Australia's corporate regulator filed a federal court action yesterday accusing the local subsidiary of global investment giant Citigroup of insider trading.
The Australian Securities and Investments Commission (ASIC) filed a civil suit alleging Citigroup Global Markets Australia engaged in "unconscionable conduct" while it was advising logistics firm Toll Holdings Ltd in a A$5.5 billion (US$3.96 billion) takeover bid for ports operator Patrick Corp.
ASIC said Citigroup engaged in "substantial proprietary trading" -- trading for their own account or benefit -- in Patrick Corp shares on August 19, last year, the business day before Toll announced its hostile bid for the rival company.
Citigroup, one of the world's largest financial services conglomerates, strongly denied the charges and accused ASIC of trying to regulate the proprietary trading desks of major investment banks.
In its court submission, ASIC alleged Citigroup did not have adequate arrangements in place to avoid conflicts of interest between itself and Toll.
"ASIC alleges that Citigroup traded on inside information and directly against the interests of its client," ASIC Deputy Chairman Jeremy Cooper said.
The regulator demanded that Citigroup admit it violated conflict of interest and insider trading provisions of the Corporations Act and implement measures to prevent any future breaches of the law.
It also sought a restraining order preventing Citigroup from trading on its own account in shares linked to its clients and demanded it pay a fine of up to A$1 million.
Cooper called the suit a "significant case" concerning conflict of interest and insider trading in the securities industry.
"ASIC is saying that Citigroup fell down on both fronts in relation to its role as adviser to Toll," he said.
Citigroup responded that it was "disappointed" by ASIC's action.
"Citigroup does not believe ASIC has any basis of a claim and that this is an attempt to regulate the proprietary trading desks which are a feature of all major investment banks," it said in a statement. "Citigroup is denying all charges made by ASIC."
The case will be back before the Federal Court in Sydney on April 28.
Toll Holdings reaffirmed its confidence in Citigroup as its adviser and said the ASIC case would not impact on its takeover bid for Patrick, which is due to close on April 28.
Toll initially bid A$4.6 billion for Patrick on August 22 in a combined cash and scrip offer which amounted to A$6.70 for each Patrick share.
The Patrick shares had spiked in price the previous Friday when Citigroup was buying stock, rising from A$5.77 to A$6.45 per share.
Last week Toll lifted its bid to an equivalent of A$7.82 dollars per Patrick share.
Friday shares in both firms were down, with Toll falling A$0.14 or 1.06 percent to 13.10 and Patrick losing A$0.60 or 0.74 percent to A$8.06. The broader market was 0.29 percent higher.
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