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Insider trading case sends out global ripples

Australian regulator’s charges cast doubt on legitimacy of prop trading.

By Chris Wright

Citigroup added Australia to its bulging global portfolio of regulatory clashes in April but the latest case might have implications that go well beyond that country’s borders. At stake is the legal status of proprietary trading at investment banks that also conduct advisory business – that is, most of them.

The Australian Securities & Investments Commission filed charges in Australia’s Federal Court alleging, among other things, that Citi engaged in insider trading and did not have sufficient measures in place to stop conflicts of interest. It wants Citi to declare that it has breached the conflicts and insider trading provisions of Australia’s Corporations Act and to pay a penalty of up to $1 million to the Commonwealth of Australia.

Cigarette break

The charges relate to Toll Holdings, an Australia-listed transportation group, which engaged Citi to advise on a possible takeover of rival Patrick Corp late in 2004. In August 2005, a trader on Citi’s proprietary trading desk began buying heavily in Patrick shares. Citi’s head of equities, Malcolm Sinclair, who was aware of the mooted takeover, noticed the trades and contacted the head of equity derivatives, Paul Darwell.

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