Good decision from the Federal Court today in regards to the case brought by ASIC against Citigroup. This was the one where ASIC regarded Citi’s prop trading in Patrick while advising on the (failed) Toll / Patrick deal in 2005 as a breach of the duty that Citi owed to Toll as their clients.

The court threw the case out on the clear grounds that Citi had no fiduciary duty to Toll despite the client relationship. Additionally, it looks like the court regarded the Chinese walls in operation as good enough to prevent leakages of price-sensitive information.

The consequences of ASIC’s action being successful really did not bear thinking about (at least if you are an investment bank) as it would mean that simultaneously both advising a client and prop trading in any party to a deal would be out. The odd outcome from this would be that, as soon as a bank was engaged to advise on a deal they would have to stop trading in the shares – meaning that the Chinese walls would have to come down at least a little. I would imagine the consequences in a conversation between a trader and the compliance officer:

Compliance: Mate, dealing in Companies X, Y and Z must all stop now.
Trader: WTF? I have large open short positions.
C: I don’t care. You may not deal.
T: Why?
C: I cannot say, but dealing in Companies X, Y and Z must all stop now.
T: Ahhh, right – I understand. Excuse me, I think I need to go for a smoke with a mate of mine.

All of a sudden everyone on that trading floor knows that a deal is in the wind – even the juniors. The more people know about it, the less chance a Chinese wall will hold. Even if the trading floor itself does not leak the lack of trade flow may well alert others in the market that a deal was on and that the banks that are not trading in the shares are doing the advising.

Liquidity in the shares of the parties to the deal would also drop, by itself a signal that something was up.

Oddly, the ASIC website is silent on this. They are normally very quick with a press release. Thanks to the FT Asia for this story.


ASIC have now put out their press release on this one – putting, as you would expect, about the best possible spin on it – not dwelling on the loss, talking about how these “clarifications will assist ASIC” and then going on to talk about their successes in insider trading prosecutions. Would have been nice, but unexpected, for them to say “look, we were wrong – sorry” but regulators do not say that, do they?

Reading the decision further, and also the commentary in today’s AFR, the judge really worked them over. Essentially it took him 5 minutes to say “no case to answer” and ask everyone t

o leave. Ouch.