Citigroup was cleared of insider trading charges on Thursday by an Australian court, which ruled the U.S. bank's Chinese Walls were not breached when it traded shares in a company it knew was a takeover target.

The case has been closely watched internationally as it deals with how investment banks separate their trading and merger advisory businesses.

Australian regulators had charged the bank with breaching its Chinese Walls after a chat between two Citigroup dealers over a cigarette break on a Sydney street led one trader -- Andrew Manchee -- to believe his firm was involved in the A$6.3 billion ($5.1 billion) takeover of stevedoring firm Patrick by rival Toll Holdings Ltd. in 2005.

That trader, then in possession of inside information, sold a parcel of Patrick shares later that day, the Australian Securities and Investments Commission (ASIC) told the court.

Australian Federal Court Judge Peter Jacobson dismissed the charges against Citigroup, but warned Chinese Walls do not eliminate conflicts of interest, only manage them and that their existence does not override a fiduciary duty to a client.

Citi Australia advised corporate takeovers worth about $41 billion last year, making it Australia's fourth busiest deal broker, according to data compiler Dealogic.

Citigroup welcomed the ruling, which an analyst said would signal business as usual for the investment banking industry.

I think it's a judgment that will be welcomed by the investment industry and would provide them with some significant comfort in relation to the way they currently operate, said Ian Ramsay, director of Melbourne University's corporate law centre.

The regulator had launched a second insider trading charge against Citigroup, arguing that several Citigroup officers had inside information that Citigroup was acting for Toll in relation to the proposed Patrick takeover, yet Citigroup was trading Patrick shares.

Citigroup rejected the charges, saying its Chinese Walls were not breached, and that it believed the Australian regulator wanted to prevent investment banks from proprietary trading -- trading on the bank's behalf -- from the date they accept an advisory mandate with a client.

ASIC said it would assess the judgment and decide whether to appeal, adding the judgment clarified aspects of Chinese Walls which would assist it in future cases.

It also welcomed the guidance on fiduciary duty to a client, which would help it assess conflict of interest concerns.

Strong enforcement action against insider trading reinforces market integrity and confidence, said ASIC chairman Tony D'Aloisio. ASIC will take action where it considers that insider trading may have occurred.


Judge Jacobson ruled that there had been no insider trading or conflict of interest. The charges were civil, not criminal, and no individuals were charged.

He said the bank's Chinese Walls insulated the trader from privileged information and that his knowledge was not attributable to Citigroup.

But Jacobson also said that 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.

Jacobson ruled that the bank did not have a conflict of interest in trading Patrick shares because it did not have a fiduciary relationship in its contract with Toll.

The judge spends quite a lot of time discussing the strengths and weakness of 'Chinese Walls'. He clearly finds the Citigroup 'Chinese Wall' was satisfactory but there are a few reservations, Melbourne University's Ramsay said.

His discussions of 'Chinese Walls' will be closely read by the banking industry because what Citigroup does is extraordinarily common across the world.

Ramsay said the ruling on fiduciary duty was very important, pointing out that Citigroup was cleared of conflict of interest because its letter of engagement excluded fiduciary duty.

There is a possibility that if they didn't have such a letter there may have been a fiduciary relationship, he said.

Citigroup Chief Executive Chuck Prince has worked in recent years to reform business practices and ethics after a series of scandals cost the bank billions of dollars and alarmed regulators.

Citigroup agreed to pay $4.6 billion to settle lawsuits over its roles in the collapses of Enron Corp. and WorldCom Inc, and was fined over a multi-billion-euro bond trade in 2004.