Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Australian court rules that Chinese walls need not be perfect

I am not a lawyer and the judgement
of the Federal Court of Australia dismissing insider trading and
conflict of interest charges against Citigroup is 120 pages long,
but the sum and substance of the judgement seems to be that absolute
perfection is not required in Chinese wall arrangements. The judgement
says:

But what the unscripted actions of Mr Sinclair and Mr Darwell show is
the practical impossibility of ensuring that every conceivable risk is
covered by written procedures and followed by employees.

However, the arrangements required to satisfy s 1043F(b) of the
Corporations Act do not require a standard of absolute perfection.
The test stated in the section is an objective one. It is,
“arrangements that could reasonably be expected to ensure that
the information was not communicated”.

In my view, the arrangements referred to by Mr Monaci in his
written statement were sufficient to meet the requirements of s
1043F(b). They did not, in express terms, anticipate the situation
which arose on 19 August 2005 but they laid down general procedures
which could reasonably be expected to ensure that legal or compliance
officers of Citigroup vetted any communication of potentially price
sensitive information to prevent it crossing the Chinese wall.

The other important part of the judgement is that parties can
contract out of a fiduciary relationship. The acquirer’s mandate
letter stated that Citigroup was engaged “as an independent
contractor and not in any other capacity including as a
fiduciary”. With the court holding that this clause absolved
Citigroup of all fiduciary (conflict of interest) responsibilities,
language of this kind will probably become even more commonplace than
it is now.

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