Acc204 Corporation Law- Company Directors Assessment Answers

Answer

ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963

Introduction

ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963 is a very important case that shed light on some of the very essential principles of law, such as, the insider trading rule, the concept of Chinese wall, the relationship of the investment banks with its clients, whether the relationship is fiduciary or not, etc.

Considering the facts of the case, it is submitted that in Australia, there is a company dealing with financial services, in the name of Citigroup Inc. One of the subsidiaries of Citigroup Inc, is Citibank which is one of the parties in the leading case. Apart from various banking activities, Citibank deals in investment banking and equity trading. The bank is the valid holder of Australian Financial Services License. The services of the bank are divided into two segments, private side and public side. The private side consists of employees who are acquainted with the confidential information of the bank, whereas, the public side consist of employees who are not holding any kind of secret information of the bank. The main activity of the public side is to indulge in proprietary trading, that is, buy/sell securities on behalf of the bank with the help bank resources. In order to comply with the regular banking practices, Citibank has also established a Chinese wall according to which the private side is totally segregated from the public side and there is no transfer of secret or any kind of information amid the two. (Pearson G , 2009)

Since 2005, the bank is furnishing advice to Toll Holdings Ltd (Toll) regarding the takeover of Patrick Corporation Ltd (Patric)k, through its private side. The decision of takeover was decided by the firm in 2005 (June). Later, one of the clients of the bank (at its public side) intends to buy few shares (approx one million) of Patrick with the help of the bank. The same was done by the Bank on 19^th August 2005 resulting in increasing the share prices of Patrick. Thus, the decision of takeover was established by the bank prior to the decision of the bank to buy the shares of Patrick. (Hanrahan PF, 2007)

When the decision of the purchasing of shares in Patrick was in pipeline, one of the private side employees get accustomed of this fact and the bank decided to stop with the purchase of the hares in Patrick and eventually the bank decided to sell the shares so purchased, thereby, 20% of the shares on Patrick were sold out by the bank. All these actions of the bank has raised suspicion in the eyes of ASIC and ASIC argued that there are few directorial duties that are not comply with by the bank. (Barker et al, 2017)

The same are established herein under:

The Directors Duties Breached

The duties that are considered by ASIC to be violated are:

Breach of section 912A(1)(aa) Corporations Act, 2001

The Corporation Act 2001 lays down various duties and responsibilities that must be comply with by the officers of the corporation. One such duty which must be comply with every bank is incorporated under section 912A (1)(aa) Corporations Act, 2001. According to which if there is presence of conflict of interest in any financial institution while catering its duties, then, it is obligatory upon such financial institution to make arrangements to deal with such situation. It is contended by ASIC, that Citibank has not made adequate arrangement to meet with the situation and thus the provisions of section 912A (1)(aa) Corporations Act, 2001 are breached. (Jacobson J, 2007)

Duty to be in fiduciary relationship

One of the arguments of ASIC is that the actions of the bank are not in compliance with its duty of truth, honesty and trust. It is argued by ASIC that when the bank is giving advice to Toll, then, basically, both the bank and Toll share a relationship of honesty, trust and faith and thus there is a presence of fiduciary relationship amid the two. But, this fiduciary duty is not complied with by the bank. This is because, the private side of the bank is indulging in purchasing shares in Patrick there by increasing the share value of the shares of the Patrick and the public side of the bank is indulged in giving advice to Toll as how to takeover Patrick. Thus, there is conflicting actions in which the bank is indulged, because, if the share prices of the Patrick will increase then the takeover of Toll will become difficult. So, the bank is not catering his fiduciary duty adequate with Toll. (Clayton UITZ, 2008)

Breach of Section 1043H of the Corporations Act, 2001

ASIC submitted that when Citibank is purchasing the shares of Patrick knowing the fact that Toll is indulged in taking over Patrick (since the decision is already taken in June 2005), then, the purchase of shares will increase the price of the shares thereby making the takeover difficult. Since, this action is carried out by Citibank with full knowledge and intention thus the provisions of Section 1043H of the Corporations Act, 2001 are not comply with making the actions misleading and deceptive in nature.

Breach of Section 1043A of the Corporation Act, 2001

ASIC has also contended that the acts of the bank is nothing but an act of insider trading and thus has violated his duties. This is because there is direct communication amid the private side of the bank and the public side of the bank and thus the concept of Chinese wall was totally disregarded by the bank. This is because, when the employee of the private side gets accustomed with the fact that the public side is purchasing the shares of Patrick, then, they decided to stop with the purchase of the shares and eventually the bank decided to sell the shares so purchased, thereby, 20% of the shares on Patrick were sold out by the bank. The acts of Citibank are catered such so that the takeover process can be carried out easily. These actions are insider trading on the part of Bank. (Ali & Gregoriou, 2009)

All these arguments are individually tackled by the court and is submitted herein under.

The Decisions 

The court has individually dealt with all the four arguments that are raised by ASIC. While giving the final verdict, it was found by the court that any bank has the capacity to contract out itself from its fiduciary duty. Also, the compliance programmed factors and Chinese wall must also be looked into before finding whether the duty of insider trading is violated or not.

The court has not agreed with all the four arguments upon which ASIC has rely its claim. The various reasons that are submitted by the court are:

Reason 1

The ASIC argument that the bank has not comply with section 912A (1)(aa) Corporations Act, 2001 is also rejected by the court. The court found out that the bank has made adequate arrangements to tackle with the conflict of interest situation. The main emphasis to consider that the arguments were adequate was that the Chinese wall which is established by the bank has met with all Australian standards and policies. The court has taken into account some of the important points before deciding whether the Chinese wall is not made properly or not. The same are, firstly, that proper programmers must be established by the bank according to which the employees are thought to keep the confidential information out of the scope of public; secondly; that the private side and the public side of the bank must be segregated adequately and not only on papers; thirdly, adequate arrangement must be made to check that the wall is not broken and if broken that proper compliance programmers must be established; lastly, if the situation arises that the wall needs to be broken then a set of rules and regulations must be laid down and must be followed. (A Tuch, 2005)

The court concluded that all the factors are met with and thus there is no violation of section 912A (1)(aa) Corporations Act, 2001

Reason 2

The ASIC argument that the bank has not acted fiduciary while dealing with Toll is not agreed with by the court. The court submitted that there is no such kind of duty that existed amid the two. The court contended that the presence of fiduciary duty cannot be always anticipated and presupposed when a takeover is carried out by a bank on behalf of its client. The bank has the capacity to contract out itself from the fiduciary duty that existed with its client except from the duty of fraud (Aequitas v AEFC (2001); Daly v Sydney Stock Exchange Ltd [1986]). The parties are normally bound by the contractual terms and the contracting out become must easier when there is no presence of trust (Hadid v Lengest Communications Inc [1999]).

The court submitted that the Citibank has contracting out from its fiduciary duty towards Toll by specifically incorporating a clause in the contract that is established amid the two. The argument of ASIC that the duty amid Citibank and Toll is established only after the contract is already established amid the two. However, this contention is rejected by the court by submitting that bath the parties are sharing relationship from 2005 and that time there is no fiduciary duty and the duty is also especially excluded by Citibank. (Ritchie T, 2008)

Thus, the fiduciary duty’ argument of ASIC is rejected by the court.

Reason 3

The argument of ASIC that section 1043H of the Corporations Act is violated is rejected. The court submitted that Toll and the bank are in no manner bound by any kind of fiduciary duties as the same is contracted out by the bank by incorporating a term in the contract amid the two. Since there is no duty so there is no obligation on the bank to bring the action of purchase of shares of Patrick to the notion of Toll. Thus, there is no act which is undertaken by the bank which can be construed as deceptive or misleading in nature.

Reason 4 

ASIC contended that the acts of the bank is nothing but an act of insider trading and thus has violated his duties under Section 1043A of the Corporation Act 2001. But, this argument is not supported by the court by any means. The court rejected the stand that when communication took place amid the private and public side of the bank wherein the public side was asked to stop buying the shares of Patrick, then, mainly the act establishes that the bank is mainly acting on behalf of Toll. The court submitted that in order to hold the bank liable for insider trading the communication of information must be carried out by the officer. It is only an officer who can get acquaint with such confidential information and no one else. However, it was an employee of the bank who has transferred the information (Prince Jefri Bolkiah v KPMG [1999]. The court also contended that the takeover was not depended upon the buy or sale of the shares of the Patrick, rather, the same was already in pipeline since 2005. 

Thus, there is no breach of Section 1043A of the Corporation Act 2001.

Conclusion 

It is thus concluded that all the contentions and arguments that are raised by ASIC which tries in establishing that the acts of the bank are not justified and that it has violated number of statutory duties under the corporation Act 2001 is rejected by the court from all four corners. The decision is made against of ASIC and in favor of Citibank. The court submitted that various factors and points must be kept in mind in order to hold that a financial institution is not in fiduciary duties with its client and that there is no breach of insider trading and that the Chinese wall is not broken. The banks must exclude their duty of trust and faith and the client must waive of this duty expressly.

It is the leading case which has laid down various considerations which must be kept in mind while dealing with financial institutions.

Reference List

Books/Articles/Journals

Ali & Gregoriou (2009) INSIDER TRADING Global Developments and Analysis

A Tuch (2005) Investment Banks as Fiduciaries: Implications for Conflicts of Interest’ 29 Melbourne University Law Review 478.

Barker et al (2017) Private Law in the 21st Century, Bloomsbury Publishing.

Hanrahan PF (2007) ASIC v Citigroup: Investment banks, conflicts of interest, and Chinese walls.

Jacobson J (2007) FEDERAL COURT OF AUSTRALIA - Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (ACN 113 114 832) (No. 4) [2007] FCA 963 SUMMARY, NSD 651 OF 2006.

Ritchie T (2008) ASIC v Citigroup: An Amber Light For Proprietary Trading, Corporate Governance eJournal.

Pearson G (2009) Financial Services Law and Compliance in Australia

Legislation

 The Corporation Act 2001

Case Laws

Aequitas v AEFC (2001) 19 ACLC 1006

ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963.

Daly v Sydney Stock Exchange Ltd - [1986] HCA 25

Hadid v Lengest Communications Inc [1999] FCA 1798.

Prince Jefri Bolkiah v KPMG [1999] 2 AC 222.

Online material

ClaytonUTZ (2008) ASIC v Citigroup - The compliance implications (online). Available at: https://www.claytonutz.com/knowledge/2008/january/asic-v-citigroup-the-compliance-implications. (Accessed on 20th April 2017).