Pty Ltd, undertaking the business in different divisions including equities
trading (ET) and investment banking (IB). The private side of the employees, i.e., IB were

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exposed to the confidential information which was market sensitive (O’Brien, 2007). The public
employees, i.e., ET, on the other hand, did not have exposure to this information. Chinese Walls
had been set up by the company in order for the flow of information to be restricted in
between these divisions of its business. Legal claims were initiated in this case once the shares
of Patrick Corporation Limited, herein referred to as Patrick were purchased by the public
employees of the company (Seeto, 2008).
The reason why a legal case was raised was due to the timing of this purchase as at the
very same time, the other division of the company, i.e., IB was acting upon the takeover bid
proposed of Patrick for another company, i.e., Toll Holdings, which has been herein referred to
as Toll. Before Toll made the announcement regarding the bid of Patrick, the shares of the
company were bought on the last trading day. When the IB division became aware of this
purchase, they undertook different steps so that the purchase of more share of Patrick by ET
division could be halted. Following the directions of IB, ET stopped the purchase of more shares
of Patrick. Though, just when 30 minutes were left before the closure of trading, ET sold
200,000 shares, which had been bought at the same day and these were sold at a good profit
margin. Following day, Toll publicized about the takeover bid for Patrick (Seeto, 2008).
Contravened Duties/ Responsibilities
The claim which was made by the ASIC in this case stated that there had been breaches
of different provisions covered under the Corporations Act, 2001, which is an act of
commonwealth, which applies over the companies in Australia (Cassidy, 2006; Latimer, 2012).
ASIC stated that there had been breaches of section 912(1)(a) of the Corporations Act, on the

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basis of 5 different places. Under this section, those who hold Australian Financial Services
Licence, i.e., AFSL were required to be put together for proper arrangements in order to
effectively manage the conflict of interest, particularly the ones which relate to financial
services (ICNL, 2017). These claims were made on the basis of the present fiduciary relationship
which was present between the defendant and Toll (Stringer & Harkness, 2007). ASIC also
made a claim that these fiduciary duties owed towards Toll by Citigroup were not met as
Citigroup has been indulged in conduct which could be best deemed as unconscionable as a
result of which, section 12CA(1) of the Australian Securities and Investments Commission Act,
2001 (Cth) had been contravened, in addition to the contravention of the common law as a
result of the conflict of interest being allowed and the duty being contravened (Jacobson,
2007).
There was also a failure on part of Citigroup to inform Toll about the shares of Patrick
which had been acquired by Citigroup and this led to the claim that Citigroup was involved in a
conduct which could be deemed as misleading or deceptive, resulting in a contravention of
section 1041H of the Corporations Act, 2001 and section 12DA of Australian Securities and
Investments Commission Act 2001. The bases of these contraventions were due to the fiduciary
duty owed by Citigroup towards Toll for making the proper disclosures regarding the
information which related to the bid being undertaken. This led to two claims being made by
ASIC against Citigroup for the undertaken insider trading. First claim was made on the basis that
the shares which had been sold off by Citigroup were done through the proprietary trade who
held the insider information. Secondly, Citigroup was trading on Patrick’s shares where the

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private side employees in the IB division held the insider information relating to this transaction
(Stringer & Harkness, 2007).
Court’s Decision
The court, in order to decide upon the issues surrounding the conflict of interest, held
that the claimed upon fiduciary relationship of Citigroup was not present with Toll in this case.
This was due to the reason that the mandate letter present amidst Citigroup and Toll clearly
stated that Citigroup had been retained by Toll in the position of independent contract as a
result of which there was an absence of capacity in this case, particularly the fiduciary one. This
resulted in the court coming to the conclusion that the exclusion of fiduciary relationship was
an effective one. The court also noted that the mandate letter covering the express terms
whereby the pre-contractual dealing between Patrick and Toll could have easily shown that a
fiduciary relationship was present between the two, in case there had been one in the first
place (Allens, 2007).
The reason for coming to this decision was properly elucidated by the court. The court
stated that the relationship which is present between an advisor and their client does not
inherently affirm the presence of a fiduciary relationship, till the same belonged to a particular
or specific category of client and attorney, which was not the case here. Instead the scope and
the presence of the fiduciary relationship is dependent upon the factual circumstances, along
with the contractual terms of the contract which takes place between two or more parties
(McCabe, 2007). This is also true when a contractual relation provides clearly that the basis of
the relations, the liabilities and rights of each of the parties to the contract to be regulated by

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the undertaken contract, and the operation of fiduciary duty to be modified or excluded by the
parties to the contract. In response to this, ASIC referred to section 912(1)(aa) of the
Corporations Act as per which a fiduciary relationship is not required to be present (WIPO,
2015). This made the existence of the fiduciary relations a crucial aspect of the ASIC claims
particularly for the adequacy of the conflict management arrangements of Citigroup. The basis
of the unconscionable conduct and the misleading or deceptive conduct was also the presence
of such relations (The Sydney Morning Herald, 2007).
The court thoroughly discussed upon the claims raised for the insider trading by ASIC.
The first claim of insider trading was made for the supposition of the proprietary trader that the
actions of Citigroup played a key role in the matter of takeover of Toll by Patrick. This claim, for
being valid, had to show the knowledge of proprietary trader to the defendant. As per section
1042G of the Corporations Act, only in the specified circumstances can the knowledge of the
officers of company can be attributed to the company (Federal Register of Legislation, 2017).
ASIC had contended that this was present as a result of the authorization which had been given
to the proprietary trader which allowed them to trade up to a value of $10 million daily and
that this case fell in this category as a result of which the financial standing of the Citigroup
could be impacted (Stringer & Harkness, 2007).
These claims of ASIC were deemed as insufficient by the court. There had to be
indulgence or involvement in policy making or decision making for this condition to be fulfilled,
which could impact the business of the company in whole or part manner. ASIC did not rely
upon section 769 of this act (Stringer & Harkness, 2007). Further, this section was related to

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the state of mind of an employee to the company and showed the knowledge of the employee,
which was beyond the knowledge as an officer of company (Australian Government, 2017).
In the second issues, the contention was made that the knowledge was present
regarding the bid of Patrick. The court held that Citigroup had deployed adequate safeguards in
form of Chinese Walls as was needed based on section 1043F and there was no standard of
absolute perfection which had to be established for this purpose (Jade, 2007). Hence, the
arrangements of Citigroup were deemed as sufficient for complying with the requirements of
this section. The court also stated that the arrangement of defendant did not anticipate the
circumstances which had taken place expressly; though it had been stated that the general
procedure, which was required, in reasonable manner for undertaking some compliance, had to
be vetted by the legal officer of the company, particularly when the communication covered
price sensitive information, which could cross the Chinese Wall, to be prevented from
happening (Austlii, 2007).
The court also highlighted that the defence which was available pursuant to section
1043 of the Corporations Act, had to be applied and that it had to be shown that apart from the
Chinese Walls being placed in a proper manner, there was a need for the related information to
be communicated in a proper manner to such person who had the decision making power for
such trade. As a result of the indirect terms in which the private side of employees
communicated with Head of Equities, in addition to the conversation terms between Head of
Equities and the proprietary trader, the court came to the conclusion that the relevant

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information had never been communicated. This helps in establishing that the proper
placement of Chinese Walls helps in addressing the issue properly (Euromoney, 2007).
The court also observed that the written polices and the compliance procedures of the
defendant showed that the required procedure had been aptly followed. The written policy of
the company whereby the IBs were restricted from communicating the confidential information
to the ET division without indulging a legal personnel for accessing the materiality of the
information and that there had been a proper placement of Chinese Walls in the requisite
places. The employees were provided with proper and regular training so as to avoiding any
conflicting situation (Seeto, 2008).
Conclusion
ASIC v Citigroup has been seen as a major victory for the companies which deploy
sufficient mechanisms for safeguarding the company against issues like insider trading. In this
case, the claims raised by ASIC were set aside by the court and they held that there had been
no contraventions on part of the company particularly with regards to the claimed insider
trading due to absence of fiduciary relation and proper placement of Chinese Walls. This case
highlighted that Citigroup had successfully fulfilled the requirements set out under statutory
laws which were applicable on the company. This case also becomes a key example for the
other companies for effectively using Chinese Walls for restricting the flow of information from
one division of the company to another. This case acts as an important warning and a reminder
that by installing proper safeguards and by following the law, the company can safeguard itself
from accusations of insider trading.

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References
Cassidy, J. (2006). Concise Corporations Law (5th ed.). NSW: The Federation Press.
Allens. (2007). Client Update: Commercial Litigation – ASIC Fails In Conflict Of Interest And
Insider Trading Case Against Citigroup. Retrieved from:
http://www.allens.com.au/pubs/ldr/cucljun07.htm
ASIC. (2017). 07-171 Decision in ASIC v Citigroup. Retrieved from: http://asic.gov.au/about-
asic/media-centre/find-a-media-release/2007-releases/07-171-decision-in-asic-v-
citigroup/
Austlii. (2007). Australian Securities and Investments Commission v Citigroup Global Markets
Australia Pty Limited (ACN 113 114832) (No. 4) [2007] FCA 963 (28 June 2007). Retrieved
from: http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2007/963.html?
stem=0&synonyms=0&query=Citigroup
Australian Government. (2017). Corporations Act 2001. Retrieved from:
https://www.legislation.gov.au/Details/C2013C00605
Euromoney. (2007). A big win for the banks: The impact of ASIC v Citigroup. Retrieved from:
http://www.euromoney.com/Article/1407811/A-big-win-for-the-banks-The-impact-of-
ASIC-v-Citigroup.html
Federal Register of Legislation. (2017). Corporations Act 2001. Retrieved from:
https://www.legislation.gov.au/Details/C2013C00605

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Hanrahan, P.F. (2008). ASIC v Citigroup: Investment banks, conflicts of interest, and Chinese
walls. Retrieved from:
http://law.unimelb.edu.au/__data/assets/pdf_file/0008/1709837/67-Hanrahan_-
_ASIC_v_Citigroup1.pdf
ICNL. (2017). Corporations Act 2001. Retrieved from:
http://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf
Jacobson, D. (2007). ASIC v Citigroup Decision: No Conflict And No Insider Trading. Retrieved
from: http https://www.brightlaw.com.au/asic-v-citigroup-decision-no-conflict-and-no-
insider-trading/
Jade. (2007). Australian Securities and Investments Commission v Citigroup Global Markets
Australia Pty Limited (ACN 113 114832) (No. 4). Retrieved from:
https://jade.io/article/11171
Latimer, P. (2012). Australian Business Law 2012 (31st ed.). Sydney, NSW: CCH Australia Limited.
McCabe, B. (2007). ASIC v Citigroup and fiduciary obligations. Retrieved from:
http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1007&context=cgej
O'Brien, J. (2007). Private Equity, Corporate Governance and the Dynamics of Capital Market
Regulation. London: Imperial College Press.
Seeto, G. (2008). ASIC v Citigroup - The compliance implications. Retrieved from:
https://www.claytonutz.com/knowledge/2008/january/asic-v-citigroup-the-compliance-
implications

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Stringer, R., & Harkness, J. (2007). Citigroup — what does it tell us that we didn’t already know?.
Retrieved from:
https://www.governanceinstitute.com.au/media/409666/citigroup_conflict_manageme
nt_august2007.pdf
The Sydney Morning Herald. (2007). Australian Securities and Investments Commission v
Citigroup Global Markets Australia Pty Limited (ACN 113 114 832) (No. 4) [2007] FCA
963. Retrieved from: http://www.smh.com.au/pdf/ASICvCitigroup.pdf
WIPO. (2015). Corporations Act 2001. Retrieved from:
http://www.wipo.int/wipolex/en/text.jsp?file_id=370817