Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

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Tue, 04 Apr 2006

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 release provides some details and has published the full text of ASIC’s Statement of Claim

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.

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.

Posted at 14:39 on Tue, 04 Apr 2006     View/Post Comments (0)     permanent link