A Bizarre Insider Trading Case from Down Under

Thom Lambert —  3 April 2006

Today’s W$J reports on an odd lawsuit the Australian government is pursuing against Citigroup. According to the Australian Securities and Investments Commission, a smoke break conversation between Citigroup employees resulted in illegal insider trading. Citigroup, it seems, was representing bidder Toll Holdings, Inc. in a yet-to-be-announced hostile bid for Patrick Corp., Austrialia’s largest port cargo handler. Someone from Citigroup’s investment banking operation allegedly shared information about the deal with one of Citigroup’s proprietary traders (i.e., someone who trades securities for Citigroup’s own account). The trading that followed, Australian regulators say, violated the law.

This seems pretty straightforward. Indeed, the regulators’ lawsuit would make perfect sense if the I-banker had informed the trader of the forthcoming bid, and the trader had then purchased stock of the target. But that’s not what happened. Instead, here’s what occurred:

The morning of the conversation at issue, the Sydney Morning Herald reported that a takeover bid for Patrick appeared imminent. The report prompted the Citigroup trader to begin purchasing Patrick stock for Citigroup’s account. At about lunchtime, a Citigroup I-banker learned of these purchases. He then contacted the proprietary trader’s boss and said, “Do you know who is buying Patrick shares?” and “We may have a problem with that.” Inferring that Citigroup must be representing the bidder, the boss then took the trader out for a 3:30 p.m. smoke break and told him, without giving a reason, to stop buying Patrick stock. (Such purchases, after all, could drive up the price of Patrick stock, creating problems for the bidder, Citigroup’s client.) The trader then began selling the Patrick shares before the market closed at 4:00 p.m.

That’s it. According to the Journal, “the trading [the proprietary trader] did prior to the smoke break isn’t in question, because only after that conversation with [his boss] was [the trader] considered privy to insider information.”

On the basis of these alleged facts, the Australian regulators are seeking fines, compensation for the bidder, and an order requiring Citigroup to declare publicly that it violated the insider trading laws.

Now, I know not one iota about Australian insider trading law (although it’s got to be more coherent than our screwy doctrine). I can’t see, though, how the “insider trading” at issue could possibly have injured either Citigroup’s client or the trader’s trading partners. Citigroup’s client, the bidder, could only have been helped by the post-smoke break sales (if they had any price effect at all, it would have been to lower Patrick’s price). The folks who bought the stock from Citigroup probably got it at a price lower than they otherwise would’ve had to pay. With the informed sales, Citigroup basically acted contrary to its own interest in order to benefit its client, the bidder. The investors who purchased from Citigroup were lucky beneficiaries of this loyalty. And Citigroup is to be punished?

Our own securities regulators have taken every opportunity to expand insider trading liability. I thought, though, that this was a distinctly American phenomenon. Guess I was wrong.

Thom Lambert

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I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

2 responses to A Bizarre Insider Trading Case from Down Under

  1. 
    andrew manchee 4 March 2010 at 5:37 am

    Hi.

    i just read this. Thanks for being on e of the very few who understood i did nothing wrong..and in fact my trading on the day was ‘textbook’ ..trading on price action etc..thanks. If want more detail of how ‘textbook’ the trading was..let me know…seriously..it was v good sh term trading ..on the day.

    andrew (the trader in this article)

  2. 

    This case could have enormous implications for the entire investment banking industry, the world over, because the regulator is attacking the architecture of that industry. Read more about this at:

    http://www.soxfirst.com/50226711/citigroup_today_australia_tomorrow_the_world.php