Fiduciary Duties and Regulatory Rules System

Question : Discuss about the Fiduciary Duties and Regulatory Rules System. Answer: Introduction : ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963 is the landmark case where important principles were laid down. Firstly, that there is no law that forbids any investment bank from contracting out of fiduciary relationship; secondly, the obligations for insider trading can be analyzed with the help of Chinese Wall arrangements; Thirdly, when the provision of insider trading is analyzed and consideration is made whether the same is violated or not, then, the court may look into the compliance programme factors of the company. This case has highly praised how the Citigroup Global Markets Australia Pty Limited (Citibank) has grounded with the current practices of the investment banks. It was established that there is no fiduciary relationship amid Citibank and its clients which has put to rest to most of the claims of ASIC. (Seeto G, 2017) Citigroup Inc, is a global financial services company is based in Australia. Citibank is one of its segments. One of the activities of Citibank was that it deals in equity trading and investment banking. In order to carry out the services, Citibank is also holding Australian financial services license. The employees of Citibank have access to the market sensitive and confidential information with which Citibank deals with (private side). There is other group of employees as well who does not have any access to this confidential informations (public side). A standard market practice is prevalent which is also adopted by Citibank according to which a Chine Wall is established. As per Chinese wall, restrictions and barriers are created so that the information which is there on the private side does not pass on to the public side. The public side of Citibank is indulged in buying and selling of securities (internal trading house) with the help of the funds of the bank (Proprietary tradin g). (Garton, at. Al, 2015) On 19th August 2005, there is a trader in the public side of Citibank who made the bank to buy approximately one million shares in Patrick Corporation Ltd. this resulted in shooting up the share price of Patrick Corporation Ltd which ultimately has helped the investment bank sector. On the other hand, the private side of Citibank was providing advice to one of its clients, Toll Holdings Ltd, as how to takeover Patrick Corporation Ltd. the assistance is provided by Citibank since January 2005 and the authorization on the takeover was decided by them by June 2005, much before the share price of Patrick Corporation Ltd shoot up. (Latimer P, 2012) One of the employees of the private side found out that the public side is indulged in purchasing the shares of Patrick Corporation Ltd and thus the public side was told to stop the activity without specifying any reason for the same. The result is that the public side of the bank sold 20% of the shares so brought. Based on the above facts, it was found by ASIC that there are few duties that are breached which are analyzed herein under. The duties and responsibilities that are breached Based on the factual scenario, ASIC contemplated that there are few duties that are not fulfilled by the Citigroup. The same are: ASIC tried to establish that the Citibank is in breach of its duty of honesty and fiduciary relationship. The main reason upon which this claim is based by ASIC is that Toll Holdings Ltd and Citibank are in fiduciary relationship. When Citibank brought the shares of Patrick Corporation Ltd, then, it has acted in conflict with its own interest because on one side it is giving advice to Toll Holdings Ltd to takeover Patrick Corporation Ltd and on the other hand it is purchasing the shares of Patrick Corporation Ltd which resulted in shooting up the prices of the Patrick Corporation Ltd. Toll Holdings Ltd will prefer that the prices of Patrick Corporation Ltd must remain low but on the contrary the actions of Citibank has resulted in raising the prices of the Patrick Corporation Ltd. so, there is breach of duty of honesty that is resulted by the actions of Citibank. (A Tuch, 2005) ASIC claimed that Citibank is in violation of s 912A(1)(aa) Corporations Act, 2001. As per s 912A(1)(aa) Corporations Act, 2001, every financial services licensees must make proper arrangements in order to deal with the conflict of interest situation. But, when there is conflict of interest that took place, then, there are no adequate arrangements or managements that were maintained by Citibank. (HanrahanPF, 2007) ASIC claimed that there is breach of section 1043H of the Corporations Act. Further, the Citibank has also violated section 12DA of the ASIC Act. It is argued by ASIC that the violation of the section has resulted in deceptive and misleading actions by Citibank. Citibank has not informed Toll Holdings Ltd that they are purchasing shares of Patrick Corporation Ltd which may result in increasing the share price. This action of Citibank which is done intentionally is nothing but a deceptive and misleading act. ASIC also claimed that Citibank is involved in insider trading and thus has violated section 1043A of the Corporation Act, 2001. To support the claim, ASIC submitted that as soon as the employee of the private side informed not to buy the shares of Patrick Corporation Ltd, the public side has stopped from buying the shares, rather, they sold 20% of the shares that are purchased by Citibank. These actions depict that Citibank is not advising Toll Holdings Ltd it is actually representing Toll Holdings Ltd in the takeover process. It is also contended by ASIC that the private side of the Citibank were aware that Toll Holdings Ltd will launch its takeover bid only after the purchase of shares, that is, 19th August 2005. These actions were nothing but the acts of Insider Trading. All these claims were raised by ASIC. The main allegations of ASIC were that there is prevalence of insider trading and breach of fiduciary duty when the investment bank has advised on takeovers. But, these claims were not supported by the decision of the court and the court did not agree with the contentions of ASIC. The Decision and Reasons for the Decision. The Federal court has not agreed with the contentions of ASIC and rejected the claims. The main decision and the reasons are submitted herein below: (Ritchie T, 2008) The claim made by ASIC that the Citibank has violated its fiduciary duty was rejected by the court. It was held that there were no fiduciary duties that existed amid Toll Holdings Ltd and Citibank. It was held that it is not always that the relationship amid the client and the investment bank while considering a takeover will not always be a fiduciary relationship. A fiduciary relationship has many facets. Apart from deliberate avoidable of duty or fraud, most of the aspects of fiduciary can be contracted out by phrasing adequately in the contract. This is simpler when there is no prior trust relationship amid the parties and only duties and obligations are defined in the contract. the court has took reference to Aequitas v AEFC (2001); Daly v Sydney Stock Exchange Ltd- [1986] and Hadid v Lengest Communications Inc [1999]. In the given facts, there is a contract amid Toll Holdings Ltd and Citibank wherein it was stated that Citibank will only act as a contractor and has no fiduciary duty towards the client. ASIC contended that the fiduciary duty rose only after the establishment of the contract, that is, January 2005, but, in reality the parties are in relationship mush before January 2005 and at that time there was no fiduciary duty then how come the duty arises in 2005 when the same is specifically excluded by writing in the contract. It was also held by the court that ASIC claim that Citibank has no arrangements for dealing the conflict of interest situation is also false. Rather, Citibank has made adequate arrangements to deal with the conflicting situation. This argument of ASIC was soley based on the first claim. The failure of the first claim resulted in the failure of the second claim. The court found that the arrangement by Citibank was adequate as the chine wall it has established was appropriate and meet the needs of the situation. The court submitted that formation of policies and procedures does not define adequate arrangements, rather, there are few essentials which must always be analyzed before finalizing whether the arrangements were adequate or not, that is, to establish that the chins wall is created adequately. The same are, that the departments must be separated physically and not theoretically; that there must be proper programmers for the education of the employees which guides them to keep th e confidential information secret; if any how the wall needs to be crossed then there must be set of proper procedure which must be followed; there must be proper compliance programme which monitor the officers and if any officer or employee is found to be breaching the wall then there must be disciplinary actions against him. The court found that Citibank has comply with all these requirements and thus has managed arrangements to meet the conflicting of interest situation. It was contended by ASIC that Citibank is in violation of section 1043H of the Corporations Act and section 12DA of the ASIC Act, but, the arguments of ASIC was rejected by the court and it was held that Citibank was not in any kind of deceptive and misleading conduct. The court submitted that there was no fiduciary relationship that is established amid Citibank and Toll Holdings Ltd and thus Citibank is under no duty to bring any information in the knowledge of Toll Holdings Ltd regarding the insider trading. Citibank lack of providing information cannot be construe as if the act was misleading or deceptive. Thus, the ASIC claim is rejected. ASIC contended that Citibank is indulged in insider trading which was also rejected by the court. ASIC established that when the private side told the public side to stop buying the shares, the public side must have deduced that the bank must have been action on behalf of Toll Holdings Ltd for the takeover bid. Thus, the actions of selling of shares are justified. The court held that the Citibank can be held for insider trading only when the officer who was indulged in the act was the officer of the bank because it is only the officer of the bank who can have access to such confidential information of the bank. The court held that the information was provided by an employee of the bank and not by the officer (Prince Jefri Bolkiah v KPMG [1999]. Also, the takeover information was already prevalent in the market and the price of Patrick shares were already taking the same into account. (Law Commission, 1992) Taking these considerations into account it is justified in stating that Citibank was no where involved in the act of insider trading. Based on the reasoning the court has rejected all the claims of ASIC and ruled that Citibank was not in violating of its duties and thus the case decided in favor of the Citibank. However, even the case is won by Citibank but that does not mean that it is a kind of approval to all investment banks, rather, there are various observations and risk which must always be kept in mind by the bank, that is, the banks must expressly exclude their fiduciary duty while dealing with the client; client consent may also be taken that the duty is waived off; the client must have core competency in the takeovers and they must be aware of the banks business practices; till the time the consent is not obtained the public side must not be allowed in trading in the shares; Thus, this case is the landmark case and must be analyzed with all its pros and cons, ruling and understating which will lay down a foundation for the Investment Banks prior they deal with their clients in takeovers. Reference List A Tuch (2005) Investment Banks as Fiduciaries: Implications for Conflicts of Interest 29 Melbourne University Law Review 478 Garton, at. Al (2015) Moffat's Trusts Law, Cambridge University Press. HanrahanPF (2007) ASIC v Citigroup: Investment banks, conflicts of interest, and Chinese walls. Latimer P (2012) Australian Business Law 2012. Law Commission (1992) United Kingdom, Fiduciary Duties and Regulatory Rules, Consultation Paper No 124. Ritchie T (2008) ASIC v Citigroup: An Amber Light For Proprietary Trading, Corporate Governance eJournal. Seeto G (2017) ASIC v Citigroup - The compliance implications ClaytonUTZ (Online). Available at: https://www.claytonutz.com/knowledge/2008/january/asic-v-citigroup-the-compliance-implications. (Accessed on 12th April 2016). Aequitas v AEFC (2001) 19 ACLC 1006 ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963. Daly v Sydney Stock Exchange Ltd- [1986] HCA 25 Hadid v Lengest Communications Inc [1999] FCA 1798. Prince Jefri Bolkiah v KPMG [1999] 2 AC 222.