Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Australian Insider Trading Case against Citigroup

There has been a lot of discussion in the press and in the blogs about
an insider trading case launched by the Australian Securities and
Investments Commission (ASIC) against Citigroup Global Markets Australia Pty
Ltd. ASIC’s press
provides some details and has published the full
text of ASIC’s Statement of

The facts are that while Citi’s investment bankers were
advising a potential acquirer, its proprietary trading desk was buying the
target’s stock. When the investment bankers came to know about
this, they informally communicated to the traders that they should not be
buying. The traders then stopped buying and in fact sold some
shares. Since the shares rose sharply when the bid was announced, the
traders would have made more money if they had continued
buying or held on to what they had already bought.

Much of the comments that I have read are sceptical about whether
ASIC has any case at all. Several authors have pointed out that Citi
did not profit from its selling and that the client actually gained. But
after reading the statutes that ASIC cites, it appears to me that ASIC
has framed its claim very well.

  • Section 912A(1)(aa)of the Australian
    Corporations Act
    states that a licensee must “have in place
    adequate arrangements for the management of
    conflicts of interest that may arise wholly, or partially, in
    relation to activities undertaken by the licensee or a
    representative of the licensee in the provision of financial
    services as part of the financial services business of the
    licensee or the representative”.
  • Subsection 1043A(1) states that “the insider must not …
    apply for, acquire, or dispose of, relevant … financial
    products”. This is an absolute ban that does not refer to the
    direction of the trade, the profitability of the trade or even whether
    the trade was based on the inside information.
  • Section 1043F provides a Chinese wall exemption to the absolute
    ban imposed by subsection 1043A(1). The requirements for obtaining
    this exemption are that:

    • (a) the decision to enter into the transaction or agreement was
      taken on its behalf by a person or persons other than [the
      officer or employee possessing inside information]; and
    • (b) it had in operation at that time arrangements that could
      reasonably be expected to ensure that the information was
      not communicated to the person or persons who made the
      decision and that no advice with respect to the transaction or
      agreement was given to that person or any of those persons
      by a person in possession of the information; and
    • (c) the information was not so communicated and no such advice
      was so given.

These statutory provisions seem to imply that in the absence of adequate
Chinese Walls any trading in the securities concerned
becomes insider trading regardless of whether Citi benefited from
such trading or whether anybody suffered due to it.

Some commentators have suggested that modern financial
conglomerates would find it impossible to function in such a
situation. I think this is totally wrong. Conglomerates can still
function freely provided they ensure that they have strong Chinese
Walls and adequate mechanisms for managing conflicts of interest. If
ASIC has its facts right, Citi’s systems were simply inadequate.


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