Citigroup inside-trade hearing a 'test case'

SYDNEY - Citigroup's insider-trading hearing in Australia will be a test case for whether barriers between investment bankers and traders can prevent conflicts of interest with clients, the securities regulator said yesterday.

Australia's first insider-trading suit against a company claims Citigroup traded shares in Patrick Corp, the nation's largest cargo handler, using confidential information. The trades were "against the interest" of Toll Holdings, which Citigroup was advising on a A$5.2 billion ($6.13 billion) hostile bid for Patrick, the regulator said on March 31.

"We have concerns about proprietary trading," Australian Securities & Investments Commission's Sydney-based spokeswoman Anne Lampe said yesterday. "Whether in this case it breached Chinese walls will be tested in court." Citigroup has denied the claim.

The potential for conflict between regulators and investment banks may rise as a surge in mergers advisory business butts up against equity trading, the fastest growing contributor to Wall Street profits.

Britain's Financial Services Authority last month estimated insider trading may have occurred in 29 per cent of UK takeovers in the six years to 2004.

"Chinese walls provisions of the insider trading legislation have never been tested before," Gregory Lyon, 45, a Melbourne-based barrister and author of The Law of Insider Trading in Australia, said on Monday.

"It's certainly going to cause a number of institutions to look at their own policies and make sure they're pretty firmly in place."

Australia's regulator warned in August that firms without adequate compliance regimes faced greater risk of regulatory action.

Citigroup's head of corporate and investment banking in Australia, Stephen Roberts, 49, said last week that the implications of the regulator's actions were that "once an investment bank accepts a corporate advisory mandate it must stop a wide range of trading activities". That would have a significant impact on trading volumes, he said.

"There's nothing wrong with proprietary trading," so long as Chinese walls remain intact, Martin Wheatley, chairman of the Hong Kong Securities & Futures Commission, said yesterday. "It makes the market more efficient. There's more liquidity."

"The regulator is using Citigroup to set an example," said Alex Low, head of business law at Macquarie University in Sydney. "They may have to reorganise internal management to ensure advice happens at one end of the building and trading at the other, and that people don't talk too much outside work."

The commission is seeking a fine of as much as A$1 million and orders for Citigroup to keep price-sensitive information on deals away from traders who buy and sell shares on the firm's behalf.

- BLOOMBERG