Court rejects ASIC Citi case

AUSTRALIA'S corporate regulator suffered a major blow yesterday when the Federal Court rejected its landmark insider trading case against investment bank Citigroup Global Markets.

AUSTRALIA'S corporate regulator suffered a major blow yesterday when the Federal Court rejected its landmark insider trading case against investment bank Citigroup Global Markets.

The highly anticipated judgment is a vindication for Citi, and provides relief for the wider banking industry, which had been worried about the potential implications of the case.

The case was launched amid much fanfare last year by the Australian Securities and Investments Commission, which sought more than $1 million in penalties from Citi for alleged breaches of Chinese walls, insider trading, and the failure to manage conflicts of interest when its proprietary trading arm traded heavily in Patrick Corporation shares in 2005, on the day before a proposed takeover by Toll holdings. Citi was advising Toll on the takeover.

Instead, Federal Court judge Peter Jacobson comprehensively ruled against ASIC, which will now be forced to pay Citigroup's legal fees. With some of Australia's most experienced barristers and lawyers fighting the case, its total costs are likely to run into the millions.

At the heart of the case was whether Citi could contract out its fiduciary duty to Toll.

"(ASIC's) claims failed at the outset because the letter of engagement under which Toll retained Citigroup as its adviser specifically excluded the existence of such a relationship," Justice Jacobson said. The Court held that the law does not prevent an investment bank from contracting out of a fiduciary capacity -- whether it should be able to do so is a matter for the legislature, not the courts.

The rest of the case hinged on whether the fiduciary duty existed. Without it, the other claims fell away.

The judge ruled that the trader in question, Andrew Manchee, was not an officer of Citi and did not possess inside knowledge relating to Toll's takeover.

The judge said that ASIC failed to ask Mr Manchee directly if he had made that supposition -- both in a compulsory interview and when he was in the witness box.

ASIC Chairman Tony D'Aloisio said the regulator would continue to launch court cases where it felt it was in the public interest to do so, and denied any embarrassment.

"No, we are not embarrassed," he said. "We argued the case well ... and we accept the decision of the court."

Mr D'Aloisio, a former corporate lawyer, said ASIC was considering appealing parts of the judgement but was taking further legal advice.

"It's been an interesting and unusual day," he said.

Citi did not escape criticism altogether. The judge said part of the evidence of Mark Bartels, head of Equity Capital Markets at Citi, was "wholly unconvincing".

And despite ruling in Citi's favour, the judge also said: "The events which took place within Citigroup during the afternoon and evening of 19 August, 2005, show that Chinese walls may not be as solid as the name implies," Justice Jacobson said.

He also said a statement by former head of compliance Peter Monaci, prepared by Citi's lawyers, "would have been more convincing if he had personally involved himself in its preparation".

Australian Financial Markets Association chief executive Duncan Fairweather said the industry's preference was always "discussion rather than litigation" but the decision had provided clarity to the sector.

Professor Ian Ramsay, director of the Centre fo Corporate Law and Securities Regulation at the University of Melbourne, said the case was always going to be tough for ASIC to win and the result would be of comfort to the investment banking sector.

"I think there is a lesson here about what the threshold is in bringing a case ... I think they need to reconsider when they bring cases that endeavour to change market practice," he said.

"At the end of the day, this wasn't a case where the insider trading law was shown to be vague or weak -- it was really a case where the facts were always going to be difficult to establish."

Citi markets and banking chief executive Stephen Roberts, who was called on to give evidence in the case, released a statement saying the bank was pleased with the result and that it would continue to work with ASIC.

"Citi Australia looks forward to continuing to work with ASIC and the industry to develop and uphold a well-regulated market for financial services in Australia," he said.

While Citi was publicly low-key on the result, privately it was celebrating the win yesterday.

The decision has reassured investment banks concerned about losing the chance to trade stocks on their own account.

One banking source said: "I think everyone who has an investment banking model is breathing a sigh of relief ... but I think most people thought it was never going to get up."