This report analyzes the case of ASIC v Citigroup (2007) that was about fiduciary duty. Citigroup is an American based multinational investment banking and financial service provider. Along with this, this report provides the detail introduction of the case happened between ASIC and Citigroup. Furthermore, it identifies and analyzes the duties breached in the case and address the reason why the duties were breached. Eventually, the report provides a detailed analysis of the finding and final decision of the court in regarding the given case and reason behind the given decision.
This case study is about the role of relationship clause in setting a contractual obligation and describing the duties and obligation of the parties. This case is about City Group. City Group operated its business through different unit and divisions such as investment banking, equity trading, equity capital market and others. The employees in Investment Banking Division and Equity Capital Market were provided with the market sensitive data and information while the employees in equity were not treated so (Ferguson and Ma, 2014). The organization built a wall for restricting the communication and flow of information among the different departments and units. The equity employees of the organization bought shares in Patrick Corporation Limited on Australian Security Exchange. The purchase was taken place while IBD and ECM of City Group were doing act for Toll.
The ASIC commended proceed against Citigroup for this reason. Along with this, ASIC sued against Citigroup for breaching its obligation and fiduciary duty (Ferguson and Ma, 2014). Citigroup was an advisor but it positioned itself in disputes with Toll by purchasing share of Patrick. This caused the fiduciary relationship between Toll and Citigroup. The interest of the Citigroup was conflicted with its duty of loyalty to Toll for financial advising. It means Citigroup had infringed the statutory and legal provisions that regulate the financial service providers (Ferguson and Ma, 2014). However, Toll decided to keep the Citigroup as its financial advisor clearly excepting the fiduciary relationship between them. The company accepted that Citigroup has been kept as a sole advisor to the company. ASIC (Australian Security and Investment Commission) put efforts to resolve and remove the effects of this clause by presenting an argument that relationship between Toll and Citigroup should have to be taken into account to determine the existence of the fiduciary relationship.
Breach of duty is a legal and statutory situation or disturbance that occurs when one party in the contract fails to perfume its duty of care to another party. The incompliance with the legal and ethical obligation and regulations causes a breach of duty. The duty of care means the obligation imposed on the individual or parties involved in the contract for acting considering the welfare and wellbeing of the others concerned to the project or contract (Braid, 2013). Therefore, in this case, the fiduciary duty and insider trading are two main issues. The Citigroup was alleged for breaching the duty of care and duty of loyalty. The duty of loyalty is the duty and responsibility of the directors and managers to be not engaged in transactions in which its personal interest conflicts with others. It is said to be breached when an organization takes business opportunities and advantages from other businesses (Carson, 2015). At the same time, the duty of care of Citigroup was to not to be involved in the actions and transaction that could not harm to Toll. The fiduciary duty can be defined as higher standard determined for the duty of care. The fiduciary relationship is where one party depends on other for fiduciary relation (Jade, 2017).
The Australian Security and Investment Commission did not sue against ET for possessing the insider information and using it for purchasing the shares. The main issue was that the Citigroup infringed the fiduciary duty under the section 912A (1), Corporation Act, 2001 (ASIC, 2016). According to this section, the fiduciary duty is the duty of the directors and managers to not to do any act that might cause a loss for others. Furthermore, Citigroup found guilty of breaching the provisions defined in section 1043 H of Corporation Act, 2001 and section 12 DA under ASIC Act. Along with this, the Citigroup has infringed the provisions related to insider trading defined in section of1043A of Corporation Act, 2001 (Seeto, 2017). ASIC alleged that employees ET division was exposed to the internal information of the organization that led to the insider trading. This was for the personal interest of Citigroup. Therefore, the AISC alleged on Citigroup that the company was engaged in the insider trading and breached its duty and responsibility to seeking organization.
The investment banking, equity trading, and equity capital market are three units and divisions of the Citigroup. The Citigroup breached the duty of care and duty of loyalty as there was a Chinese wall between the units that restrict the flow of information between them. Along with this, ET was not exposed to the information. The employees of the purchased the share of the Patrick about which the investment banking was not aware (Ferguson and Ma, 2014). ET showed its personal financial conflicts while IB had to protect the financial interest of the Toll. But the interest of ET and conflicted with the interest of Toll. This caused a breach of the duty of care. Along with this, The IB failed to protect the interest of Toll and failed to perform its duty to Toll. This was said to be a breach of loyalty.
In the case of Australian Securities and Investments Commission vs. Citigroup Global Markets Australia Pty Limited, federal court has rejected the ASIC claim against the Citigroup. The court declared that Citigroup is not contravened its obligations and did not breach the provision of corporation act. Along with this, Citigroup also did not breach the insider trading provisions of corporation act. The ASIC sought the $1 million from the Citigroup for the breach of insider trading, Chinese walls it is because Investment banking division of the Citigroup was the advisor of Toll for the takeover of Patrick and Toll Holdings proposed a takeover before takeover of Patrick. The Peter Jacobson justice of federal court ruled against the ASIC to pay the legal fees of Citigroup (Jacobson, 2007). In the case, it was founded that Citigroup did not breach the insider trading provisions and obligations of corporation act. In this case, ASIC claimed against the Citigroup that Citigroup breach the fiduciary relationship, did not have arrangements to manage the conflicts, Citigroup also conducts the deceptive and misleading, and Citigroup also breached the insider trading provisions. But federal court rejected all the claims made by ASIC against the Citigroup.
The court also declared that Citigroup did not breach the corporation act in the business activities. The main reason for rejecting the first claim was that Citigroup and Toll are not in a fiduciary relationship because Citigroup act as an independent contractor and it has not capacity of fiduciary. Therefore, no fiduciary relationship exists between contact (mandate letter) of Citigroup and Toll (Ritchie, 2008). At the same time, the court also rejected the second claim of ASIC that Citigroup did not have arrangements to manage the conflicts because company was not involved in a fiduciary relationship and has Chinese walls for the arrangements of management conflicts. The Citigroup has Chinese walls for the arrangements of conflicts as each department of company is separate from each other, monitoring by compliance officers, and has disciplinary sections in each department for breaching the wall.
Furthermore, it is founded that Citibank and Toll were not in a fiduciary relationship and based on this company is also not involved in misleading and deceptive conduct. Moreover, the claim of ASIC that Citigroup breaches the provisions of insider trading in corporations act. But court also rejected this claim of ASIC and declared that Citigroup is not involved in insider trading, ASIC claimed that Citigroup engaged in insider trading when company purchases the shares of Patrick which were sold by the public (Ritchie, 2008). ASIC also stated that trader also told to Citigroup to stop buying of shares from public that indicates that company was acting for the takeover of Patrick. In order to prove that Citigroup was involved in insider trading, ASIC needs to prove that trader was the employee of Citigroup, but ASIC was unable to prove the case. Therefore, based on above analysis it can be said that Citigroup was success in this case and does not breach any provisions or duty of corporations act.
From the analysis of above case, it can be concluded that Citigroup has various business divisions such as Investment Banking division (IBD), equities trading department, and Equity Capital Markets division. The Investment banking division was the advisor of Toll and Toll was announced its bid for Patrick for its takeover but Equities trading department purchased shares in Patrick Corporation Limited. In this case, ASIC claimed that Citigroup breaches the duty of care, loyalty, provision of insider trading, and fiduciary duties. But federal court rejected the claims of ASIC that Citigroup did not breach any duty or provision of the corporations act because company has physical separation by departments.
ASIC (2016). 07-171 Decision in ASIC v Citigroup. Retrieved from https://asic.gov.au/about-asic/media-centre/find-a-media-release/2007-releases/07-171-decision-in-asic-v-citigroup/
Braid, E. (2013). IS MY FINANCIAL ADVISOR A FIDUCIARY OR A STOCKBROKER? Retrieved from https://www.highpassasset.com/blog/58-is-my-financial-advisor-a-fiduciary-or-a-stockbroker.html
Carson, B. (2015). Is Your Financial Advisor a Fiduciary? Retrieved from https://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2015/03/19/is-your-financial-advisor-a-fiduciary
Ferguson, D. and Ma, C. (2014). Addisons Contractual Interpretation Series – Relationship clauses – can fiduciary obligations be avoided? Retrieved from https://www.addisonslawyers.com.au/knowledge/assetdoc/5566d4592c364479/Addisons%20Contractual%20Interpretation%20Series%20Relationship%20Clauses.pdf
Jacobson, D. (2007). ASIC V CITIGROUP DECISION: NO CONFLICT AND NO INSIDER TRADING. Retrieved from: https://www.brightlaw.com.au/asic-v-citigroup-decision-no-conflict-and-no-insider-trading/
Jade (2017). Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (ACN 113 114 832) (No. 4)  FCA 963. Retrieved from https://jade.io/article/11171
Ritchie, T. (2008). ASIC v Citigroup: An Amber Light For Proprietary Trading. Retrieved from: https://www.austlii.edu.au/au/journals/ElderLRev/2008/2.pdf
Seeto, G. (2017). ASIC v Citigroup - The compliance implications. Retrieved from https://www.claytonutz.com/knowledge/2008/january/asic-v-citigroup-the-compliance-implications
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