Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) - [2007] FCA 963

FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (ACN 113 114 832) (No. 4) [2007] FCA 963

SUMMARY

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v CITIGROUP GLOBAL MARKETS AUSTRALIA PTY LIMITED (ACN 113 114 832)
NSD 651 OF 2006

JACOBSON J
28 JUNE 2007
SYDNEY

In accordance with the practice of the Federal Court in some cases of public interest, the following summary has been prepared to accompany the reasons for judgment delivered today. The summary is intended to assist understanding of the decision of the Court. It is not a complete statement of the conclusions reached by the Court or the reasons for those conclusions. The only authoritative statement of the Court’s reasons is that contained in the published reasons for judgment. The published reasons for judgment and this summary will be available on the Internet at >
Citigroup Global Markets Australia Pty Limited (‘Citigroup’) is the Australian arm of Citigroup Inc, a global financial services company. Citigroup’s business in Australia is conducted through various divisions and business segments. They include investment banking and equities trading.
Citigroup has established ‘Chinese walls’ to restrict the flow of information between different departments. Employees who work in areas such as the Investment Banking Division and who are exposed to confidential, market sensitive information, are known as private side employees. Those who work in areas such as Equities and who are not so exposed, are known as public side employees.
These proceedings arise out of the purchase by a public side employee of Citigroup of over 1 million shares in Patrick Corporation Limited (‘Patrick’) at a time when private side employees working in the Investment Banking Division were acting for Citigroup’s client, Toll Holdings Ltd (‘Toll’) on a proposed takeover bid for Patrick. The shares were purchased by the proprietary trader for Citigroup’s own account on the last trading day before Toll announced its bid for Patrick.
The Australian Securities and Investments Commission (‘ASIC’) does not allege that the proprietary trader was in possession of inside information when he purchased the shares. However, when private side employees became aware of the proprietary trader’s purchase of the shares, steps were taken from within the private side that resulted in an instruction to the trader to stop buying any more shares in Patrick. The trader did not buy more shares but in the half hour before the close of trading, he sold nearly 200,000 of the parcel of Patrick shares that he had purchased earlier that day.
ASIC contends that Citigroup, as an adviser to Toll, occupied a relationship that was in critical respects, fiduciary. ASIC also contends that in purchasing the shares in Patrick, Citigroup placed itself in a position where its duty of loyalty to Toll conflicted with its interests arising from the purchase of the shares in Patrick. The gravamen of the claim is that Citigroup contravened its obligations under s 912A(1)(aa) of the Corporations Act to have in place adequate arrangements for the management of conflicts of interest.
All of the claims of conflict of interest and duty and breach of s 912A(1)(aa) depended upon the existence of a fiduciary relationship between Citigroup and Toll. However, the claims failed at the outset because the letter of engagement under which Toll retained Citigroup as its adviser specifically excluded the existence of such a relationship. The Court held that the law does not prevent an investment bank from contracting out of a fiduciary capacity; whether it should be able to do so is a matter for the legislature, not the courts.
ASIC relied on a number of propositions of law to overcome the effect of the engagement letter and sought to impose on Citigroup a duty to obtain Toll’s express consent to proprietary trading in Patrick shares. The Court held that the propositions relied on by ASIC had no application in the present case.
ASIC claimed in the alternative that Citigroup breached the provisions of s 1043H of the Corporations Act and s 12DA of the ASIC Act which prohibit misleading and deceptive conduct. However, those claims also depended upon the existence of a fiduciary relationship between Citigroup and Toll. Accordingly, both of those claims failed for the reasons above. So too did a further alternative claim for unconscionable conduct under s 12CA of the ASIC Act.
ASIC also makes two claims against Citigroup of contravention of the insider trading provisions contained in s 1043A of the Corporations Act. The first claim covered the trader’s sale of Patrick shares late in the afternoon, after he was given instructions not to buy those shares. ASIC alleges that, as a result of what was said to him, he made a supposition that Citigroup was acting for Toll in the proposed takeover of Patrick. This is said to constitute “information” within the meaning of s 1042A of the Corporations Act and the sale is alleged to constitute insider trading by Citigroup.
This claim failed because the trader was not an “officer” of Citigroup within the meaning of s 9 of the Corporations Act. His knowledge was therefore not attributable to Citigroup for the purposes of the insider trading provisions: see s 1042G(1)(a) of the Corporations Act. In any event, the Court held that the trader did not make the supposition alleged by ASIC.
The second insider trading claim covers all of the trading undertaken by the trader on the day in question. ASIC alleges that senior officers of the Corporate Investment Banking division of Citigroup knew that there was a substantial likelihood that Toll would launch its takeover bid on the next working day after the shares were purchased. Thus it is said that even though those officers did not know of Citigroup’s trading, their knowledge was attributable to Citigroup so as to make it liable for insider trading.
The second insider trading claim failed because at the time when Citigroup traded in the shares, it had arrangements that could reasonably be expected to ensure that the information was not communicated to the trader. That is to say, Citigroup had in place, inter alia, Chinese walls which insulated the trader from the information so as to satisfy the requirements of s 1043F of the Corporations Act.
Although the defence in s 1043F of the Corporations Act was upheld, the Court endorsed warnings given in an earlier authority about the risk of leakage of information through the structural barriers commonly known as Chinese walls.

FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (ACN 113 114 832) (No. 4) [2007] FCA 963

CORPORATIONS – Conflict of interest and of duty and interest – ASIC asserted contravention of s 912A(1)(aa) of the Corporations Act – whether respondent and client were in a fiduciary relationship – construction of engagement letter – effect of exclusion clause – whether full disclosure and express consent is required to waive fiduciary obligations – specific claims of conflict of interest alleged – applicable principles – interpretation of s 912A(1)(aa) of the Corporations Act – whether respondent provided “financial services” under s 766A(1)(a) of the Corporations Act – whether services were an “exempt service” under regulation 7.1.29(3) of the Corporations Regulations – consideration of the requirements for adequate arrangements for management of conflicts of interest pursuant to s 912A(1)(aa) of the Corporations Act

CORPORATIONS – Insider trading – ASIC asserted contravention of s 1043A of the Corporations Act – meaning of “information” within s 1042A of the Corporations Act – whether relevant person was an “officer” – whether a mere supposition, uncommunicated, may amount to “information” – applicable principles – consideration of whether information was generally available and/or was materially price sensitive – adequacy of respondent’s Chinese walls arrangements for purposes of s 1043F of the Corporations Act

Australian Securities and Investments Commission Act 2001 (Cth) – ss 12CA(1), 12DA(1)
Corporations Act 2001 (Cth) – ss 9, 20, 764A(1)(a), 766A(1)(a), 766A(2)(b), 766B(1), 912A(1)(aa), 1041H(1), 1042A, 1042C, 1042D, 1043A(1), 1043F
Corporations Regulations 2001 (Cth) – 7.1.29(1), 7.1.29(3)

Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 (Cth), Explanatory Memorandum
Corporations Legislation Amendment Bill 1991 (Cth), Explanatory Memorandum

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AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v CITIGROUP GLOBAL MARKETS AUSTRALIA PTY LIMITED (ACN 113 114 832)
NSD 651 OF 2006

JACOBSON J
28 JUNE 2007
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 651 OF 2006

BETWEEN:	AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff
AND:	CITIGROUP GLOBAL MARKETS AUSTRALIA PTY LIMITED (ACN 113 114 832) Defendant

JUDGE:	JACOBSON J
DATE OF ORDER:	28 JUNE 2007
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

The application be dismissed.
The plaintiff pay the defendant’s costs of the proceedings.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

TABLE OF CONTENTS

PART 1 – INTRODUCTION AND OVERVIEW	1
Introduction	1
Abbreviations, Acronyms etc	1
Overview	2
PART II – THE FACTS	7
Private Side Employees Learn of Public Side Purchases	7
Mr Bartels’ Conversations with Mr Sinclair and Mr Sinclair’s with Mr Darwell	9
The ‘Cigarette on the Pavement’ Conversation	10
Mr Manchee’s Thought Processes	11
The Compliance Department is Notified	13
Citigroup’s General Counsel and CEO Are Informed	14
The CEO and Others Telephone Mr Bartels	15
A CHRONOLOGICAL ACCOUNT OF THE RELEVANT FACTS	15
December 2004 to January 2005: Citigroup Begins Pitching to Toll	15
January 2005 to February 2005: The Pitch Continues; Citigroup Purchases Shares Discreetly for Toll	16
March 2005 to April 2005: Citigroup Reports on Share Purchases and Continues Pitching	18
May 2005: Citigroup Still Not Appointed	19
June 2005: Citigroup Requires Execution of Custodian & Nominee Appointment	20
June 2005: Citigroup Continues to Press for Mandate	21
Late June 2005: Citigroup’s Mandate is Secured But Not Documented; Carnegie Wylie Appointed	22
June to July 2005: Negotiation of Citigroup’s Mandate Letter	24
July to August 2005: Planning for Bid; Calculation of Premium	26
8 August 2005: The Mandate Letter is Signed	27
8 August 2005 to 11 August 2005: Planning for Launch of Bid; Calculation of Premium	30
11 August 2005: Citigroup Foreshadows Category 1 Restriction	30
11 August to 17 August 2005: Further Planning for Takeover Announcement	31
18 August 2005: Press Speculation on Toll Bid; Virgin Announces Profit Downgrade	33
18 August 2005: Re-execution of Custodian & Nominee Appointment	34
Market Trading in Patrick Shares on 19 August 2005	34
The Events of 19 August 2005	35
Sunday 21 August 2005: The Rehearsal	36
22 August 2005: The Announcement	38
22 – 24 August 2005: ASX and ASIC Commence Considerations of Whether Insider Trading Occurred	39
September 2005: ASX Notification to ASIC of Possible Contravention; ASIC Gives Notice to Citigroup Under s 912C of the Corporations Act	40
Mr Chatfield’s Evidence	41
PART III – THE LEGISLATIVE FRAMEWORK AND THE ISSUES THAT ARISE	45
The Legislation	45
The Issues	50
PART IV – THE CONFLICTS CLAIMS: THE ROLE OF INVESTMENTS BANKS AND A CONSIDERATION OF LEGAL PRINCIPLES	52
The Role of Investment Banks in the Financial System	52
The Identification of a Fiduciary Relationship	55
The Co-existence of Contractual and Fiduciary Relationships and the Effect of Exclusion Clauses	56
An Adviser May Have Fiduciary Obligations	58
The Scope of the Fiduciary Obligations	59
Informed Consent	60
A Special Instance of Conflict	61
Chinese Walls	63
PART V: THE CONFLICTS CLAIMS – DETERMINATION OF ISSUES	66
Issue 1 – Fiduciary Relationship, Construction of the Mandate Letter	66
Issue 2 – Whether Informed Consent was Required	69
Issue 3 – Whether Toll Gave Informed Consent	71
Issue 4 – Does it Matter Whether the Information was Relevant to Toll’s Decision	73
Issue 5 – The Five Alleged Breaches of Duty	74
Issue 6 – Construction of s 912A(1)(aa) of the Corporations Act and Reg 7.1.29(3) of the Corporations Regulations	84
Issue 7 – Adequate Arrangements under s 912A(1)(aa) of the Corporations Act	87
Issue 8 – Misleading and Deceptive Conduct	90
Issue 9 – Unconscionable Conduct	91
PART VI: THE FIRST INSIDER TRADING CLAIM – DETERMINATION OF ISSUES	91
The Relevant Facts	92
Issue 10 – Whether Mr Manchee was an Officer of Citigroup	93
Issue 11 – Whether Mr Manchee Made the Supposition	98
Issue 12 – Whether Mr Darwell Made and Conveyed the Supposition	100
Issue 13 – Whether an Uncommunicated Supposition can Constitute Information	102
Issue 14 – Whether the Information was Generally Available	106
Issue 15 – Whether the Information was Price Sensitive	110
PART VII – THE SECOND INSIDER TRADING CLAIM – DETERMINATION OF ISSUES	111
Issue 16 – Possession of the Information	111
Issue 17 – Whether the Information was Generally Available	112
Issue 18 – Whether the Information was Price Sensitive	112
Issue 19 – The Chinese Walls Defence	113
CONCLUSION AND ORDERS	116
SCHEDULE I – ACRONYMS	119
SCHEDULE II – DRAMATIS PERSONAE	120

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 651 OF 2006

BETWEEN:	AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff
AND:	CITIGROUP GLOBAL MARKETS AUSTRALIA PTY LIMITED (ACN 113 114 832) Defendant

JUDGE:	JACOBSON J
DATE:	28 JUNE 2007
PLACE:	SYDNEY

REASONS FOR JUDGMENT

PART 1 – INTRODUCTION AND OVERVIEW

Introduction

The essential issue which arises in these proceedings is whether the terms of a letter of engagement, under which an investment bank was retained by a large public company to advise on a proposed takeover, excluded the existence of any fiduciary relationship between the investment bank and its client.

The corporate regulator, the Australian Securities and Investments Commission (‘ASIC’) contends that, notwithstanding the existence of a clause in the letter which excluded the existence of such a relationship, the investment bank breached certain fiduciary duties to its client by failing to obtain the client’s informed consent to proprietary trading in the takeover target’s shares by another division of the bank. ASIC also contends that the purchase, and subsequent sale, of a portion of the parcel of the target’s shares, constituted insider trading.

Abbreviations, Acronyms etc

Toll Holdings Limited (‘Toll’) is the parent company of a number of corporations in the Toll corporate group, including Toll (Corporate Services) Pty Limited (‘Toll Corporate’). I do not propose to distinguish between the various members of the Toll group, except where necessary. Accordingly, I will describe Toll and its related bodies corporate by the abbreviation ‘Toll’, unless the context otherwise requires.
I will set out a list of acronyms as Schedule I to my reasons for judgment. Schedule II will contain a dramatis personae.

Overview

Citigroup Inc is a global financial services company which conducts its business in more than 100 countries. It operates in Australia primarily through Citigroup Global Markets Australia Pty Limited (‘Citigroup’) which is the defendant in these proceedings.
Citigroup’s activities are conducted through various businesses including the Corporate and Investment Bank, known by the acronym ‘CIB’. The CIB provides a diverse range of products and services. They include investment banking and financial products and services to wholesale investors, financial advisory services and equities trading. The CIB conducts equities trading on its own account, as principal, as well as for institutional or wholesale customers.
The CIB is divided into a number of operational areas and divisions. Employees who work in some of these areas are likely to be exposed to “inside information” within the meaning of s 1042A of the Corporations Act 2001 (Cth). A prime example is the Investment Banking Division, known by the acronym, ‘IBD’, which provides financial advisory and investment banking services including in relation to mergers and acquisitions.
Employees in other areas, such as Equities (other than Equity Capital Markets, or ‘ECM’), are not expected to come into possession of such information. Those employees work on the public side of Citigroup’s business and are known as ‘public side’ employees. Employees who work in areas which are exposed to information that may amount to inside information are called ‘private side’ employees.
Citigroup has established Chinese walls between employees who work in the private side and the public side of its business. It is apparently now more common to describe these structures by the anodyne term “information barriers”: see Asia Pacific Telecommunications Limited v Optus Networks Pty Limited [2007] NSWSC 350 at [4]. I prefer the traditional description, Chinese walls.
The issues which arise in the present proceedings raise, at least in part, the question of whether Citigroup’s Chinese walls were adequate to prevent the flow of inside information from the private side to the public side.
The proceedings arise out of the purchase by a public side employee of over one million shares in Patrick Corporation Limited (‘Patrick’) at a time when private side employees working in the IBD were acting for Citigroup’s client, Toll, on a proposed takeover bid for Patrick. The shares were purchased by a trader, Mr Andrew Manchee, who worked on the proprietary trading desk which is situated in Equity Derivatives, within the Equities Division.
ASIC does not suggest that Mr Manchee was in possession of inside information when he purchased the shares. However, when Mr Manchee’s purchases became known to private side employees, steps were taken to instruct him to stop buying further shares in Patrick. Mr Manchee followed the letter of the instruction but not long after receiving it he sold nearly 200,000 of the parcel he had previously purchased.
ASIC relies on the steps which were taken within Citigroup once Mr Manchee’s purchases became known to the private side as demonstrating the inadequacy of the Chinese walls to prevent the flow of inside information from the private side to the public side. ASIC also contends that the sale by Mr Manchee of 192,352 Patrick shares after a conversation with his superior, Mr Paul Darwell, constituted insider trading by Citigroup in contravention of s 1043A of the Corporations Act.
But the more fundamental point for which ASIC contends is that Citigroup, as an adviser to Toll on its proposed takeover of Patrick, occupied a relationship which was, in critical respects, fiduciary. ASIC contends that as a fiduciary, Citigroup was obliged not to allow itself to be placed in a position of actual or potential conflict between its duty of loyalty to Toll and its interest in the profits sought to be obtained from its proprietary trading in Patrick shares.
ASIC submits that the fundamental point to be made in these proceedings is that if trading by an institution such as Citigroup in the shares of its client’s target company is to be undertaken, the institution needs to obtain the informed consent of the client. It is not sufficient, according to ASIC, for consent to be given indirectly. What is said to be required is the client’s express permission for trading.
A difficulty immediately arises in ASIC’s argument in the present case. This is because ASIC contends that the fiduciary relationship between Citigroup and Toll arose from the contract between them. But the mandate letter, under which Toll’s wholly owned subsidiary, Toll Corporate, engaged Citigroup as its adviser for the proposed takeover bid provided expressly that Citigroup was engaged:
“as an independent contractor and not in any other capacity including as a fiduciary”.
In Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 97, Mason J said that where a contractual relationship provides the foundation for the erection of a fiduciary relationship, the contract regulates the rights and liabilities of the parties. His Honour went on to say that the fiduciary relationship, “if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to”, the contractual terms.
How then, to use the language of Mason J in Hospital Products, can a fiduciary relationship be superimposed upon the mandate letter in the face of clear language which excludes it?
ASIC’s answer to this conundrum is to be found in eleven propositions to which I will refer later. At the heart of them is the proposition that where the inclusion of a particular term in a contract between a fiduciary and client would create an actual or potential conflict of interest between the fiduciary and the client, the fiduciary must obtain the client’s informed consent to the inclusion of that provision. This approach to the question builds, in large measure, analogically upon principles applicable to solicitors: see in particular the observations of Mahoney JA in Law Society of New South Wales v Foreman (1994) 34 NSWLR 408 at 435-436.
The gravamen of ASIC’s case is that for the exclusion of the fiduciary relationship in the mandate letter to be effective, it was incumbent upon Citigroup to draw Toll’s attention expressly to the effect of the exclusion, that is, that it permitted Citigroup to trade in Patrick shares on its own account, in potential conflict with the interests of Toll.
Citigroup disputes the applicability of ten of the eleven propositions propounded by ASIC. It submits that because the mandate letter provides so precisely that no fiduciary relationship exists between Citigroup and Toll, there is simply no scope for the mandate to accommodate a fiduciary relationship. It submits that the propositions put forward by ASIC to overcome this difficulty have no application particularly when the fiduciary relationship is not one of the ‘per se’ relationships referred to in the authorities: see for example Hospital Products at 96 per Mason J.
The substance of Citigroup’s answer to the claim is that the duty of a fiduciary to obtain the informed consent of a client has no application here because it presupposes the existence of an antecedent fiduciary relationship. No such pre-existing relation is claimed to have been created.
Citigroup also relies, to the extent necessary, upon events preceding (and post-dating) the execution of the mandate letter, as demonstrating Toll’s knowledge of, and informed consent to, Citigroup’s proprietary trading in Patrick shares. These events include the submission by Citigroup to one of the Toll companies, Toll Transport Pty Limited (‘Toll Transport’), and subsequent execution, of a Custodian & Nominee Appointment Agreement dated 23 June 2005. That contract deals with the acquisition by Citigroup of a discreet pre-bid stake in Patrick for and on behalf of Toll. This contract contained express disclosure of Citigroup’s right to trade as principal in Patrick shares.
ASIC also points to events pre-dating the execution of the mandate letter as part of its case. However, a difficulty arises because of its disavowal of any fiduciary relationship pre-dating the actual execution of the mandate letter: cf United Dominions Corporation Limited v Brian Pty Limited (1985) 157 CLR 1 at 11-12 per Mason, Brennan and Deane JJ.
A central part of ASIC’s case is that Citigroup was required, as a financial services licensee, to have in place adequate arrangements for the management of conflicts of interest: see s 912A(1)(aa) of the Corporations Act. According to ASIC, conducting proprietary trading without having obtained Toll’s informed consent to the proprietary trading, amounts to a breach of this subsection.
ASIC does not concede that, as a matter of statutory construction, s 912A(1)(aa) applies only where a licensee and its client are in a fiduciary relationship. However, Mr Walker SC, for ASIC, did concede that for the purposes of the present case, ASIC’s contention that Citigroup contravened s 912A(1)(aa) depends upon the success of ASIC’s submission that the parties were in a fiduciary relationship.
Even if Citigroup did owe fiduciary duties to Toll, the question of whether s 912A(1)(aa) was engaged depends upon a number of questions of statutory construction. The principal questions are whether Citigroup was providing “financial services” within the meaning of s 766A(1) and “financial product advice’ within the meaning of s 766B(1) of the Corporations Act, as well as whether any such services were exempt services within Reg 7.1.29(3) of the Corporations Regulations 2001 (Cth).
ASIC seeks to argue the conflicts claim on three further bases. These are, first, a contravention of s 1041H of the Corporations Act, second, breach of s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) and third, breach of s 12CA of the ASIC Act. However, each of them depends upon acceptance of ASIC’s contention that Citigroup owed fiduciary duties to Toll.
There are two separate insider trading claims against Citigroup. The first is Mr Manchee’s sale of the 192,352 shares in Patrick. Mr Manchee was a public side employee. He was not told that Citigroup was acting for Toll in relation to the proposed takeover of Patrick. Nevertheless, he is alleged to have made that supposition as a result of an instruction from Mr Darwell.
Thus, a question which arises in the first insider trading claim is whether an uncommunicated supposition, formed as a result of a person’s internal thought processes, amounts to “information” within the meaning of s 1042A of the Corporations Act. However, there is a threshold question as to whether Mr Manchee was an “officer” of Citigroup whose knowledge is to be attributed to that corporation.
The second insider trading claim is that certain private side employees of Citigroup were aware that Citigroup was acting for Toll on the proposed takeover and that there was a substantial likelihood that Toll would announce its bid in the very near future. The purchase and sale by Citigroup of Patrick shares while those employees were in possession of the information is said to constitute insider trading.
Issues arise as to whether the information was “generally available” and whether a reasonable person would expect it to have a “material effect” on the price of Patrick shares: see s 1042A of the Corporations Act.
A central issue which arises on the second insider trading case is whether Citigroup has made good its defence that it had in place adequate Chinese walls in accordance with the statutory defence contained in s 1043F of the Corporations Act.

PART II – THE FACTS

Private Side Employees Learn of Public Side Purchases

On 8 August 2005, Toll engaged Citigroup, through the IBD, to act as Toll’s joint adviser on a proposed takeover of Patrick. The terms of the retainer were recorded in the mandate letter to which I referred briefly at [16].
I will set out the terms of the retainer in more detail later. It is sufficient to record by way of introduction that Citigroup undertook to perform such “financial advisory and investment banking services” for Toll as were customary and appropriate in a proposed takeover bid.
Although the mandate letter was not signed until 8 August 2005, the IBD had been ‘pitching’ to Toll from at least January 2005 in an effort to secure the mandate.
The head of the team of Citigroup employees who led the pitch was Mr Grant Dempsey. He was Co-Head, Melbourne Coverage, Investment Banking. All of the employees who worked for Mr Dempsey were private side employees who were members of the IBD.
Mr Dempsey’s team was not the only team on the private side of the Chinese wall who worked for Toll on the takeover. The ECM Division of Citigroup was retained by Toll in January 2005 to acquire, on a confidential basis, a shareholding in Patrick of up to 4.9% on behalf of Toll.
Mr Mark Bartels was the head of the ECM Division. His team commenced purchasing Patrick shares on 19 January 2005. The purchases continued until 26 July 2005.
Mr Bartels’ team was separate from Mr Dempsey’s team. The primary function of ECM was to provide advice on structuring, marketing and pricing of equity and equity-linked securities offers for capital raising transactions. In the context of the Toll takeover, however, Mr Bartel’s team provided share market summaries to both Toll and to Mr Dempsey’s team.
On 19 August 2005, the market was alive with rumours that Toll would make a bid for Patrick. That morning, between about 10:15am and about 11:50am, Mr Manchee purchased approximately 450,000 shares in Patrick. He then adopted a particularly aggressive buying approach in the afternoon acquiring 674,752 shares in Patrick, on Citigroup’s account, between 2:55pm and 3:07pm.
At some time during the course of the day, Mr Bartels noticed that Citigroup had engaged in extensive trading in Patrick shares. During the afternoon Mr Bartels made two significant calls. One was to Mr Malcolm Sinclair, Citigroup’s Head of Equities. The other was to Mr Peter Monaci, Managing Director, Head of Capital Markets and Global Banking Compliance for the Asia Pacific region of CIB.
Mr Sinclair and Mr Monaci are both private side employees. However, the contact between Mr Bartels and Mr Sinclair resulted in a conversation between Mr Sinclair and an employee on the public side of the Chinese wall. That employee was Mr Darwell, the Head of Equity Derivatives, who was as I mentioned above, Mr Manchee’s superior. What took place between Mr Sinclair and Mr Darwell, and in a subsequent conversation between Mr Darwell and Mr Manchee, is at the heart of the first insider trading case.
Mr Bartels’ conversations with Mr Sinclair and Mr Monaci also resulted in knowledge of Citigroup’s stake in Patrick radiating through various parts of the private side of the Chinese wall. Discussions took place between Mr Sinclair, Mr Monaci, Mr Stephen Roberts, the CEO of CIB (Australia and New Zealand), and Mr Warren Scott, Citigroup’s General Counsel (Australia and New Zealand). Those four persons then contacted Mr Bartels to seek his opinion as to whether Toll should be informed of Citigroup’s trading.
The conversations between those gentlemen on the private side of the Chinese wall, as well as those which took place across the Chinese wall between Mr Sinclair and Mr Darwell and then between Mr Darwell and Mr Manchee are said to show that Citigroup had no adequate mechanism or procedures to manage a conflict.
What is noticeable about the discussions that took place on the afternoon and early evening of 19 August 2005 is that Mr Dempsey was not informed that Citigroup had acquired a stake in Patrick.

Mr Bartels’ Conversations with Mr Sinclair and Mr Sinclair’s with Mr Darwell

The evidence suggests that Mr Bartels called Mr Sinclair before he alerted Mr Monaci, although the exact sequence of the calls is not entirely clear from the evidence. In my view, it is more likely that Mr Sinclair was Mr Bartels’ first port of call because there was no suggestion that Mr Monaci was aware of the trading when he first spoke to Mr Sinclair.
Mr Sinclair’s Equities Division is on the public side of the Chinese wall but Mr Sinclair sits on the private side. At some time during lunch or in the early afternoon of 19 August 2005 Mr Bartels told Mr Sinclair that Citigroup was trading in Patrick shares. There appear to have been two telephone conversations between Mr Bartels and Mr Sinclair about that fact.
Mr Sinclair was sufficiently concerned about the situation that he contacted Mr Darwell, a public side employee. Equity Derivatives, of which Mr Darwell is Head, is a subdivision of Equities. Mr Darwell reports to Mr Sinclair.
The conversation between Mr Sinclair and Mr Darwell took place shortly after 3pm. Mr Sinclair asked Mr Darwell whether Citigroup was involved in trading in Patrick shares and who was doing the buying. Mr Darwell made some enquiries and reported back to Mr Sinclair that the proprietary trading team was involved. He said that Mr Manchee had purchased the shares.
In one of the conversations between Mr Sinclair and Mr Darwell, most likely before Mr Darwell spoke to Mr Manchee, Mr Sinclair said to Mr Darwell “we may have a problem”.
Mr Darwell did not ask Mr Sinclair why there might be a problem. He thought in his own mind that there may be some truth in the rumours of a takeover bid for Patrick and that Citigroup may be involved. But he made no enquiry of Mr Sinclair because he was unaware of the takeover and:
“I would not ask because it may put me in a position where I would cease to function in my job”.

The ‘Cigarette on the Pavement’ Conversation

Mr Darwell’s Equity Derivatives area is organised into trading desks, one of which is the proprietary trading desk at which Mr Manchee sits. He is one of five traders at that desk and reports to Mr Darwell. Mr Manchee is, of course, a public side employee.
Mr Manchee has a daily trading limit of AUD$10 million in leading stocks, that is to say, those within the ASX 200. He can purchase up to AUD$10 million worth of any one stock. The limit is an end-of-day limit, so that he is apparently authorised to spend more than AUD$10 million during the day, provided that his book is within the limit at the close of trading. The purchase of approximately one million shares in Patrick at a price of just over AUD$6 was well within Mr Manchee’s limit.
After Mr Sinclair’s enquiry of Mr Darwell, Mr Darwell phoned Mr Manchee. The phone call took place between about 3:15 and 3:30pm. The call was short. Mr Darwell said “Can we go down for a cigarette?” This was enough for Mr Manchee to realise that Mr Darwell wanted to discuss something.

A conversation then took place on the pavement outside of Citigroup’s offices. Mr Darwell asked Mr Manchee how many shares he had purchased and why he had bought them. He asked why Mr Manchee was being so aggressive. Mr Manchee had bought approximately 1.2 million shares and told Mr Darwell that he had bought them because of hedge fund trading, charts, volume and rumours. Mr Darwell said “Don’t buy any more”.

Mr Manchee’s Thought Processes

Mr Manchee accepted that the conversation with Mr Darwell was unusual. He agreed that this applied to the circumstances and the subject matter, including the fact that Mr Darwell gave no reason for the instruction not to buy any more shares. Mr Manchee took Mr Darwell to mean that he was carrying too much risk; that was one of the reasons he sold nearly 200,000 shares when he returned to his desk.
Mr Manchee gave the following evidence in his examination under s 19 of the ASIC Act on 12 December 2005:
“Q Didn’t it occur to you that Darwell’s reason for giving you this instruction was a matter that he felt unable to communicate with you?
APrivilege. I suppose there was a possibility that he was unable to communicate something to me.
QDidn’t you suppose that when he was telling you to stop buying it had something to do with these rumours about a Toll takeover?
APrivilege. I probably assumed it did.”
The examination continued as follows:
“QI am trying to explore what your state of mind was at the time. Didn’t it occur to you that Darwell knew something that he couldn’t tell you, but which was in his view a good reason why he should tell you to stop buying Patrick shares?
APrivilege. That might have been one of the things that I thought about.
QDidn’t it occur to you that a possibility was that he knew something about Citigroup’s involvement with the rumoured Toll takeover and that’s why he was speaking to you?
APrivilege. As I said, perhaps there was a possibility he did know something I didn’t know.
QWhat I was wanting to explore was, do you agree that that was something that occurred to you at the time as a possibility?
APrivilege. I can’t recall exactly, but it probably, it could have occurred to me at the time that, you know, it was a possibility.
QWell, isn’t this right, that you supposed at the time that one possibility was that the reason Darwell was telling you to stop buying Patrick shares was because he knew something that he couldn’t tell you about the Citigroup’s involvement in the rumoured Toll takeover.
APrivilege. Perhaps at the time I thought he might have known something that he couldn’t tell me, and the reason that he would know something but couldn’t tell me that Citigroup were involved somehow, perhaps he would have known, and I might have thought about that as a possibility.”
Later in the examination the following exchange took place:
“QBut wasn’t it obvious to you that the reason that Darwell was telling you to stop buying shares was because he knew something about Citigroup’s involvement that he couldn’t tell you that was the reason you should keep out of it?
APrivilege. No. I didn’t know that was – I wouldn’t have even thought, even if Citigroup did have something to do with it, that he would know anything.”
It will be seen that in the earlier part of the examination, Mr Manchee made a concession which, on one view, he later withdrew. Mr Myers QC for Citigroup did not concede that there was an inconsistency between the two portions of the transcript but he consented to leave being granted to Mr Walker to cross-examine Mr Manchee on the apparent inconsistency in accordance with s 38 of the Evidence Act 1995 (Cth). I will deal with this later in my reasons for judgment.

The Compliance Department is Notified

Sometime prior to 4pm, Mr Sinclair and Mr Monaci had a conversation in Mr Sinclair’s office. The conversation was to the following effect:
“Mr Sinclair:    It’s the prop desk who have traded.
Mr Monaci:What do you mean?
Mr Sinclair:    The prop traders have been trading in Patricks.
…
Mr Monaci:Just because the prop desk has traded in Patrick doesn’t necessarily mean that there’s a problem with the Chinese wall. We shouldn’t automatically assume that there’s something wrong. We will probably get a regulatory inquiry given the volume of trading in Patrick that has occurred.
Mr Sinclair:   I agree. I asked Paul Darwell to look into the trading. Let me call Paul in.
Mr Monaci:Wait, hang on, Paul is public side.
Mr Sinclair:    I understand that. We’ll tell him that we’ve got a query.”
Mr Monaci wanted to ensure that he did not tip off Mr Darwell or “taint him”. He therefore said to Mr Sinclair:
“Okay. We’ll tell him that we picked it up on surveillance and that given the increase in the price of the stock, we’re expecting a query from the stock exchange.”
At some stage during the afternoon of 19 August 2005, most probably after his conversations with Mr Sinclair, and after Mr Sinclair had first spoken with Mr Monaci, Mr Bartels rang Mr Monaci. He also told him that Citigroup had purchased a large parcel of Patrick shares. He said that Mr Monaci could expect an enquiry from ASIC.

Citigroup’s General Counsel and CEO Are Informed

At some time after his conversation with Mr Sinclair, Mr Monaci went to see another private side employee, Mr Scott. It is not clear whether Mr Sinclair was present though the evidence seems to indicate it was likely he was there.
Mr Monaci told Mr Scott that Toll’s bid was expected to be announced on Monday and that Citigroup’s proprietary trading desk had engaged in substantial trading during the day.
Messrs Monaci and Scott then went to a conference room on level 40 of Citigroup’s premises where Mr Roberts was present with Mr Les Matheson, Country Officer for Citigroup in Australia. Mr Matheson was responsible for all aspects of Citigroup’s retail business. He left shortly after Mr Monaci and Mr Scott arrived. Mr Sinclair also seems to have been present during the discussions that took place.
A discussion took place between Messrs Roberts, Sinclair, Scott and Monaci. The fact that Citigroup had engaged in proprietary trading, with the purchase of about one million shares in Patrick, was revealed to Mr Roberts.
Mr Monaci expressed concern to Mr Roberts and the others that there may be a perception within ASIC of potential insider trading by Citigroup. Mr Monaci seems to have expressed the view that there was no breach in the Chinese wall.
One of the persons present at the meeting asked “Should we tell Toll?”. Mr Roberts appears to have said that Mr Bartels was the appropriate person to answer that question.

The CEO and Others Telephone Mr Bartels

In the early evening of 19 August 2005, at about 6pm or 7pm, those present at the meeting with Mr Roberts called Mr Bartels on a speaker phone. One of them asked Mr Bartels whether they should tell Toll that Citigroup had purchased shares in Patrick.
Mr Bartels expressed the view that it was unnecessary for Citigroup to inform Toll.

A CHRONOLOGICAL ACCOUNT OF THE RELEVANT FACTS

December 2004 to January 2005: Citigroup Begins Pitching to Toll

By late December 2004, Citigroup’s IBD began preparing documents for the purpose of an approach to Toll. Citigroup sought to be retained by Toll as its adviser in relation to opportunities to enter the Ports logistics market in Australia.
A discussion paper prepared by Citigroup, dated 31 December 2004, identified Patrick as “the most immediate and realistic entry opportunity” for Toll. It stated that Toll was uniquely positioned to acquire Patrick. It also stated that Citigroup would be pleased to work with Toll to refine its analysis of the acquisition and to agree on a final recommendation.
Even before this discussion paper, Citigroup was well aware of the need to identify and deal with potential conflicts of interest in transactions generally. In a memorandum dated 29 November 2004 to CIB Division Heads and various managers, including Compliance Managers, a directive was given about proceeding with transactions that may involve, inter alia, the likelihood of a conflict.
The memorandum included a directive that if business management wished to proceed with such a transaction, the Division Head:
“must determine if the transaction could reasonably be expected to cause clients or regulators to express concern as to whether the transaction is consistent with the behaviour they would expect of a leading market participant and, as a result, our reputation and standing could be damaged”.
Indeed, in another transaction between Citigroup and Toll recorded in a mandate letter dated 10 December 2004, Mr Dempsey and Mr Bartels provided expressly for Citigroup to be entitled to purchase shares on its own account. The letter stated:
“The Company hereby agrees that Citigroup and/or a related body corporate thereof will, subject to adherence with the Corporations Act and any other relevant laws, above confidentiality obligations and the effective operation of appropriate ‘Chinese Walls’ within by [sic] Citigroup, have the right to purchase shares for their own account and that any such purchase will not constitute a conflict of interest for purposes of Citigroup’s engagement hereunder.”

January 2005 to February 2005: The Pitch Continues; Citigroup Purchases Shares Discreetly for Toll

On 12 January 2005, Mr Dempsey sent an email to Mr Neil Chatfield, the Chief Financial Officer of Toll, setting out a number of possible alternative methods for the acquisition of Patrick. One of them was a takeover offer to Patrick shareholders consisting partly of cash and partly of scrip. The scrip was to comprise partly shares in Toll and partly shares in Patrick’s 62.4% owned subsidiary, Virgin Blue Holdings Limited (“Virgin”).
On 19 January 2005, Mr Chatfield instructed Mr Bartels to acquire a stake in Patrick of up to 4.9%. The shares were to be acquired discreetly in the name of a Citigroup company as nominee. Acquisitions commenced that same day.
On 20 January 2005, Mr Christian Lunny of Citigroup’s IBD sent an email to Mr Dempsey, Mr Bartels and others within Citigroup. The email sought to check possible conflicts of interest so as to ensure it was appropriate “to continue pitching” the transaction to Toll. The email went on to describe Citigroup’s role as being “to act as financial adviser to Toll for the 100% acquisition of Patrick”. It also stated that Citigroup would seek to provide Toll with its acquisition financing requirements.
On 21 January 2005, Citigroup’s IBD prepared an updated analysis for the proposed acquisition of Patrick. Codenames were given to the project, the bidder and the target. The project was known as “Douro”, the bidder as “Tawny” and the target as “Para”.
The updated analysis document stated that Citigroup believed the best method of achieving Tawny’s strategic objectives was to acquire 100% of Para with the consideration to comprise cash and scrip in Virgin. The document also stated that:
“Citigroup would be pleased to work with Tawny to refine the acquisition analysis and to agree on the most appropriate transaction structure.”
On 24 January 2005, Mr Dempsey sent an email to Mr Chatfield and Mr Stephen Stanley of Toll. The email thanked them for their time at a meeting on 21 January 2005. Mr Dempsey suggested a meeting take place with Citigroup’s head of mergers and acquisitions to discuss the takeover process. Mr Dempsey also stated:
“Now that we are fully aware of the history, we can really get some good advise [sic] back to you in terms of options next meeting.”
On 31 January 2005, Citigroup prepared a further draft working document for Project Douro. The document stated that it was agreed at the last meeting between Tawny and Citigroup that their analyses of the potential acquisition of Para were “well aligned” and the focus should shift to the question of acquisition approach and funding issues.
The document also stated that:
“Tawny should consider formally engaging Citigroup to further develop an acquisition financing plan, encompassing all capital markets (debt, hybrid and equity).”
The document also made reference to the fact that Tawny had commenced discreet purchases of shares in Para in an effort to move to the substantial shareholder threshold of 4.9%. An estimate of the time required to accumulate that stake was given at up to four months.
On 2 February 2005, Mr Dempsey sent an email to Mr Chatfield setting out some thoughts for further discussion. The email included the following:
“So, my pitch is to get mandated (of course!) And get our guys internally to the line on funding approval …”
On 3 February 2005, Mr Dempsey sent an email to an officer of Citigroup Inc in the USA. He said that Citigroup had targeted Toll strongly and that “we are ‘near mandated’”.
On 7 February 2005, Mr Dempsey sent another email to Mr Chatfield. Mr Dempsey suggested a further meeting to chat about Project Douro and to discuss Citigroup being given a mandate.
On 8 February 2005, Citigroup prepared a draft working document dealing with the next steps in Project Douro. It said that those steps should be to “focus on key funding strategy and execution issues” to prepare for a bid.
Citigroup prepared a further working document on 18 February 2005 for a presentation to Tawny. The stated objective of the document was to “re-assess the economics to Tawny for the acquisition of Para”. Core assumptions of the analysis included an offer premium range of 25% to 35% over the prevailing Patrick share price.
The document of 18 February 2005 contained a number of projections on the impact of the takeover including the impact on Tawny’s earnings per share after the acquisition of Para.

March 2005 to April 2005: Citigroup Reports on Share Purchases and Continues Pitching

On 24 March 2005, Mr Bartels sent an email to Mr Chatfield reporting on Citigroup’s purchase of shares in Patrick for Toll Holdings. He said that the purchases had been very discreet and that Citigroup’s purchases since 19 January 2005 had been at a price which was lower than the Volume Weighted Average Price (‘VWAP’) on the active days.
Mr Bartels sent a further email to Mr Chatfield on 20 April 2005 stating that Citigroup had beaten the VWAP on all the days it had been active.
On 22 April 2005, Mr Dempsey sent an email to Mr Chatfield, with a copy to Mr Paul Little, the CEO of Toll. The email attached an updated analysis of the proposed takeover based on the latest research reports on Tawny, Para and “Vintage”. Vintage was the code name for Virgin. The document included a sensitivity analysis of the effect on Tawny’s earnings per share based on a range of different premiums over the Patrick share price.

May 2005: Citigroup Still Not Appointed

By May 2005 Citigroup had still not received the mandate it sought. On 3 May 2005, Mr Dempsey sent an email to Mr Chatfield stating that he had spoken to Mr Little who was in New Zealand. He reported that Mr Little had said that Citigroup should not assume it would advise Toll on the takeover and “there were others interested in doing so”. Mr Dempsey commented that he had assumed that Citigroup was “working somewhat in the tent despite not being mandated”.
On 13 May 2005, Mr Dempsey sent an email to Mr Stanley of Toll. The email attached an analysis showing the projected premium on Patrick’s share price based on the VWAP over various periods.
Mr Dempsey sent another email to Mr Chatfield on 18 May 2005 pitching yet again for the mandate and attaching a confidential letter to this effect from himself and Jason McLeod, also Co-Head of IBD Coverage, Melbourne. It is apparent from the email and letter that by this date, another company, Carnegie Wylie & Company Pty Limited (‘Carnegie Wylie’), had been named by Toll as a possible adviser.
The email of 18 May 2005 included the following:
“The only thing we will continue to emphasis [sic] as we work the scope out is our ability to add significant value on the advisory side of the business as well. As the letter says, we respect the capabilities in this area of Toll and the position Wylie has but we also think we have exhibited our strong capabilities in this area. We continue to have very good global market news which is invaluable in these processes. We not only have access to global players (as you now have) we have strong understanding of their transaction history which again is invaluable in interpreting interactions with them.
There is also an enormous amount of work in a public takeover and most of that grunt will be done by our team. So, just a little pitch for us to continue to be seen as not just a funder but also adviser. To that end, participating in as many meetings as possible relating to the transaction is important to be able to maxim [sic] our value. At the end of the day this is a large transaction with room for many points of view. One that Citigroup will back to the hilt even if it gets a little hairy.”
The confidential letter attached to the email pointed out to Mr Chatfield the advantages to Toll of the appointment of Citigroup as its adviser.
Mr Dempsey and Mr McLeod stated in the letter that they supported the possible role for Mr John Wylie of Carnegie Wylie. They also said they would “work with you to ensure a working relationship to the benefit of Toll”.
The letter of 18 May 2005 continued as follows:
“We also appreciate the in-house capabilities Toll has in merger & acquisitions and look forward to defining the scope parties may play in this transaction and to demonstrate the value Citigroup will deliver in a broad advisory leadership role.
We strongly believe Citigroup’s ability to bring a complete advisory and funding package (equity & debt) will be crucial to the success of the proposed transaction. Driving the advisory effort is important to us and we believe we will add as much in that area as we will in funding support. In particular, we trust that Citigroup has already demonstrated some of the key requirements needed as financial adviser.”

June 2005: Citigroup Requires Execution of Custodian & Nominee Appointment

Although Citigroup had commenced purchasing a stake in Patrick on Toll’s behalf in January 2005, no formal documentation was prepared until mid-June of that year.
On 15 June 2005, Mr Bartels sent an email to Mr Chatfield stating that, as previously discussed, Citigroup had purchased shares in the name of Citigroup nominees and another nominee company. He forwarded a form of Custodian & Nominee Appointment for execution by Toll.
The form of Custodian & Nominee Appointment provided for Toll Transport to appoint Citigroup (or its authorised representative) as its custodian and nominee for the financial products designated by it.
The proposed terms of the Custodian & Nominee Appointment incorporated certain standard Citigroup Terms of Business. The standard terms included the following under the subheading “Disclosure of Interest”:
“You acknowledge that we may execute Orders for you and charge you commission in circumstances where we or our associates:
-hold a principal position or deals in the Securities (Wholesale Clients who are not Financial Services Licensees may opt out of this clause by informing your CGM Account Manager prior to trading; or otherwise notifying us);
-provide similar services to other persons in relation to the Securities;
-are allocated a sale or purchase of Securities when we have an unexecuted Order on the same terms from you;
-take the opposite position in a Transaction (including a crossing) either acting for another client or on our own account;
-sponsor or underwrite a new issue involving the Securities;
-have material price sensitive information relating to Securities where the individuals processing your Order are prevented from knowing or taking into account such information by reason of Chinese Walls; or
-have a potential conflict of interest of which you are not aware and which we are unable to disclose to you.”

The Custodian & Nominee Appointment was executed by Toll Transport, without alteration of the abovementioned standard terms, on 17 June 2005.

June 2005: Citigroup Continues to Press for Mandate

On 16 June 2005, Citigroup prepared a draft discussion document containing an acquisition financing overview. The document stated that Citigroup had been asked to “consider funding structures relating to Tawny’s potential acquisition of Para”. The document also stated that Citigroup provided the update to Tawny as part of its ongoing analysis of Project Douro and was “pleased to support in this important transaction”.
On the same day, Mr Dempsey sent an email to Mr Chatfield, once again stressing the value of Citigroup’s services, while at the same time respecting those of Mr Wylie.
The email continued as follows:
“However, recent deals (wmc) have shown the value of 2 opinions for the client to work their way through. In fact encouraging open debate and contrary views is healthy in front of client to get best results. So just want to make sure that we don’t get boxed into lesser advisory role. We have a lot to add on this side not least of which is the grunt to do an enormous amount of work but also the experience (I have done m&a for over a decade also). We can figure out scope, protocals [sic] etc later but want the starting point to be joint advisors. Toll always has the right to listen and agree with whoever they want but joint advisors should be involved in all things together to get best results.
…
Sounds somewhat semantic but very important for us to get in the right role. Part of the tactics is managing interlopers, hedge funds, panel issues, accc etc etc and we are resourced to cope with all of that. And of course the documentation.
So my plea is to see us as valuable advisors and not second tier ones.”
Mr Dempsey had one more thought in his overtures to Mr Chatfield on 16 June 2005. He sent it by email shortly after 11pm. The email included the following:
“More importantly we need to get citigroup global to move to fund this thing very agressively [sic]. To do that we need to be joint advisors at minumum [sic]. That is the package model that excites the powers that be to move heaven and hell to get committed in an agressive [sic] balance sheet way.
…
Don’t mean to pitch too hard via email but just trying to give you our thoughts before you guys make some decisions tomorrow. No more from me tonight!!”

Late June 2005: Citigroup’s Mandate is Secured But Not Documented; Carnegie Wylie Appointed

On 18 June 2005, Mr Dempsey sent two internal emails within Citigroup’s IBD. The first reported that “(w)e have the gig” as joint advisers with Carnegie Wylie. The email also stated that Citigroup would provide finance advisory services and lead the funding.
The second of the emails of 18 June 2005 stated that Citigroup’s Melbourne team had made nine presentations to Toll to obtain the opportunity to be an adviser. It observed that Citigroup had a well developed understanding of the financials and the funding requirements. Mr Dempsey also said that he would have day to day client management and advisory oversight.
Mr Dempsey prepared a draft retainer letter which he appears to have sent to Mr Chatfield on or about 27 June 2005. The terms of the scope of Citigroup’s engagement to provide financial advisory and investment banking services for Toll were identical with those set forth in the final form of the letter.
So too was the acknowledgment that Citigroup had been retained solely as an adviser to Toll as an independent contractor and “not in any other capacity including as a fiduciary.”
On or about the same day, 27 June 2005, Mr Wylie on behalf of Carnegie Wylie, and Mr Chatfield on behalf of Toll Corporate, signed a retainer letter for the engagement of Carnegie Wylie as a financial adviser for the proposed takeover of Patrick by Toll.
Under this letter of engagement, Carnegie Wylie agreed to provide the following services:
(a)advice on valuation and commercial issues associated with the takeover;
(b)tactics for the acquisition;
(c)negotiating and structuring the acquisition; and
(d)other advisory services in connection with the transaction reasonably requested by Toll.
The engagement letter provided for payment, inter alia, of a transaction fee, which was in effect a success fee, calculated on a sliding scale depending on the acquisition price and percentage of Patrick acquired under the takeover.
As with the Citigroup mandate letter, Carnegie Wylie also excluded the existence of a fiduciary relationship between the parties. Carnegie Wylie undertook to act in the best interests of Toll in its performance of the engagement. It agreed to do so as an independent contractor only and “no relationship of agent and principal, joint venture partners, partnership or a relationship of a fiduciary nature will be created”.

June to July 2005: Negotiation of Citigroup’s Mandate Letter

On 28 June 2005, Mr Dempsey sent an email to Mr Chatfield on the subject of the fees payable to Citigroup. He said he wished to chat to Mr Chatfield about Citigroup’s fees relative to those of Carnegie Wylie.
Mr Dempsey said in the email that Citigroup needed to be treated at least equally to Carnegie Wylie on fees. He said he was confident that Citigroup would earn its status as co-adviser and that it had, and would, continue to bring more “grunt/effort” to the project which should be recognised.
The email continued as follows:
“I hope you have seen to date that we can hold our own in terms of tactics/strategy – most of the debate to date has been led by us from and [sic] advisory perspective (although we are not disputing and are embrasing [sic] what our co-adviser brings to the deal).”
On 30 June 2005, Mr Dempsey sent another email to Mr Chatfield about a meeting that day as well as a number of topics to be discussed in the near future. One of them was the mandate. He said he “would love to get this agreed both in terms of fees and mandate letter.” He put forward a proposal with a view to being put on an equal basis to Carnegie Wylie.
On 1 July 2005, Mr Dempsey prepared a further draft of the mandate letter. It contained one change of substance from the earlier draft in that it set out the proposed fee structure. Fees were stipulated on a sliding scale based upon acceptance level and offer price. The maximum fee payable was stated as AUD$18 million if more than 90% acceptances were received at an offer price of AUD$7. The draft stated that the fee structure had been agreed to ensure that the interests of Toll and Citigroup were well aligned.
On the same day, 1 July 2005, Mr Dempsey sent an internal email to two addressees including Mr Roberts. He said that “fees were now settled” with Toll. He pointed out that if the takeover was fully successful Citigroup would get between AUD$10 million and AUD$18 million and that this was equivalent to the fees payable to Carnegie Wylie.
On 7 July 2005, Citigroup prepared a further draft discussion paper containing an analysis of earlier takeovers including the proportion of cash to scrip in the consideration and the premiums offered.
On 8 July 2005, the Toll group legal manager sent a copy of the draft mandate letter to Mr Chatfield, marked up to show Toll’s suggested changes. There were no changes of substance to the scope of the engagement, the fees payable, or the exclusion of Citigroup’s fiduciary capacity.
On 12 July 2005, Mr Dempsey sent an email to Mr Chatfield suggesting a price of AUD$7 per share as the appropriate outcome for a negotiated merger with Patrick. He gave some observations as to what this represented as a premium to the Patrick share price.
On 19 July 2005, Mr Dempsey sent an email to Mr Chatfield dealing with various topics. One of them was the mandate letter. He said he assumed it was all in order to be signed as he had agreed to all of Mr Chatfield’s “no’s”. He also said he would sign it and send it to Mr Chatfield for signature.
On 21 July 2005, Mr Dempsey again emailed Mr Chatfield about signing the mandate letter. He said he was “getting pressure internally” to have the document signed.

July to August 2005: Planning for Bid; Calculation of Premium

On 26 July 2005, Deutsche Bank issued a substantial shareholder notice stating that it had acquired a 5.01% shareholding interest in Patrick. This led to speculation about a possible takeover and put some upward pressure on the share price.
On 29 July 2005, Mr Lunny sent an internal email to Mr John Hanson of the IBD. The email attached a document containing an analysis of the premium to the Para share price at a range of offer prices from AUD$6.85 to AUD$7.75.
On 31 July 2005, a member of the IBD notified a member of the ECM Division of the proposed launch date of Tawny’s bid. The timing was said to have shifted to an expected launch date of 8 August 2005 in light of recent market rumours and share price movements. This message was passed on to Mr Bartels.
With the anticipated launch date fast approaching, the ‘deal team’ (made up of Citigroup IBD and Carnegie Wylie personnel) began working on the possibility of addressing defences which may be raised against the takeover bid. The list of defences included an argument that the premium was too low for control. The team’s thoughts on the subject were passed on to Mr Little and Mr Chatfield.
On or about 7 August 2005, Citigroup prepared a draft announcement to the Australian Securities Exchange (‘ASX’) in anticipation of the launch of Tawny’s bid. Under the subheading “Attractive Premium for Para Shareholders”, the document stated that the offer price:
“represents a [#]% premium relative to Para’s one month VWAP to 26 July 2005, the day prior to speculation regarding an offer for Para emerged.”
The draft announcement also included provision for other ways in which the premium could be calculated.
On 7 August 2005, Mr Dempsey sent an email to Mr Lunny and other IBD personnel, attaching a document with an analysis of responses/strategies to be made by Tawny in answer to issues likely to arise in relation to the transaction. The email had previously been copied to Mr Little and Mr Chatfield.
One of the issues identified in the document was that the market would develop different interpretations of the bid premium. The response proposed for this was that Para should focus on pre-bid prices unless prices moved in Tawny’s favour during the transaction.
On 8 August 2005, Citigroup prepared a working document for a presentation to Tawny on considerations to be taken into account in determining the offer price. The considerations referred to in the working document included reference to the premium calculation. It said that the premium would be calculated so as “to convey the most optically appealing bid”.
The document also said that the transaction should be marketed as a 24.7% premium to the closing price on 26 July 2005, the date on which market speculation emerged after Deutsche Bank issued its substantial shareholder notice. A graph of recent Para stock price movements showed an increase from AUD$5.60 on 26 July 2005 to AUD$5.97 on 8 August 2005.

8 August 2005: The Mandate Letter is Signed

On 8 August 2005, the mandate letter was signed by Mr Dempsey on behalf of Citigroup and by Mr Chatfield for Toll Corporate. Clearly enough, by that date Toll had nominated Toll Corporate as the takeover vehicle.
The mandate letter stated that Toll had engaged Citigroup as its joint financial adviser “in connection with a possible Transaction” involving Patrick. The “Transaction” was defined to mean the acquisition, directly or indirectly, by Toll Holdings, of all or a significant portion of the business, assets or securities of Patrick, or any other effort by Toll Holdings to obtain control of a significant investment in Patrick.
The mandate letter was set out on Citigroup’s letterhead. The following appeared under the subheading “Scope of Engagement”:
“As we have discussed, in the course of our engagement as your financial adviser, we will perform such financial advisory and investment banking services for the Company in connection with the proposed Transaction as are customary and appropriate in transactions of this type and as you reasonably request. …
Citigroup will advise the Company in connection with, and will be considered by the Company in relation to, any interest rate, currency rate, equity or other hedge program(s) of the Holding Company relating to the Transaction, including assisting in the structuring of such program(s) and managing any related auctions. Citigroup or its related bodies corporate will provide any liability management services (including consent solicitations, debt repurchases or defeasances) desired by the Company in relation to or as a result of the Transaction, subject to the execution of definitive documentation containing mutually agreed fees, terms and conditions with respect to such services.
If the Holding Company successfully completes the Transaction but does not dispose of the Subject’s interest in Virgin Blue Holdings Ltd (“Vintage”) as part of this Transaction, and subsequent decides to sell Vintage (within the next 12 months) then the Company will consider appointing Citigroup as advisors to the Company in connection with the sale on terms to be mutually agreed.”
The following appeared in the letter under the heading “Fees and Expenses”:
“The proposed fee structure for financial advisory and investment banking services has been agreed to ensure the interests of the Company and Citigroup are well aligned and to ensure that Citigroup is rewarded for best achieving the Company’s objectives. The fee will be determined based upon the Offer Price to the Subject Company and is intended to reflect two potential situations: 1) greater than 90% of the Subject Company is acquired under the Offer and 2) less than 90% is acquired under the Offer.
For each situation, the Company will pay to Citigroup the cash fees outlined in Table 1 below. (In the event the Offer Price falls within a Price band shown in Table 1, the fee shall be calculated by way of liner interpolation. For all Offer Prices below $7.00, the fee shall be held flat at the $7.00 level. For all Offer Prices in excess of $7.90, the fee shall be held flat at the $7.90 level).”

Table 1 Offer Price

Acceptance $7.00 $7.45 $7.90

>90% $18m $14m $10m

<90% $9m $7m $5m

The paragraphs of the mandate letter which included an acknowledgment that Citigroup was not engaged in a fiduciary capacity are important. I will set them out in full:
“The Company acknowledges that Citigroup has been retained hereunder solely as an adviser to the Company, and not as an adviser to or agent of any other person, and that the Company’s engagement of Citigroup is as an independent contractor and not in any other capacity including as a fiduciary. Citigroup may, to the extent it deems appropriate, render the services hereunder through one or more of its related bodies corporate. Neither this engagement, nor the delivery of any advice in connection with this engagement, is intended to confer rights upon any persons not a party hereto (including members, employees or creditors of the Company) as against Citigroup or our related bodies corporate or their respective directors, officers, agents and employees. Citigroup may, subject to the prior written approval of the Company (such approval not to be unreasonably withheld or delayed), at our own expense, place announcements or advertisements in financial newspapers, journals and marketing materials describing our services hereunder.
The Company acknowledges that it is not relying on the advice of Citigroup for tax, legal or accounting matters, it is seeking and will rely on the advice of its own professionals and advisors for such matters and it will make an independent analysis and decision regarding any Transaction based upon such advice.
The Company should be aware that Citigroup and/or its related bodies corporate may be providing or may in the future provide financial or other services to other parties with conflicting interests. However, consistent with our long-standing policy to hold in confidence the affairs of our customers, we will not use confidential information obtained from the Company except in connection with our services to, and our relationship with, the Company, nor will we use on the Company’s behalf any confidential information obtained from any other customer.”
A further paragraph of the mandate letter dealt with the topic of confidential information supplied to Citigroup. It provided that Citigroup agreed to treat all information obtained by it from Toll, in connection with the engagement, as confidential. There were a number of provisions which stipulated circumstances in which Citigroup would be free to treat such information as not confidential or to make disclosure as required by law.

8 August 2005 to 11 August 2005: Planning for Launch of Bid; Calculation of Premium

On 8 August 2005, Mr Dempsey sent an email to Mr Chatfield and others, suggesting an opening offer price of 0.47 Tawny shares and a special dividend of 0.33 Vintage shares per Para share. At current closing prices, this was said to translate to a consideration of AUD$6.98 per share.
The email of 8 August 2005 continued:
“this headline price equates to only a 17.5% premium on closing price for para on Friday but we will sell it differently. I think we should primarily sell it as 25% premium to the closing price on 25 July but also reference it as a 23% premium to the 1 and 3 month vwap.”
On the same day Mr Dempsey sent an email to Mr Roberts informing him that the mandate letter had been signed. He said that the anticipated launch date was being kept to a select group; not even people on the fringe of the deal were aware of the date.
The anticipated launch date, which was then expected to be 15 August 2005, was subject to further delay. Mr Dempsey informed Mr Roberts in an email of 9 August 2005 that it could be delayed until later that week.
On 11 August 2005, Citigroup prepared a briefing paper for a presentation to the board of Tawny. Citigroup stated its belief that a valuation of AUD$6.96 to AUD$7.89 per share was appropriate for Para. This was said to equate to a premium of 23% to 40% to Para’s one month VWAP.

11 August 2005: Citigroup Foreshadows Category 1 Restriction

Citigroup has in place written policies and procedures setting out the considerations that apply to a decision as to whether a public side employee should be brought ‘over the wall’, that is to say, over the Chinese wall. These policies are intended to prevent the flow of potentially price sensitive information across the wall.
Citigroup also has in place arrangements to monitor trading to determine whether it may have been based on price sensitive information. Transactions undertaken by the private side businesses of Citigroup are recorded on a Compliance Surveillance System known by the acronym ‘CSS’.
The CSS is essentially a ‘Watch List’ of proposed private side transactions which is monitored by Citigroup’s Compliance and Control Group. Sanctions apply where trading is undertaken that is found to have been based on potentially price sensitive information. Employees’ knowledge that monitoring is taking place is intended to prevent the flow of such information across the Chinese wall.
Citigroup’s written procedures include ‘The Guide to Trading Restrictions’. These procedures apply where the CIB acts as a financial adviser in a mergers and acquisitions transaction. When this happens, the people involved in the transaction are moved from the Watch List to another list called the ‘Restricted Trading List’. The relevant parties are not placed on the Restricted Trading List before public announcement. According to Mr Monaci, this is because to do so would risk sending a signal about confidential investment banking activities.

Thus, it can be seen that the purpose of the extended definition was to make it plain that the term was not to be confined to “specific information” consisting of an existing fact that was capable of being expressed unequivocally, as stated by Lee J in Ryan v Triguboff.
It is also apparent that the new definition was to include in the concept of information, factual knowledge obtained by means of a hint or veiled suggestion from which the receiver of it can impute other knowledge: see Commissioner for Corporate Affairs v Green [1978] VR 505 at 511.
This approach to construction has been adopted in relation to s 128 of the Securities Industry Act 1980 (NSW), the successor to s 75A of the Securities Industry Act and precursor to s 1002A of the Corporations Act 1989: see Hooker Investments Pty Limited v Baring Bros Halkertson & Partners Securities Limited (1986) 10 ACLR 462 at 467-468 per Young J; R v Rivkin (2004) 184 FLR 365 at [126] – [127] per Mason P, Wood CJ at CL and Sully J. As Young J said in Hooker Investments v Baring Bros, at 468, information goes further than knowledge and:
“may include a rumour that something has happened with respect to a company which a person neither believes nor disbelieves”.
In Hannes v DPP at [410], Barr and Hall JJ quoted with approval the statement of McInerney J in CCA v Green that, in many cases, a hint may suggest information or may enable an inference to be drawn as to information. Their Honours also said at [411] that an inference “may be drawn with varying degrees of certainty as to its accuracy” but such an inference nevertheless remains information. They observed that there is no clear distinction between information conveyed orally or by conduct.
In my view it follows from what was said by McInerney J in CCA v Green, by Young J in Hooker Investments v Baring Bros and by Barr and Hall JJ in Hannes v DPP that information can be non-specific and that what is drawn from it by way of inference is also included within the statutory definition of information. Moreover, the information, whether in the form of a hint or a rumour, must be communicated orally or by conduct, for example by observation of the words or conduct of others.
It also seems to follow from this that an inference may be a supposition or a matter of supposition, and therefore falls within the definition of information in s 1042A. The supposition would therefore be that which the person drew from the hint or other non-specific information received from another.
It was submitted on behalf of Citigroup that the legislative history shows that the inclusive definition of “information” in s 1042A of the Corporations Act was not intended to extend the ordinary meaning of the word “information” to encompass uncommunicated thought processes.
Citigroup pointed to the expression “matters of supposition” in the definition and submitted that a distinction was to be drawn between such a “matter” and a mere supposition. Mr Myers submitted that “information” is something which is necessarily communicated.
Reference was made in Citigroup’s written submissions to difficulties which would arise where a court is required to assess whether a person’s supposition, as opposed to the facts or material on which it is based, would have been likely to have a material effect on the price of the securities. Citigroup argued that this would undermine s 1042D, which provides that the materiality of information is to be assessed objectively.
However, it seems to me that Citigroup’s submissions are contrary to the views expressed in Hannes v DPP at [410] – [412] per Barr and Hall JJ. It seems to me to follow from this that whilst the hint or other non-specific information must be communicated by words or conduct, the inference or supposition drawn from it is “information” within the statutory definition.
The answer to the practical difficulties raised by Citigroup seems to me to have also been given in Hannes v DPP at [415] per Barr and Hall JJ. Their Honours noted that the kind of information which may affect a securities market may be quite imprecise. But if the information in question is so imprecise that it is unlikely to affect the market, the charge will not be made out. See also their Honours’ remarks at [412].
Thus, although I have come to the view that Mr Manchee did not make the supposition alleged in the pleadings, I would reject the submission that his own internal thought processes were incapable of constituting “information” within
s 1042A of the Corporations Act.

Issue 14 – Whether the Information was Generally Available

The test for whether information is generally available is contained in s 1042C of the Corporations Act. Two alternative tests are stated. These are:
-that it consists of readily observable matter: s 1042C(1)(a); or
-that:
(i) it has been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in securities of a kind whose price might by affected by the information; and
(ii)since it was made known, a reasonable period has elapsed for it to be disseminated among such persons: s 1042C(1)(b).
The question of whether a matter is “readily observable” is one of fact. Observability does not depend on proof that persons actually perceived the information; the test is objective and hypothetical: see R v Firns (2001) 51 NSWLR 548 at [88] per Mason P.
Where the information is a “matter of supposition”, the question of whether it is generally available depends on whether the supposition is capable of being made or drawn by other investors based on readily observable matter or information that has been made known in the manner stated in s 1042C(1)(b)(i) of the Corporations Act: see s 1042C(1)(c).
ASIC called Mr Sisson to give expert evidence. However, his first report dated 31 October 2006 did not deal with the question of whether the “information” relied on by ASIC was generally available. Mr Sisson did address the question briefly in a later report dated 16 March 2007, in reply to the evidence of Citigroup’s expert, Mr Richard Mews.
Mr Sisson answered the question of whether an observation, deduction, conclusion or inference, that is, that Citigroup was acting for Toll in relation to its proposed takeover of Patrick, was generally available by asking whether it was “carried out by a sufficient number of people”. He also dealt with the issue briefly in cross-examination, stating that if the matter is known by one person who keeps it to himself or herself, the information is not generally available; it has to be akin to a market-wide reaction.
Overall, I found Mr Sisson to be a fair and objective witness whose opinions I would, for the most part, accept. He seemed to me to be conscious of his overriding duty to assist the Court on matters relevant to his expertise.
However, in my view, the test applied by Mr Sisson as to whether the information was generally available was not in accordance with that which has been recognised by the authorities. There are two reasons for this. First, the test of whether material is readily observable is not whether the particular matter was widely observed but whether it could have been: see R v Firns at [88], [91] per Mason P; see also Hannes v DPP at [626] per Barr and Hall JJ.
The second reason is that s 1042C(1)(c) of the Corporations Act does not appear to involve a consideration of whether the market has had a reasonable time to absorb the information: see the analysis of the extrinsic material in [55] – [56] of the judgment of Mason P in R v Firns. His Honour was of the view that Parliament’s intention was not to “penalise individual initiative and diligence.”
Thus, it seems to me that Mr Sisson’s evidence on this question must be rejected. The effect of what he did was to ask whether it was generally available by considering the question of whether it was generally known.
Nevertheless, it does not follow that I must find that the information was generally available. Citigroup submitted that I should make this finding upon the basis of the evidence of its expert, Mr Mews. But I am not satisfied that Mr Mews’ evidence establishes the proposition for which Citigroup contends.
Mr Mews expressed the opinion that “a reasonable and diligent investor” would have been able to observe or deduce from “readily observable material” prior to the start of trading on 19 August 2005 that there was a “substantial likelihood” that Toll would make a takeover bid for Patrick, “in the near future” and “that Citigroup was acting for Toll” in relation to any such proposal.
Mr Mews set out in considerable detail the information which he assumed to be generally available at the opening of trading on 19 August 2005 and which he relied upon to support his opinion. This information included:
-substantial media commentary and speculation as to the likelihood of a takeover bid by Toll for Patrick;
-Toll’s repeated unwillingness to give a direct answer to questions about the rumours;
-the profit downgrade of Patrick published the previous day;
-Citigroup’s role as the dominant broker in Patrick’s stock;
-the accumulation of a substantial number of Patrick shares by Citicorp Nominees Pty Limited; and
-the absence of any report from Citigroup’s respected transport analyst, Mr Jason Smith, following Patrick’s profit downgrade.
However, I prefer Mr Sisson’s opinion that this evidence is more persuasive after the event than it apparently was on 19 August 2005.
The position seems to me to be analogous to that which was referred to by Spigelman CJ in R v Hannes at [254] – [257]. Here the supposition that Citigroup was acting for Toll in relation to the Patrick takeover was one essential part of the “information” on which the claim was based. As Spigelman CJ said at [257], if it was generally available, one would expect to find it in the contemporaneous reports. Yet no such evidence was available, even in the form of speculation or rumour.
Mr Mews and Mr Sisson agreed that when one is considering whether information in the form of a deduction is generally available, the analogy of a jigsaw puzzle is apt. But as Mr Sisson said, if all pieces other than those from a small area are removed, as Mr Mews appears to have done, it is relatively easy to fit the remaining pieces together to reach the desired conclusion.
Counsel for Citigroup pointed to the evidence of Mr Harvey to support a finding that the information was generally available. Mr Harvey was called by ASIC to give evidence on its behalf.
Mr Harvey’s evidence confirmed the heightened speculation in the market up to, and on, 19 August 2005, that Toll would make a bid for Patrick. His evidence also suggested that the “clue” to the large movement in Patrick’s share price on 19 August 2005 was the fact that Mr Smith did not publish any analysis of Patrick shares on that day notwithstanding the previous day’s profit downgrade. Citigroup submitted that this supported the opinion expressed by Mr Mews.
However, it seems to me that the view I reached about Mr Mews’ evidence applies equally to that of Mr Harvey. Although Mr Harvey acknowledged that the absence of a report from Mr Smith may have triggered some of the activity in Patrick shares, this was a clue that was only available with the benefit of hindsight.
Citigroup submitted that even if the relevant supposition was not generally available at the opening of the market on 19 August 2005, it was widely known to the market by 3:37pm which is the relevant time for determining the first insider trading claim.
Mr Sisson conceded that the likelihood of a Toll takeover bid became more generally known as the day’s trading progressed. Indeed, he said the situation was “more equivocal” by 3:37pm because information relating to the likelihood of a bid for Patrick appears to have become more generally available during the course of the day.
But the supposition for which ASIC contends is that Citigroup was acting for Toll in relation to the takeover of Patrick. It seems to me, as I have said above, that the link to Citigroup is an essential part of the allegation. Mr Sisson’s concession did not extend to the market knowledge of such a link. Nor do I consider it to be supported by Mr Mews’ evidence or by that of Mr Harvey. I have come to this view notwithstanding Citigroup’s submission that Mr Mews was only cross-examined in a perfunctory manner.

Issue 15 – Whether the Information was Price Sensitive

In order for the information to be taken to have the necessary material effect on the price of Patrick shares, it had to be information that “would, or would be likely to, influence persons” who commonly acquire shares in deciding whether or not to acquire or dispose of Patrick shares: see s 1042D of the Corporations Act.
In his first report of 31 October 2006, Mr Sisson expressed the view that “the certain knowledge that Toll had engaged a major investment bank to act on its behalf would undoubtedly have had a material impact” on the price of Patrick shares. However, the difficulty with this evidence is that it does not accord with the pleaded supposition. It cannot therefore support the proposition that the information was price sensitive.
Mr Mews addressed the question directly. He saw no basis for suggesting that knowledge of the supposition that Citigroup was acting for Toll in relation to a possible takeover of Patrick by Toll would have affected the market at 3:37pm when Mr Manchee disposed of nearly 200,000 Patrick shares.
Mr Sisson came close to conceding the correctness of this view in his report of 16 March 2007. He said that in the circumstances which existed at that time, it was possible to argue that the relevant information would have had little “further impact” on the price of Patrick shares because the share price had already moved to a price which reflected a substantial likelihood of a takeover, although “not necessarily with Citigroup acting for the bidder”.
What is missing from Mr Sisson’s concession is a consideration of the price sensitivity of that part of the information which focuses upon Citigroup’s role as acting for the bidder. As I have said several times, that was a part of the supposition which ASIC contended that Mr Manchee made.
Although I have found that much of the supposition as alleges that Citigroup was acting for Toll was not generally available, in my opinion, if it had been available, the better view is that it would not have had the requisite material effect at the time when the first insider trading is alleged to have taken place. That was Mr Mews’ evidence and Mr Sisson’s concession comes sufficiently close to agreeing with it.

PART VII – THE SECOND INSIDER TRADING CLAIM – DETERMINATION OF ISSUES

Issue 16 – Possession of the Information

The second insider trading claim focuses upon Citigroup’s purchases and sales of Patrick shares throughout the course of trading on 19 August 2005.
The substance of the claim is that Citigroup acquired and sold the shares on that day while Messrs Roberts, Sinclair, Bartels, Darwell, Monaci, Scott and Manchee were in possession of inside information. The inside information is said to be that Citigroup was acting for Toll in relation to its proposed takeover of Patrick and that Citigroup knew there was a substantial likelihood that Toll would launch a takeover bid for Patrick in the near future: see Further Amended Statement of Claim [153], [154].
It is unnecessary to consider in any detail which of the relevant Citigroup personnel were “officers” of the company. Plainly, Mr Roberts as CEO was an officer within the definition contained in s 9 of the Corporations Act. So too, it seems to me, were Mr Sinclair as head of Equities and Mr Bartels as head of ECM. This was conceded by Mr Myers.
Each of Mr Roberts, Mr Sinclair and Mr Bartels knew at the opening of trading on 19 August 2005 that Citigroup was acting for Toll in relation to the proposed bid and that it was likely that Toll would launch the bid on Monday 22 August 2005. Each was notified on 15 August 2005 of the scheduled rehearsal of the launch of the bid and each of them was subsequently notified of the rescheduled launch set for 22 August 2005.
It follows that Citigroup was aware, through the knowledge of those officers at least, of the elements of the inside information alleged by ASIC in the second insider trading claim.

Issue 17 – Whether the Information was Generally Available

To suggest that information as to the proposed timing of the announcement was generally available would be contrary to the strategy employed by Citigroup and Toll that this information was not to be disclosed prior to the announcement.

Issue 18 – Whether the Information was Price Sensitive

Moreover, it seems to me to be likely that information as to the timing of the bid would have been price sensitive within the test stated in s 1043D of the Corporations Act. This seems to me to be borne out by the fact that Patrick shares opened on the day of the announcement at AUD$7.15, being 10.9% above the closing price on Friday 19 August 2005, and, during the course of very heavy trading on 22 August 2005, rose to AUD$7.38.

Issue 19 – The Chinese Walls Defence

The substantial question which arises on the second insider trading claim is whether Citigroup had in operation on 19 August 2005 arrangements that could reasonably be expected to ensure that the information was not communicated to the person who traded in the shares, namely Mr Manchee: see s 1043F of the Corporations Act. That is to say, were Citigroup’s Chinese wall arrangements adequate, within the requirements of paragraph (b) of that section.
In order to make good the Chinese walls defence, Citigroup must establish that the transaction met each of the requirements of paragraphs (a), (b) and (c) of s 1043F of the Corporations Act: see [252] above. The first of these is satisfied because the decision to buy or sell the Patrick shares was made by Mr Manchee who was not the person who was in possession of the relevant information.
The third requirement is also satisfied. This is stated in s 1043F(c) which must be read in light of s 1043F(b). What is required is that the inside information not be communicated to the person who made the decision to enter into the transaction and that no advice “with respect to the transaction”, was given by a person in possession of the information.
Here, the only communication with Mr Manchee was the ‘cigarette on the pavement’ conversation which took place with Mr Darwell at 3:30pm. I have already held that Mr Darwell did not communicate to Mr Manchee the information which was the subject of the second insider trading claim, namely that Citigroup was acting for Toll and that Toll would launch a bid for Patrick in the near future.
The only remaining question in relation to the third requirement is whether it can be said that advice was given to Mr Manchee with respect to the transaction by a person in possession of the information. No advice was given to Mr Manchee with respect to his purchases of shares before 3:30pm. The relevant transaction therefore is the sales that took place between about 3:37pm and about 4:05pm.
It may well be that Mr Darwell’s communication to Mr Manchee can be characterised as advice, that is to say, advice not to purchase any more shares. But s 1043F(b) is satisfied even if advice was given with respect to the transaction, so long as it is not given by a person who is in possession of the information. For reasons stated above, Mr Darwell was not in possession of the relevant information.
Thus, the only question is whether Citigroup had in place arrangements which satisfied paragraph (b) of s 1043F. I referred at [449] – [452] above, when dealing with the adequacy of Citigroup’s arrangements for the management of conflicts of interest, to Mr Monaci’s evidence as to Citigroup’s physical arrangements and its policies and procedures. I found, albeit with some reservations, that they were adequate to meet the obligations imposed by s 912A(1)(aa) of the Corporations Act: see [452] – [456].

Although ASIC did not cross-examine Mr Monaci as to the adequacy of the arrangements set out in his statement, it contended that there were two reasons why the Chinese walls defence must fail. The first was that Citigroup had no mechanism to bring a trader such as Mr Manchee ‘over the wall’. The second was that Citigroup had no effective arrangements to prevent the fourth conflict of interest, which was caused by its purchase of the Patrick shares, from arising.
In attacking the absence of any mechanism to bring Mr Manchee across the wall, Citigroup pointed to the ad hoc nature of what took place once the private side became aware of Mr Manchee’s trading.
It is true, as ASIC submitted, that what took place was unscripted. Moreover, Mr Manchee remained isolated from the information only as a result of the oblique nature of the communications and, in particular, by Mr Darwell’s circumspect behaviour in conveying his concerns in a way which did not suggest the existence of price sensitive information.
But it would be wrong to conclude that there were no arrangements in place to bring a trader such as Mr Manchee across the Chinese wall. Mr Monaci referred in his statement to Citigroup’s written policies which require private side employees not to communicate ‘material non-public information’ to persons on the public side without involving legal or compliance personnel to assess the materiality of the information and, when appropriate, to implement ‘wall crossing’ procedures. He also said that:
“Any private side person wishing to talk about non-public information with (or otherwise convey such information to) persons from the public side of the information barrier (Chinese wall) are required to pre-clear such communications with legal or Compliance.”
Assuming Mr Sinclair’s statement to Mr Darwell to be ‘material non-public information’, it would follow that Mr Sinclair’s initial communication with Mr Darwell was not in accordance with Citigroup’s written procedures. This is because he obtained no prior clearance, as Mr Monaci implicitly recognised in saying “Wait, hang on, Paul is public side”.
I do not consider that Mr Sinclair is to be criticised. 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.
ASIC submitted that a proper arrangement in the run up to the announcement of the bid would have been to bring proprietary traders such as Mr Manchee across the Chinese wall. It pointed out that those arrangements existed in relation to analysts.
However, I do not consider that there is any evidentiary support for the proposition that this step was required in order to put in place appropriate arrangements in relation to proprietary traders. I accept Mr Monaci’s evidence that there are policy considerations which underlie the question of when to bring employees across the Chinese wall. This is because, to bring a trader such as Mr Manchee over the wall risks sending a signal to the market about confidential investment banking activities.
The findings which I have made also answer ASIC’s submission that Citigroup had no arrangements in place to prevent the fourth conflict of interest from arising.
What underlies both aspects of ASIC’s attack on the adequacy of Citigroup’s Chinese walls is its contention that adequate arrangements for the management of conflicts of interest entailed the receipt of Toll’s informed consent to proprietary trading. But it would follow from this that Chinese walls could never amount to a defence in the absence of informed consent. Mr Walker conceded as much in his closing address.
To make such a finding would be contrary to the express recognition of the Chinese walls defence in s 1043F of the Corporations Act. I therefore reject the submission.

CONCLUSION AND ORDERS

The conflicts claims and the insider trading claims fail for the reasons set out above.
The conflicts claims depended upon the existence of a fiduciary relationship between Citigroup and Toll. The claims failed at the outset because the mandate letter excluded the existence of such a relationship. The propositions of law relied upon by ASIC to impose a duty on Citigroup to obtain Toll’s express consent to propriety trading were not engaged.
The law does not prevent an investment bank from contracting out of, or modifying, any fiduciary obligations. ASIC’s view of the proper construction of s 912A(1)(aa) of the Corporations Act is consistent with this.
In his article in 29 MULR at 505, Mr Tuch refers to public policy reasons that support the imposition of fiduciary obligations on investment banks. He says that permitting investment banks to have interests conflicting with their clients’ damages community confidence in the integrity of the relationship and may erode public confidence in the securities and investment markets. However, this is a matter for the legislature, not the courts.
The first insider trading claim failed because Mr Manchee was not an “officer” of Citigroup and because he did not make the supposition alleged by ASIC.
The second insider trading claim failed because the Chinese walls defence contained in s 1043F of the Corporations Act was engaged. Nevertheless, the events which took place within Citigroup during the afternoon and evening of 19 August 2005 show that Chinese walls may not be as solid as the name implies.
Accordingly, I will order that the application be dismissed. I see no reason why costs should not follow the event but I will hear argument if either of the parties wishes to contend for a different costs order.

I certify that the preceding six hundred and five (605) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

Associate:

Dated: 28 June 2007

Counsel for the Plaintiff:	Mr B Walker SC, Mr J Stevenson SC, Mr N Perram SC and Ms J Single
Solicitor for the Plaintiff	Australian Securities and Investments Commission
Counsel for the Defendant:	Mr AJ Myers QC, Mr DEJ Ryan SC, Mr RA Dick and Mr M Thangaraj
Solicitor for the Defendant:	Freehills
Dates of Hearing:	26 – 29 March & 11 April 2007
Date of Judgment:	28 June 2007

SCHEDULE I – ACRONYMS

ASIC	The Australian Securities and Investments Commission
ASX	Australian Stock Exchange
CIB	Corporate and Investment Bank
CSS	Compliance Surveillance System
ECM	Equity Capital Markets
IBD	Investment Banking Division
VWAP	Volume Weighted Average Price

SCHEDULE II – DRAMATIS PERSONAE

Bartels, Mark	Citigroup, Head of ECM
Chatfield, Neil	Toll, CFO
Darwell, Paul	Citigroup, Head of Equity Derivatives
Dempsey, Grant	Citigroup, Co-Head, Melbourne Coverage, Investment Banking
Hanson, John	Citigroup, IBD Financial Advisory Deal Team Member
Harvey, Darryl	ASX, Analyst in the Surveillance Division
Little, Paul	Toll, CEO
Lunny, Christian	Citigroup, IBD Financial Advisory Deal Team Member
Manchee, Andrew	Citigroup, Proprietary Trader, Equities
Matheson, Les	Citigroup, Country Officer for Citigroup in Australia
McLeod, Jason	Citigroup, Co-Head of IBD Coverage, Melbourne
McInerney, Bernard	Toll, Company Secretary
Mews, Richard	Citigroup’s expert
Monaci, Peter	Citigroup, Managing Director, Head of Capital Markets and Global Banking & Compliance for Asia Pacific CIB
Roberts, Stephen	Citigroup, CIB CIO
Scott, Warren	Citigroup’s General Counsel, Australia and New Zealand
Sinclair, Malcolm	Citigroup, Head of Equities
Sisson, Andrew	ASIC’s expert
Smith, Jason	Citigroup, Transport Analyst
Stanley, Stephen	Toll, Senior Executive
White, David	ASX officer
Wylie, John	Carnegie Wylie & Company Pty Limited

Table 1	Offer Price
Acceptance	$7.00	$7.45	$7.90
>90%	$18m	$14m	$10m
<90%	$9m	$7m	$5m