Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited

The Australian Securities and Investments Commission ('ASIC') does not allege that the proprietary trader was in possession of inside information when he purchased the shares. However, when private side employees became aware of the proprietary trader's purchase of the shares, steps were taken from within the private side that resulted in an instruction to the trader to stop buying any more shares in Patrick. The trader did not buy more shares but in the half hour before the close of trading, he sold nearly 200,000 of the parcel of Patrick shares that he had purchased earlier that day.

ASIC contends that Citigroup, as an adviser to Toll, occupied a relationship that was in critical respects, fiduciary. ASIC also contends that in purchasing the shares in Patrick, Citigroup placed itself in a position where its duty of loyalty to Toll conflicted with its interests arising from the purchase of the shares in Patrick. The gravamen of the claim is that Citigroup contravened its obligations under s 912A(1)(aa) of the Corporations Act to have in place adequate arrangements for the management of conflicts of interest.

All of the claims of conflict of interest and duty and breach of s 912A(1)(aa) depended upon the existence of a fiduciary relationship between Citigroup and Toll. However, the claims failed at the outset because the letter of engagement under which Toll retained Citigroup as its adviser specifically excluded the existence of such a relationship. The Court held that the law does not prevent an investment bank from contracting out of a fiduciary capacity; whether it should be able to do so is a matter for the legislature, not the courts.

ASIC relied on a number of propositions of law to overcome the effect of the engagement letter and sought to impose on Citigroup a duty to obtain Toll's express consent to proprietary trading in Patrick shares. The Court held that the propositions relied on by ASIC had no application in the present case.

ASIC claimed in the alternative that Citigroup breached the provisions of s 1043H of the Corporations Act and s 12DA of the ASIC Act which prohibit misleading and deceptive conduct. However, those claims also depended upon the existence of a fiduciary relationship between Citigroup and Toll. Accordingly, both of those claims failed for the reasons above. So too did a further alternative claim for unconscionable conduct under s 12CA of the ASIC Act.

ASIC also makes two claims against Citigroup of contravention of the insider trading provisions contained in s 1043A of the Corporations Act. The first claim covered the trader's sale of Patrick shares late in the afternoon, after he was given instructions not to buy those shares. ASIC alleges that, as a result of what was said to him, he made a supposition that Citigroup was acting for Toll in the proposed takeover of Patrick. This is said to constitute "information" within the meaning of s 1042A of the Corporations Act and the sale is alleged to constitute insider trading by Citigroup.

This claim failed because the trader was not an "officer" of Citigroup within the meaning of s 9 of the Corporations Act. His knowledge was therefore not attributable to Citigroup for the purposes of the insider trading provisions: see s 1042G(1)(a) of the Corporations Act. In any event, the Court held that the trader did not make the supposition alleged by ASIC.

The second insider trading claim covers all of the trading undertaken by the trader on the day in question. ASIC alleges that senior officers of the Corporate Investment Banking division of Citigroup knew that there was a substantial likelihood that Toll would launch its takeover bid on the next working day after the shares were purchased. Thus it is said that even though those officers did not know of Citigroup's trading, their knowledge was attributable to Citigroup so as to make it liable for insider trading.

The second insider trading claim failed because at the time when Citigroup traded in the shares, it had arrangements that could reasonably be expected to ensure that the information was not communicated to the trader. That is to say, Citigroup had in place, inter alia, Chinese walls which insulated the trader from the information so as to satisfy the requirements of s 1043F of the Corporations Act.

Although the defence in s 1043F of the Corporations Act was upheld, the Court endorsed warnings given in an earlier authority about the risk of leakage of information through the structural barriers commonly known as Chinese walls.

Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (ACN 113 114 832) (No. 4) [2007] FCA 963 CORPORATIONS - Conflict of interest and of duty and interest - ASIC asserted contravention of s 912A(1)(aa) of the Corporations Act - whether respondent and client were in a fiduciary relationship - construction of engagement letter - effect of exclusion clause - whether full disclosure and express consent is required to waive fiduciary obligations - specific claims of conflict of interest alleged - applicable principles - interpretation of s 912A(1)(aa) of the Corporations Act - whether respondent provided "financial services" under s 766A(1)(a) of the Corporations Act - whether services were an "exempt service" under regulation 7.1.29(3) of the Corporations Regulations - consideration of the requirements for adequate arrangements for management of conflicts of interest pursuant to s 912A(1)(aa) of the Corporations Act

CORPORATIONS - Insider trading - ASIC asserted contravention of s 1043A of the Corporations Act - meaning of "information" within s 1042A of the Corporations Act - whether relevant person was an "officer" - whether a mere supposition, uncommunicated, may amount to "information" - applicable principles - consideration of whether information was generally available and/or was materially price sensitive - adequacy of respondent's Chinese walls arrangements for purposes of s 1043F of the Corporations Act

Australian Securities and Investments Commission Act 2001 (Cth) - ss 12CA(1), 12DA(1) Corporations Act 2001 (Cth) - ss 9, 20, 764A(1)(a), 766A(1)(a), 766A(2)(b), 766B(1), 912A(1)(aa), 1041H(1), 1042A, 1042C, 1042D, 1043A(1), 1043F Corporations Regulations 2001 (Cth) - 7.1.29(1), 7.1.29(3)

Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 (Cth), Explanatory Memorandum Corporations Legislation Amendment Bill 1991 (Cth), Explanatory Memorandum

Australian Competition and Consumer Commission v Berbatis Holdings Pty Limited (2003) 214 CLR 51 referred to Adler v ASIC (2003) 46 ACSR 504 referred to Aequitas v Sparad No 100 Limited (formerly Australian European Finance Corporation Limited) (2001) 19 ACLC 1006 cited Andar Transport Pty Limited v Brambles Limited (2004) 217 CLR 424 referred to Asia Pacific Telecommunications Limited v Optus Networks Pty Limited [2007] NSWSC 350 cited Australian Breeders Co-operative Society Limited v Jones (1997) 150 ALR 488 distinguished Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 followed Birtchnell v The Equity Trustees, Executors and Agency Company Limited (1929) 42 CLR 384 referred to Boughey v The Queen (1986) 161 CLR 10 referred to Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606 cited Breen v Williams (1996) 186 CLR 71 followed Brickenden v London Loan & Savings Co [1934] 3 DLR 465 explained Briginshaw v Briginshaw (1938) 60 CLR 336 cited Bristol and West Building Society v Mothew [1998] Ch 1 cited Chan v Zacharia (1984) 154 CLR 178 cited Commercial Union Assurance Company of Australia Limited v Ferrcom Pty Limited (1991) 22 NSWLR 389 referred to Commissioner for Corporate Affairs v Bracht [1989] VR 821 followed Commissioner for Corporate Affairs v Green [1978] VR 505 followed Commonwealth Bank of Australia v Smith (1993) 42 FCR 390 referred to D & J Constructions Pty Limited v Head & ors trading as Clayton Utz (1987) 9 NSWLR 118 cited Daly v The Sydney Stock Exchange Limited (1986) 160 CLR 371 considered Darlington Futures Limited v Delco Australia Pty Limited (1986) 161 CLR 500 referred to Dresna Pty Limited v Linknarf Management Services Pty Limited (In Liq) [2006] FCAFC 193 referred to Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22referred to Gibson Motorsport Merchandise Pty Limited v Forbes (2006) 149 FCR 569 referred to Global Sportsman Pty Limited v Mirror Newspapers (1984) 2 FCR 82 referred to Hadid v Lenfest Communications Inc [1999] FCA 1798 referred to Hannes v Director of Public Prosecutions (Cth) (No 2) 60 ACSR 1 followed Henderson v Merrett Syndicates Limited [1995] 2 AC 145 referred to Hooker Investments Pty Limited v Baring Bros Halkertson & Partners Securities Limited (1986) 10 ACLR 462 cited Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 followed Kelly v Cooper [1993] AC 205 distinguished Lac Minerals Limited v International Corona Resources Limited (1989) 61 DLR (4th) 14 referred to Law Society of New South Wales v Foreman (1994) 34 NSWLR 408 considered Lion Nathan Australia Pty Limited v Coopers Brewery Limited (2006) 156 FCR 1 referred to Maguire v Makaronis (1997) 188 CLR 449 referred to McNamara Business & Property Law v Kasmeridis [2007] SASC 90 referred to New Zealand Netherlands Society 'Oranje' Incorporated v Kuys [1973] 2 All ER 1222 cited News Limited v Australian Rugby Football League Limited (1996) 64 FCR 410 cited Noranda Australia Limited v Lachlan Resources NL (1988) 14 NSWLR 1 referred to Our Lady's Mount Pty Limited (as trustee) v Magnificat Meal Movement International Inc (1999) 33 ACSR 163 referred to P & V Industries Pty Limited v Porto (No 2) [2007] VSC 64 referred to Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451 referred to Phelan v Middle States Oil Corporation (1955) 220 F (2d) 593 referred to Photocure ASA v Queen's University at Kingston(2002) 56 IPR 86 referred to Pilmer v Duke Group Limited (In Liq) (2001) 207 CLR 165 cited Prince Jefri Bolkiah v KPMG [1999] 2 AC 222 followed Project Blue Sky Inc v Australian Broadcasting Authority (1988) 194 CLR 355 followed R v Firns (2001) 51 NSWLR 548 cited R v Hannes (2000) 158 FLR 359 cited R v Rivkin (2004) 184 FLR 365 referred to Re Dwyer v Lippiatt; Dwyer v Backpackers R US.Com Pty Limited (2004) 50 ACSR 333 cited Re HIH Insurance Limited (in prov liq); ASIC v Adler (2002) 41 ACSR 72 cited Re Morris Fletcher v Cross' Bill of Costs [1997] 2 Qd R 228 referred to Ryan v Triguboff [1976] 1 NSWLR 588 explained Securities and Exchange Commission v Chenery Corporation 318 US 80 (1942) cited Stevens v Brodribb Sawmilling Company Pty Limited (1986) 160 CLR 16 referred to Symonds v Raphael (1998) 148 FLR 171 referred to Target Holdings Limited v Redferns [1996] 1 AC 421 referred to Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 referred to United Dominions Corporation Limited v Brian Pty Limited (1985) 157 CLR 1 referred to Walden Properties Limited v Beaver Properties Pty Limited [1973] 2 NSWLR 815 referred to Woolworths Limited v Kelly (1991) 22 NSWLR 189 referred to Austin RP and Ramsay IM, Ford's Principles of Corporations Law (13th ed, LexisNexis Butterworths, 2007) Finn PD, "The Fiduciary Principle" in Youdan TG (ed), Equity, Fiduciaries and Trusts (Law Book Co, 1989) Heydon JD, Cross on Evidence (7th ed, LexisNexis Butterworths, 2004) Meagher RP, Heydon JD and Leeming ML, Equity Doctrines and Remedies (4th ed, LexisNexis Butterworths, 2002) Odgers S, Uniform Evidence Law (7th ed, Law Book Co, 2006) Tuch A, "Investments Banks as Fiduciaries: Implications for Conflicts of Interest" (2005) 29 MULR 478 Tuch A, "Obligations of Financial Advisers in Change-of-Control Transactions: Fiduciary and Other Questions" (2006) 24 C&SLJ 488 Law Commission, United Kingdom, Fiduciary Duties and Regulatory Rules, Consultation Paper No 124 (1992) Law Commission, United Kingdom, Fiduciary Duties and Regulatory Rules, Report No 236, (1995) AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v CITIGROUP GLOBAL MARKETS AUSTRALIA PTY LIMITED (ACN 113 114 832) NSD 651 OF 2006

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

AND: CITIGROUP GLOBAL MARKETS AUSTRALIA PTY LIMITED (ACN 113 114 832)

JUDGE: JACOBSON J DATE OF ORDER: 28 JUNE 2007

1. The application be dismissed.
2. The plaintiff pay the defendant's costs of the proceedings.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

PART 1 - INTRODUCTION AND OVERVIEW 1 Introduction 1 Abbreviations, Acronyms etc 1 Overview 2 PART II - THE FACTS 7 Private Side Employees Learn of Public Side Purchases 7 Mr Bartels' Conversations with Mr Sinclair and Mr Sinclair's with Mr Darwell 9 The 'Cigarette on the Pavement' Conversation 10 Mr Manchee's Thought Processes 11 The Compliance Department is Notified 13 Citigroup's General Counsel and CEO Are Informed 14 The CEO and Others Telephone Mr Bartels 15 A CHRONOLOGICAL ACCOUNT OF THE RELEVANT FACTS 15 December 2004 to January 2005: Citigroup Begins Pitching to Toll 15 January 2005 to February 2005: The Pitch Continues; Citigroup Purchases Shares Discreetly for Toll 16 March 2005 to April 2005: Citigroup Reports on Share Purchases and Continues Pitching 18 May 2005: Citigroup Still Not Appointed 19 June 2005: Citigroup Requires Execution of Custodian & Nominee Appointment 20 June 2005: Citigroup Continues to Press for Mandate 21 Late June 2005: Citigroup's Mandate is Secured But Not Documented; Carnegie Wylie Appointed 22 June to July 2005: Negotiation of Citigroup's Mandate Letter 24 July to August 2005: Planning for Bid; Calculation of Premium 26 8 August 2005: The Mandate Letter is Signed 27 8 August 2005 to 11 August 2005: Planning for Launch of Bid; Calculation of Premium 30 11 August 2005: Citigroup Foreshadows Category 1 Restriction 30 11 August to 17 August 2005: Further Planning for Takeover Announcement 31 18 August 2005: Press Speculation on Toll Bid; Virgin Announces Profit Downgrade 33 18 August 2005: Re-execution of Custodian & Nominee Appointment 34 Market Trading in Patrick Shares on 19 August 2005 34 The Events of 19 August 2005 35 Sunday 21 August 2005: The Rehearsal 36 22 August 2005: The Announcement 38 22 - 24 August 2005: ASX and ASIC Commence Considerations of Whether Insider Trading Occurred 39

September 2005: ASX Notification to ASIC of Possible Contravention; ASIC Gives Notice to Citigroup Under s 912C of the Corporations Act 40 Mr Chatfield's Evidence 41 PART III - THE LEGISLATIVE FRAMEWORK AND THE ISSUES THAT ARISE 45 The Legislation 45 The Issues 50 PART IV - THE CONFLICTS CLAIMS: THE ROLE OF INVESTMENTS BANKS AND A CONSIDERATION OF LEGAL PRINCIPLES 52 The Role of Investment Banks in the Financial System 52 The Identification of a Fiduciary Relationship 55 The Co-existence of Contractual and Fiduciary Relationships and the Effect of Exclusion Clauses 56 An Adviser May Have Fiduciary Obligations 58 The Scope of the Fiduciary Obligations 59 Informed Consent 60 A Special Instance of Conflict 61 Chinese Walls 63 PART V: THE CONFLICTS CLAIMS - DETERMINATION OF ISSUES 66 Issue 1 - Fiduciary Relationship, Construction of the Mandate Letter 66 Issue 2 - Whether Informed Consent was Required 69 Issue 3 - Whether Toll Gave Informed Consent 71 Issue 4 - Does it Matter Whether the Information was Relevant to Toll's Decision 73 Issue 5 - The Five Alleged Breaches of Duty 74 Issue 6 - Construction of s 912A(1)(aa) of the Corporations Act and Reg 7.1.29(3) of the Corporations Regulations 84 Issue 7 - Adequate Arrangements under s 912A(1)(aa) of the Corporations Act 87 Issue 8 - Misleading and Deceptive Conduct 90 Issue 9 - Unconscionable Conduct 91 PART VI: THE FIRST INSIDER TRADING CLAIM - DETERMINATION OF ISSUES 91 The Relevant Facts 92 Issue 10 - Whether Mr Manchee was an Officer of Citigroup 93 Issue 11 - Whether Mr Manchee Made the Supposition 98 Issue 12 - Whether Mr Darwell Made and Conveyed the Supposition 100 Issue 13 - Whether an Uncommunicated Supposition can Constitute Information 102 Issue 14 - Whether the Information was Generally Available 106 Issue 15 - Whether the Information was Price Sensitive 110 PART VII - THE SECOND INSIDER TRADING CLAIM - DETERMINATION OF ISSUES 111 Issue 16 - Possession of the Information 111 Issue 17 - Whether the Information was Generally Available 112 Issue 18 - Whether the Information was Price Sensitive 112 Issue 19 - The Chinese Walls Defence 113 CONCLUSION AND ORDERS 116 SCHEDULE I - ACRONYMS 119 SCHEDULE II - DRAMATIS PERSONAE 120

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

AND: CITIGROUP GLOBAL MARKETS AUSTRALIA PTY LIMITED (ACN 113 114 832)

Introduction 1 The essential issue which arises in these proceedings is whether the terms of a letter of engagement, under which an investment bank was retained by a large public company to advise on a proposed takeover, excluded the existence of any fiduciary relationship between the investment bank and its client. 2 The corporate regulator, the Australian Securities and Investments Commission ('ASIC') contends that, notwithstanding the existence of a clause in the letter which excluded the existence of such a relationship, the investment bank breached certain fiduciary duties to its client by failing to obtain the client's informed consent to proprietary trading in the takeover target's shares by another division of the bank. ASIC also contends that the purchase, and subsequent sale, of a portion of the parcel of the target's shares, constituted insider trading.

Abbreviations, Acronyms etc 3 Toll Holdings Limited ('Toll') is the parent company of a number of corporations in the Toll corporate group, including Toll (Corporate Services) Pty Limited ('Toll Corporate'). I do not propose to distinguish between the various members of the Toll group, except where necessary. Accordingly, I will describe Toll and its related bodies corporate by the abbreviation 'Toll', unless the context otherwise requires. 4 I will set out a list of acronyms as Schedule I to my reasons for judgment. Schedule II will contain a dramatis personae.

Overview 5 Citigroup Inc is a global financial services company which conducts its business in more than 100 countries. It operates in Australia primarily through Citigroup Global Markets Australia Pty Limited ('Citigroup') which is the defendant in these proceedings. 6 Citigroup's activities are conducted through various businesses including the Corporate and Investment Bank, known by the acronym 'CIB'. The CIB provides a diverse range of products and services. They include investment banking and financial products and services to wholesale investors, financial advisory services and equities trading. The CIB conducts equities trading on its own account, as principal, as well as for institutional or wholesale customers. 7 The CIB is divided into a number of operational areas and divisions. Employees who work in some of these areas are likely to be exposed to "inside information" within the meaning of s 1042A of the Corporations Act 2001 (Cth). A prime example is the Investment Banking Division, known by the acronym, 'IBD', which provides financial advisory and investment banking services including in relation to mergers and acquisitions. 8 Employees in other areas, such as Equities (other than Equity Capital Markets, or 'ECM'), are not expected to come into possession of such information. Those employees work on the public side of Citigroup's business and are known as 'public side' employees. Employees who work in areas which are exposed to information that may amount to inside information are called 'private side' employees. 9 Citigroup has established Chinese walls between employees who work in the private side and the public side of its business. It is apparently now more common to describe these structures by the anodyne term "information barriers": see Asia Pacific Telecommunications Limited v Optus Networks Pty Limited [2007] NSWSC 350 at [4]. I prefer the traditional description, Chinese walls. 10 The issues which arise in the present proceedings raise, at least in part, the question of whether Citigroup's Chinese walls were adequate to prevent the flow of inside information from the private side to the public side. 11 The proceedings arise out of the purchase by a public side employee of over one million shares in Patrick Corporation Limited ('Patrick') at a time when private side employees working in the IBD were acting for Citigroup's client, Toll, on a proposed takeover bid for Patrick. The shares were purchased by a trader, Mr Andrew Manchee, who worked on the proprietary trading desk which is situated in Equity Derivatives, within the Equities Division. 12 ASIC does not suggest that Mr Manchee was in possession of inside information when he purchased the shares. However, when Mr Manchee's purchases became known to private side employees, steps were taken to instruct him to stop buying further shares in Patrick. Mr Manchee followed the letter of the instruction but not long after receiving it he sold nearly 200,000 of the parcel he had previously purchased. 13 ASIC relies on the steps which were taken within Citigroup once Mr Manchee's purchases became known to the private side as demonstrating the inadequacy of the Chinese walls to prevent the flow of inside information from the private side to the public side. ASIC also contends that the sale by Mr Manchee of 192,352 Patrick shares after a conversation with his superior, Mr Paul Darwell, constituted insider trading by Citigroup in contravention of s 1043A of the Corporations Act. 14 But the more fundamental point for which ASIC contends is that Citigroup, as an adviser to Toll on its proposed takeover of Patrick, occupied a relationship which was, in critical respects, fiduciary. ASIC contends that as a fiduciary, Citigroup was obliged not to allow itself to be placed in a position of actual or potential conflict between its duty of loyalty to Toll and its interest in the profits sought to be obtained from its proprietary trading in Patrick shares. 15 ASIC submits that the fundamental point to be made in these proceedings is that if trading by an institution such as Citigroup in the shares of its client's target company is to be undertaken, the institution needs to obtain the informed consent of the client. It is not sufficient, according to ASIC, for consent to be given indirectly. What is said to be required is the client's express permission for trading. 16 A difficulty immediately arises in ASIC's argument in the present case. This is because ASIC contends that the fiduciary relationship between Citigroup and Toll arose from the contract between them. But the mandate letter, under which Toll's wholly owned subsidiary, Toll Corporate, engaged Citigroup as its adviser for the proposed takeover bid provided expressly that Citigroup was engaged: "as an independent contractor and not in any other capacity including as a fiduciary".

17 In Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 97, Mason J said that where a contractual relationship provides the foundation for the erection of a fiduciary relationship, the contract regulates the rights and liabilities of the parties. His Honour went on to say that the fiduciary relationship, "if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to", the contractual terms. 18 How then, to use the language of Mason J in Hospital Products, can a fiduciary relationship be superimposed upon the mandate letter in the face of clear language which excludes it? 19 ASIC's answer to this conundrum is to be found in eleven propositions to which I will refer later. At the heart of them is the proposition that where the inclusion of a particular term in a contract between a fiduciary and client would create an actual or potential conflict of interest between the fiduciary and the client, the fiduciary must obtain the client's informed consent to the inclusion of that provision. This approach to the question builds, in large measure, analogically upon principles applicable to solicitors: see in particular the observations of Mahoney JA in Law Society of New South Wales v Foreman (1994) 34 NSWLR 408 at 435-436. 20 The gravamen of ASIC's case is that for the exclusion of the fiduciary relationship in the mandate letter to be effective, it was incumbent upon Citigroup to draw Toll's attention expressly to the effect of the exclusion, that is, that it permitted Citigroup to trade in Patrick shares on its own account, in potential conflict with the interests of Toll. 21 Citigroup disputes the applicability of ten of the eleven propositions propounded by ASIC. It submits that because the mandate letter provides so precisely that no fiduciary relationship exists between Citigroup and Toll, there is simply no scope for the mandate to accommodate a fiduciary relationship. It submits that the propositions put forward by ASIC to overcome this difficulty have no application particularly when the fiduciary relationship is not one of the 'per se' relationships referred to in the authorities: see for example Hospital Products at 96 per Mason J. 22 The substance of Citigroup's answer to the claim is that the duty of a fiduciary to obtain the informed consent of a client has no application here because it presupposes the existence of an antecedent fiduciary relationship. No such pre-existing relation is claimed to have been created. 23 Citigroup also relies, to the extent necessary, upon events preceding (and post-dating) the execution of the mandate letter, as demonstrating Toll's knowledge of, and informed consent to, Citigroup's proprietary trading in Patrick shares. These events include the submission by Citigroup to one of the Toll companies, Toll Transport Pty Limited ('Toll Transport'), and subsequent execution, of a Custodian & Nominee Appointment Agreement dated 23 June 2005. That contract deals with the acquisition by Citigroup of a discreet pre-bid stake in Patrick for and on behalf of Toll. This contract contained express disclosure of Citigroup's right to trade as principal in Patrick shares. 24 ASIC also points to events pre-dating the execution of the mandate letter as part of its case. However, a difficulty arises because of its disavowal of any fiduciary relationship pre-dating the actual execution of the mandate letter: cf United Dominions Corporation Limited v Brian Pty Limited (1985) 157 CLR 1 at 11-12 per Mason, Brennan and Deane JJ. 25 A central part of ASIC's case is that Citigroup was required, as a financial services licensee, to have in place adequate arrangements for the management of conflicts of interest: see s 912A(1)(aa) of the Corporations Act. According to ASIC, conducting proprietary trading without having obtained Toll's informed consent to the proprietary trading, amounts to a breach of this subsection. 26 ASIC does not concede that, as a matter of statutory construction, s 912A(1)(aa) applies only where a licensee and its client are in a fiduciary relationship. However, Mr Walker SC, for ASIC, did concede that for the purposes of the present case, ASIC's contention that Citigroup contravened s 912A(1)(aa) depends upon the success of ASIC's submission that the parties were in a fiduciary relationship. 27 Even if Citigroup did owe fiduciary duties to Toll, the question of whether s 912A(1)(aa) was engaged depends upon a number of questions of statutory construction. The principal questions are whether Citigroup was providing "financial services" within the meaning of s 766A(1) and "financial product advice' within the meaning of s 766B(1) of the Corporations Act, as well as whether any such services were exempt services within Reg 7.1.29(3) of the Corporations Regulations 2001 (Cth). 28 ASIC seeks to argue the conflicts claim on three further bases. These are, first, a contravention of s 1041H of the Corporations Act, second, breach of s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) and third, breach of s 12CA of the ASIC Act. However, each of them depends upon acceptance of ASIC's contention that Citigroup owed fiduciary duties to Toll. 29 There are two separate insider trading claims against Citigroup. The first is Mr Manchee's sale of the 192,352 shares in Patrick. Mr Manchee was a public side employee. He was not told that Citigroup was acting for Toll in relation to the proposed takeover of Patrick. Nevertheless, he is alleged to have made that supposition as a result of an instruction from Mr Darwell. 30 Thus, a question which arises in the first insider trading claim is whether an uncommunicated supposition, formed as a result of a person's internal thought processes, amounts to "information" within the meaning of s 1042A of the Corporations Act. However, there is a threshold question as to whether Mr Manchee was an "officer" of Citigroup whose knowledge is to be attributed to that corporation. 31 The second insider trading claim is that certain private side employees of Citigroup were aware that Citigroup was acting for Toll on the proposed takeover and that there was a substantial likelihood that Toll would announce its bid in the very near future. The purchase and sale by Citigroup of Patrick shares while those employees were in possession of the information is said to constitute insider trading. 32 Issues arise as to whether the information was "generally available" and whether a reasonable person would expect it to have a "material effect" on the price of Patrick shares: see s 1042A of the Corporations Act. 33 A central issue which arises on the second insider trading case is whether Citigroup has made good its defence that it had in place adequate Chinese walls in accordance with the statutory defence contained in s 1043F of the Corporations Act.

Private Side Employees Learn of Public Side Purchases 34 On 8 August 2005, Toll engaged Citigroup, through the IBD, to act as Toll's joint adviser on a proposed takeover of Patrick. The terms of the retainer were recorded in the mandate letter to which I referred briefly at [16]. 35 I will set out the terms of the retainer in more detail later. It is sufficient to record by way of introduction that Citigroup undertook to perform such "financial advisory and investment banking services" for Toll as were customary and appropriate in a proposed takeover bid. 36 Although the mandate letter was not signed until 8 August 2005, the IBD had been 'pitching' to Toll from at least January 2005 in an effort to secure the mandate. 37 The head of the team of Citigroup employees who led the pitch was Mr Grant Dempsey. He was Co-Head, Melbourne Coverage, Investment Banking. All of the employees who worked for Mr Dempsey were private side employees who were members of the IBD. 38 Mr Dempsey's team was not the only team on the private side of the Chinese wall who worked for Toll on the takeover. The ECM Division of Citigroup was retained by Toll in January 2005 to acquire, on a confidential basis, a shareholding in Patrick of up to 4.9% on behalf of Toll. 39 Mr Mark Bartels was the head of the ECM Division. His team commenced purchasing Patrick shares on 19 January 2005. The purchases continued until 26 July 2005. 40 Mr Bartels' team was separate from Mr Dempsey's team. The primary function of ECM was to provide advice on structuring, marketing and pricing of equity and equity-linked securities offers for capital raising transactions. In the context of the Toll takeover, however, Mr Bartel's team provided share market summaries to both Toll and to Mr Dempsey's team. 41 On 19 August 2005, the market was alive with rumours that Toll would make a bid for Patrick. That morning, between about 10:15am and about 11:50am, Mr Manchee purchased approximately 450,000 shares in Patrick. He then adopted a particularly aggressive buying approach in the afternoon acquiring 674,752 shares in Patrick, on Citigroup's account, between 2:55pm and 3:07pm. 42 At some time during the course of the day, Mr Bartels noticed that Citigroup had engaged in extensive trading in Patrick shares. During the afternoon Mr Bartels made two significant calls. One was to Mr Malcolm Sinclair, Citigroup's Head of Equities. The other was to Mr Peter Monaci, Managing Director, Head of Capital Markets and Global Banking Compliance for the Asia Pacific region of CIB. 43 Mr Sinclair and Mr Monaci are both private side employees. However, the contact between Mr Bartels and Mr Sinclair resulted in a conversation between Mr Sinclair and an employee on the public side of the Chinese wall. That employee was Mr Darwell, the Head of Equity Derivatives, who was as I mentioned above, Mr Manchee's superior. What took place between Mr Sinclair and Mr Darwell, and in a subsequent conversation between Mr Darwell and Mr Manchee, is at the heart of the first insider trading case. 44 Mr Bartels' conversations with Mr Sinclair and Mr Monaci also resulted in knowledge of Citigroup's stake in Patrick radiating through various parts of the private side of the Chinese wall. Discussions took place between Mr Sinclair, Mr Monaci, Mr Stephen Roberts, the CEO of CIB (Australia and New Zealand), and Mr Warren Scott, Citigroup's General Counsel (Australia and New Zealand). Those four persons then contacted Mr Bartels to seek his opinion as to whether Toll should be informed of Citigroup's trading. 45 The conversations between those gentlemen on the private side of the Chinese wall, as well as those which took place across the Chinese wall between Mr Sinclair and Mr Darwell and then between Mr Darwell and Mr Manchee are said to show that Citigroup had no adequate mechanism or procedures to manage a conflict. 46 What is noticeable about the discussions that took place on the afternoon and early evening of 19 August 2005 is that Mr Dempsey was not informed that Citigroup had acquired a stake in Patrick.

Mr Bartels' Conversations with Mr Sinclair and Mr Sinclair's with Mr Darwell 47 The evidence suggests that Mr Bartels called Mr Sinclair before he alerted Mr Monaci, although the exact sequence of the calls is not entirely clear from the evidence. In my view, it is more likely that Mr Sinclair was Mr Bartels' first port of call because there was no suggestion that Mr Monaci was aware of the trading when he first spoke to Mr Sinclair. 48 Mr Sinclair's Equities Division is on the public side of the Chinese wall but Mr Sinclair sits on the private side. At some time during lunch or in the early afternoon of 19 August 2005 Mr Bartels told Mr Sinclair that Citigroup was trading in Patrick shares. There appear to have been two telephone conversations between Mr Bartels and Mr Sinclair about that fact. 49 Mr Sinclair was sufficiently concerned about the situation that he contacted Mr Darwell, a public side employee. Equity Derivatives, of which Mr Darwell is Head, is a subdivision of Equities. Mr Darwell reports to Mr Sinclair. 50 The conversation between Mr Sinclair and Mr Darwell took place shortly after 3pm. Mr Sinclair asked Mr Darwell whether Citigroup was involved in trading in Patrick shares and who was doing the buying. Mr Darwell made some enquiries and reported back to Mr Sinclair that the proprietary trading team was involved. He said that Mr Manchee had purchased the shares. 51 In one of the conversations between Mr Sinclair and Mr Darwell, most likely before Mr Darwell spoke to Mr Manchee, Mr Sinclair said to Mr Darwell "we may have a problem". 52 Mr Darwell did not ask Mr Sinclair why there might be a problem. He thought in his own mind that there may be some truth in the rumours of a takeover bid for Patrick and that Citigroup may be involved. But he made no enquiry of Mr Sinclair because he was unaware of the takeover and: "I would not ask because it may put me in a position where I would cease to function in my job".

The 'Cigarette on the Pavement' Conversation 53 Mr Darwell's Equity Derivatives area is organised into trading desks, one of which is the proprietary trading desk at which Mr Manchee sits. He is one of five traders at that desk and reports to Mr Darwell. Mr Manchee is, of course, a public side employee. 54 Mr Manchee has a daily trading limit of AUD$10 million in leading stocks, that is to say, those within the ASX 200. He can purchase up to AUD$10 million worth of any one stock. The limit is an end-of-day limit, so that he is apparently authorised to spend more than AUD$10 million during the day, provided that his book is within the limit at the close of trading. The purchase of approximately one million shares in Patrick at a price of just over AUD$6 was well within Mr Manchee's limit. 55 After Mr Sinclair's enquiry of Mr Darwell, Mr Darwell phoned Mr Manchee. The phone call took place between about 3:15 and 3:30pm. The call was short. Mr Darwell said "Can we go down for a cigarette?" This was enough for Mr Manchee to realise that Mr Darwell wanted to discuss something. 56 A conversation then took place on the pavement outside of Citigroup's offices. Mr Darwell asked Mr Manchee how many shares he had purchased and why he had bought them. He asked why Mr Manchee was being so aggressive. Mr Manchee had bought approximately 1.2 million shares and told Mr Darwell that he had bought them because of hedge fund trading, charts, volume and rumours. Mr Darwell said "Don't buy any more".

Mr Manchee's Thought Processes 57 Mr Manchee accepted that the conversation with Mr Darwell was unusual. He agreed that this applied to the circumstances and the subject matter, including the fact that Mr Darwell gave no reason for the instruction not to buy any more shares. Mr Manchee took Mr Darwell to mean that he was carrying too much risk; that was one of the reasons he sold nearly 200,000 shares when he returned to his desk. 58 Mr Manchee gave the following evidence in his examination under s 19 of the ASIC Act on 12 December 2005: "Q Didn't it occur to you that Darwell's reason for giving you this instruction was a matter that he felt unable to communicate with you? A Privilege. I suppose there was a possibility that he was unable to communicate something to me. Q Didn't you suppose that when he was telling you to stop buying it had something to do with these rumours about a Toll takeover? A Privilege. I probably assumed it did." 59 The examination continued as follows: "Q I am trying to explore what your state of mind was at the time. Didn't it occur to you that Darwell knew something that he couldn't tell you, but which was in his view a good reason why he should tell you to stop buying Patrick shares? A Privilege. That might have been one of the things that I thought about. Q Didn't it occur to you that a possibility was that he knew something about Citigroup's involvement with the rumoured Toll takeover and that's why he was speaking to you? A Privilege. As I said, perhaps there was a possibility he did know something I didn't know. Q What I was wanting to explore was, do you agree that that was something that occurred to you at the time as a possibility? A Privilege. I can't recall exactly, but it probably, it could have occurred to me at the time that, you know, it was a possibility. Q Well, isn't this right, that you supposed at the time that one possibility was that the reason Darwell was telling you to stop buying Patrick shares was because he knew something that he couldn't tell you about the Citigroup's involvement in the rumoured Toll takeover. A Privilege. Perhaps at the time I thought he might have known something that he couldn't tell me, and the reason that he would know something but couldn't tell me that Citigroup were involved somehow, perhaps he would have known, and I might have thought about that as a possibility." 60 Later in the examination the following exchange took place: "Q But wasn't it obvious to you that the reason that Darwell was telling you to stop buying shares was because he knew something about Citigroup's involvement that he couldn't tell you that was the reason you should keep out of it? A Privilege. No. I didn't know that was - I wouldn't have even thought, even if Citigroup did have something to do with it, that he would know anything." 61 It will be seen that in the earlier part of the examination, Mr Manchee made a concession which, on one view, he later withdrew. Mr Myers QC for Citigroup did not concede that there was an inconsistency between the two portions of the transcript but he consented to leave being granted to Mr Walker to cross-examine Mr Manchee on the apparent inconsistency in accordance with s 38 of the Evidence Act 1995 (Cth). I will deal with this later in my reasons for judgment.

The Compliance Department is Notified 62 Sometime prior to 4pm, Mr Sinclair and Mr Monaci had a conversation in Mr Sinclair's office. The conversation was to the following effect: "Mr Sinclair: It's the prop desk who have traded. Mr Monaci: What do you mean? Mr Sinclair: The prop traders have been trading in Patricks. … Mr Monaci: Just because the prop desk has traded in Patrick doesn't necessarily mean that there's a problem with the Chinese wall. We shouldn't automatically assume that there's something wrong. We will probably get a regulatory inquiry given the volume of trading in Patrick that has occurred. Mr Sinclair: I agree. I asked Paul Darwell to look into the trading. Let me call Paul in. Mr Monaci: Wait, hang on, Paul is public side. Mr Sinclair: I understand that. We'll tell him that we've got a query." 63 Mr Monaci wanted to ensure that he did not tip off Mr Darwell or "taint him". He therefore said to Mr Sinclair: "Okay. We'll tell him that we picked it up on surveillance and that given the increase in the price of the stock, we're expecting a query from the stock exchange."

64 At some stage during the afternoon of 19 August 2005, most probably after his conversations with Mr Sinclair, and after Mr Sinclair had first spoken with Mr Monaci, Mr Bartels rang Mr Monaci. He also told him that Citigroup had purchased a large parcel of Patrick shares. He said that Mr Monaci could expect an enquiry from ASIC.

Citigroup's General Counsel and CEO Are Informed 65 At some time after his conversation with Mr Sinclair, Mr Monaci went to see another private side employee, Mr Scott. It is not clear whether Mr Sinclair was present though the evidence seems to indicate it was likely he was there. 66 Mr Monaci told Mr Scott that Toll's bid was expected to be announced on Monday and that Citigroup's proprietary trading desk had engaged in substantial trading during the day. 67 Messrs Monaci and Scott then went to a conference room on level 40 of Citigroup's premises where Mr Roberts was present with Mr Les Matheson, Country Officer for Citigroup in Australia. Mr Matheson was responsible for all aspects of Citigroup's retail business. He left shortly after Mr Monaci and Mr Scott arrived. Mr Sinclair also seems to have been present during the discussions that took place. 68 A discussion took place between Messrs Roberts, Sinclair, Scott and Monaci. The fact that Citigroup had engaged in proprietary trading, with the purchase of about one million shares in Patrick, was revealed to Mr Roberts. 69 Mr Monaci expressed concern to Mr Roberts and the others that there may be a perception within ASIC of potential insider trading by Citigroup. Mr Monaci seems to have expressed the view that there was no breach in the Chinese wall. 70 One of the persons present at the meeting asked "Should we tell Toll?". Mr Roberts appears to have said that Mr Bartels was the appropriate person to answer that question.

The CEO and Others Telephone Mr Bartels 71 In the early evening of 19 August 2005, at about 6pm or 7pm, those present at the meeting with Mr Roberts called Mr Bartels on a speaker phone. One of them asked Mr Bartels whether they should tell Toll that Citigroup had purchased shares in Patrick. 72 Mr Bartels expressed the view that it was unnecessary for Citigroup to inform Toll.

December 2004 to January 2005: Citigroup Begins Pitching to Toll 73 By late December 2004, Citigroup's IBD began preparing documents for the purpose of an approach to Toll. Citigroup sought to be retained by Toll as its adviser in relation to opportunities to enter the Ports logistics market in Australia. 74 A discussion paper prepared by Citigroup, dated 31 December 2004, identified Patrick as "the most immediate and realistic entry opportunity" for Toll. It stated that Toll was uniquely positioned to acquire Patrick. It also stated that Citigroup would be pleased to work with Toll to refine its analysis of the acquisition and to agree on a final recommendation. 75 Even before this discussion paper, Citigroup was well aware of the need to identify and deal with potential conflicts of interest in transactions generally. In a memorandum dated 29 November 2004 to CIB Division Heads and various managers, including Compliance Managers, a directive was given about proceeding with transactions that may involve, inter alia, the likelihood of a conflict. 76 The memorandum included a directive that if business management wished to proceed with such a transaction, the Division Head: "must determine if the transaction could reasonably be expected to cause clients or regulators to express concern as to whether the transaction is consistent with the behaviour they would expect of a leading market participant and, as a result, our reputation and standing could be damaged".

77 Indeed, in another transaction between Citigroup and Toll recorded in a mandate letter dated 10 December 2004, Mr Dempsey and Mr Bartels provided expressly for Citigroup to be entitled to purchase shares on its own account. The letter stated: "The Company hereby agrees that Citigroup and/or a related body corporate thereof will, subject to adherence with the Corporations Act and any other relevant laws, above confidentiality obligations and the effective operation of appropriate 'Chinese Walls' within by [sic] Citigroup, have the right to purchase shares for their own account and that any such purchase will not constitute a conflict of interest for purposes of Citigroup's engagement hereunder."

January 2005 to February 2005: The Pitch Continues; Citigroup Purchases Shares Discreetly for Toll 78 On 12 January 2005, Mr Dempsey sent an email to Mr Neil Chatfield, the Chief Financial Officer of Toll, setting out a number of possible alternative methods for the acquisition of Patrick. One of them was a takeover offer to Patrick shareholders consisting partly of cash and partly of scrip. The scrip was to comprise partly shares in Toll and partly shares in Patrick's 62.4% owned subsidiary, Virgin Blue Holdings Limited ("Virgin"). 79 On 19 January 2005, Mr Chatfield instructed Mr Bartels to acquire a stake in Patrick of up to 4.9%. The shares were to be acquired discreetly in the name of a Citigroup company as nominee. Acquisitions commenced that same day. 80 On 20 January 2005, Mr Christian Lunny of Citigroup's IBD sent an email to Mr Dempsey, Mr Bartels and others within Citigroup. The email sought to check possible conflicts of interest so as to ensure it was appropriate "to continue pitching" the transaction to Toll. The email went on to describe Citigroup's role as being "to act as financial adviser to Toll for the 100% acquisition of Patrick". It also stated that Citigroup would seek to provide Toll with its acquisition financing requirements. 81 On 21 January 2005, Citigroup's IBD prepared an updated analysis for the proposed acquisition of Patrick. Codenames were given to the project, the bidder and the target. The project was known as "Douro", the bidder as "Tawny" and the target as "Para". 82 The updated analysis document stated that Citigroup believed the best method of achieving Tawny's strategic objectives was to acquire 100% of Para with the consideration to comprise cash and scrip in Virgin. The document also stated that: "Citigroup would be pleased to work with Tawny to refine the acquisition analysis and to agree on the most appropriate transaction structure."

83 On 24 January 2005, Mr Dempsey sent an email to Mr Chatfield and Mr Stephen Stanley of Toll. The email thanked them for their time at a meeting on 21 January 2005. Mr Dempsey suggested a meeting take place with Citigroup's head of mergers and acquisitions to discuss the takeover process. Mr Dempsey also stated: "Now that we are fully aware of the history, we can really get some good advise [sic] back to you in terms of options next meeting."

84 On 31 January 2005, Citigroup prepared a further draft working document for Project Douro. The document stated that it was agreed at the last meeting between Tawny and Citigroup that their analyses of the potential acquisition of Para were "well aligned" and the focus should shift to the question of acquisition approach and funding issues. 85 The document also stated that: "Tawny should consider formally engaging Citigroup to further develop an acquisition financing plan, encompassing all capital markets (debt, hybrid and equity)."

86 The document also made reference to the fact that Tawny had commenced discreet purchases of shares in Para in an effort to move to the substantial shareholder threshold of 4.9%. An estimate of the time required to accumulate that stake was given at up to four months. 87 On 2 February 2005, Mr Dempsey sent an email to Mr Chatfield setting out some thoughts for further discussion. The email included the following: "So, my pitch is to get mandated (of course!) And get our guys internally to the line on funding approval …"

88 On 3 February 2005, Mr Dempsey sent an email to an officer of Citigroup Inc in the USA. He said that Citigroup had targeted Toll strongly and that "we are 'near mandated'". 89 On 7 February 2005, Mr Dempsey sent another email to Mr Chatfield. Mr Dempsey suggested a further meeting to chat about Project Douro and to discuss Citigroup being given a mandate. 90 On 8 February 2005, Citigroup prepared a draft working document dealing with the next steps in Project Douro. It said that those steps should be to "focus on key funding strategy and execution issues" to prepare for a bid. 91 Citigroup prepared a further working document on 18 February 2005 for a presentation to Tawny. The stated objective of the document was to "re-assess the economics to Tawny for the acquisition of Para". Core assumptions of the analysis included an offer premium range of 25% to 35% over the prevailing Patrick share price. 92 The document of 18 February 2005 contained a number of projections on the impact of the takeover including the impact on Tawny's earnings per share after the acquisition of Para.

March 2005 to April 2005: Citigroup Reports on Share Purchases and Continues Pitching 93 On 24 March 2005, Mr Bartels sent an email to Mr Chatfield reporting on Citigroup's purchase of shares in Patrick for Toll Holdings. He said that the purchases had been very discreet and that Citigroup's purchases since 19 January 2005 had been at a price which was lower than the Volume Weighted Average Price ('VWAP') on the active days. 94 Mr Bartels sent a further email to Mr Chatfield on 20 April 2005 stating that Citigroup had beaten the VWAP on all the days it had been active. 95 On 22 April 2005, Mr Dempsey sent an email to Mr Chatfield, with a copy to Mr Paul Little, the CEO of Toll. The email attached an updated analysis of the proposed takeover based on the latest research reports on Tawny, Para and "Vintage". Vintage was the code name for Virgin. The document included a sensitivity analysis of the effect on Tawny's earnings per share based on a range of different premiums over the Patrick share price.

May 2005: Citigroup Still Not Appointed 96 By May 2005 Citigroup had still not received the mandate it sought. On 3 May 2005, Mr Dempsey sent an email to Mr Chatfield stating that he had spoken to Mr Little who was in New Zealand. He reported that Mr Little had said that Citigroup should not assume it would advise Toll on the takeover and "there were others interested in doing so". Mr Dempsey commented that he had assumed that Citigroup was "working somewhat in the tent despite not being mandated". 97 On 13 May 2005, Mr Dempsey sent an email to Mr Stanley of Toll. The email attached an analysis showing the projected premium on Patrick's share price based on the VWAP over various periods. 98 Mr Dempsey sent another email to Mr Chatfield on 18 May 2005 pitching yet again for the mandate and attaching a confidential letter to this effect from himself and Jason McLeod, also Co-Head of IBD Coverage, Melbourne. It is apparent from the email and letter that by this date, another company, Carnegie Wylie & Company Pty Limited ('Carnegie Wylie'), had been named by Toll as a possible adviser. 99 The email of 18 May 2005 included the following: "The only thing we will continue to emphasis [sic] as we work the scope out is our ability to add significant value on the advisory side of the business as well. As the letter says, we respect the capabilities in this area of Toll and the position Wylie has but we also think we have exhibited our strong capabilities in this area. We continue to have very good global market news which is invaluable in these processes. We not only have access to global players (as you now have) we have strong understanding of their transaction history which again is invaluable in interpreting interactions with them.

There is also an enormous amount of work in a public takeover and most of that grunt will be done by our team. So, just a little pitch for us to continue to be seen as not just a funder but also adviser. To that end, participating in as many meetings as possible relating to the transaction is important to be able to maxim [sic] our value. At the end of the day this is a large transaction with room for many points of view. One that Citigroup will back to the hilt even if it gets a little hairy."

100 The confidential letter attached to the email pointed out to Mr Chatfield the advantages to Toll of the appointment of Citigroup as its adviser. 101 Mr Dempsey and Mr McLeod stated in the letter that they supported the possible role for Mr John Wylie of Carnegie Wylie. They also said they would "work with you to ensure a working relationship to the benefit of Toll". 102 The letter of 18 May 2005 continued as follows: "We also appreciate the in-house capabilities Toll has in merger & acquisitions and look forward to defining the scope parties may play in this transaction and to demonstrate the value Citigroup will deliver in a broad advisory leadership role.

We strongly believe Citigroup's ability to bring a complete advisory and funding package (equity & debt) will be crucial to the success of the proposed transaction. Driving the advisory effort is important to us and we believe we will add as much in that area as we will in funding support. In particular, we trust that Citigroup has already demonstrated some of the key requirements needed as financial adviser."

June 2005: Citigroup Requires Execution of Custodian & Nominee Appointment 103 Although Citigroup had commenced purchasing a stake in Patrick on Toll's behalf in January 2005, no formal documentation was prepared until mid-June of that year. 104 On 15 June 2005, Mr Bartels sent an email to Mr Chatfield stating that, as previously discussed, Citigroup had purchased shares in the name of Citigroup nominees and another nominee company. He forwarded a form of Custodian & Nominee Appointment for execution by Toll. 105 The form of Custodian & Nominee Appointment provided for Toll Transport to appoint Citigroup (or its authorised representative) as its custodian and nominee for the financial products designated by it. 106 The proposed terms of the Custodian & Nominee Appointment incorporated certain standard Citigroup Terms of Business. The standard terms included the following under the subheading "Disclosure of Interest": "You acknowledge that we may execute Orders for you and charge you commission in circumstances where we or our associates:

• hold a principal position or deals in the Securities (Wholesale Clients who are not Financial Services Licensees may opt out of this clause by informing your CGM Account Manager prior to trading; or otherwise notifying us);
• provide similar services to other persons in relation to the Securities;
• are allocated a sale or purchase of Securities when we have an unexecuted Order on the same terms from you;
• take the opposite position in a Transaction (including a crossing) either acting for another client or on our own account;
• sponsor or underwrite a new issue involving the Securities;
• have material price sensitive information relating to Securities where the individuals processing your Order are prevented from knowing or taking into account such information by reason of Chinese Walls; or
• have a potential conflict of interest of which you are not aware and which we are unable to disclose to you." 107 The Custodian & Nominee Appointment was executed by Toll Transport, without alteration of the abovementioned standard terms, on 17 June 2005.

June 2005: Citigroup Continues to Press for Mandate 108 On 16 June 2005, Citigroup prepared a draft discussion document containing an acquisition financing overview. The document stated that Citigroup had been asked to "consider funding structures relating to Tawny's potential acquisition of Para". The document also stated that Citigroup provided the update to Tawny as part of its ongoing analysis of Project Douro and was "pleased to support in this important transaction". 109 On the same day, Mr Dempsey sent an email to Mr Chatfield, once again stressing the value of Citigroup's services, while at the same time respecting those of Mr Wylie. 110 The email continued as follows: "However, recent deals (wmc) have shown the value of 2 opinions for the client to work their way through. In fact encouraging open debate and contrary views is healthy in front of client to get best results. So just want to make sure that we don't get boxed into lesser advisory role. We have a lot to add on this side not least of which is the grunt to do an enormous amount of work but also the experience (I have done m&a for over a decade also). We can figure out scope, protocals [sic] etc later but want the starting point to be joint advisors. Toll always has the right to listen and agree with whoever they want but joint advisors should be involved in all things together to get best results.

Sounds somewhat semantic but very important for us to get in the right role. Part of the tactics is managing interlopers, hedge funds, panel issues, accc etc etc and we are resourced to cope with all of that. And of course the documentation.

So my plea is to see us as valuable advisors and not second tier ones."

111 Mr Dempsey had one more thought in his overtures to Mr Chatfield on 16 June 2005. He sent it by email shortly after 11pm. The email included the following: "More importantly we need to get citigroup global to move to fund this thing very agressively [sic]. To do that we need to be joint advisors at minumum [sic]. That is the package model that excites the powers that be to move heaven and hell to get committed in an agressive [sic] balance sheet way.

Don't mean to pitch too hard via email but just trying to give you our thoughts before you guys make some decisions tomorrow. No more from me tonight!!"

Late June 2005: Citigroup's Mandate is Secured But Not Documented; Carnegie Wylie Appointed 112 On 18 June 2005, Mr Dempsey sent two internal emails within Citigroup's IBD. The first reported that "(w)e have the gig" as joint advisers with Carnegie Wylie. The email also stated that Citigroup would provide finance advisory services and lead the funding. 113 The second of the emails of 18 June 2005 stated that Citigroup's Melbourne team had made nine presentations to Toll to obtain the opportunity to be an adviser. It observed that Citigroup had a well developed understanding of the financials and the funding requirements. Mr Dempsey also said that he would have day to day client management and advisory oversight. 114 Mr Dempsey prepared a draft retainer letter which he appears to have sent to Mr Chatfield on or about 27 June 2005. The terms of the scope of Citigroup's engagement to provide financial advisory and investment banking services for Toll were identical with those set forth in the final form of the letter. 115 So too was the acknowledgment that Citigroup had been retained solely as an adviser to Toll as an independent contractor and "not in any other capacity including as a fiduciary." 116 On or about the same day, 27 June 2005, Mr Wylie on behalf of Carnegie Wylie, and Mr Chatfield on behalf of Toll Corporate, signed a retainer letter for the engagement of Carnegie Wylie as a financial adviser for the proposed takeover of Patrick by Toll. 117 Under this letter of engagement, Carnegie Wylie agreed to provide the following services: (a) advice on valuation and commercial issues associated with the takeover; (b) tactics for the acquisition; (c) negotiating and structuring the acquisition; and (d) other advisory services in connection with the transaction reasonably requested by Toll. 118 The engagement letter provided for payment, inter alia, of a transaction fee, which was in effect a success fee, calculated on a sliding scale depending on the acquisition price and percentage of Patrick acquired under the takeover. 119 As with the Citigroup mandate letter, Carnegie Wylie also excluded the existence of a fiduciary relationship between the parties. Carnegie Wylie undertook to act in the best interests of Toll in its performance of the engagement. It agreed to do so as an independent contractor only and "no relationship of agent and principal, joint venture partners, partnership or a relationship of a fiduciary nature will be created".

June to July 2005: Negotiation of Citigroup's Mandate Letter 120 On 28 June 2005, Mr Dempsey sent an email to Mr Chatfield on the subject of the fees payable to Citigroup. He said he wished to chat to Mr Chatfield about Citigroup's fees relative to those of Carnegie Wylie. 121 Mr Dempsey said in the email that Citigroup needed to be treated at least equally to Carnegie Wylie on fees. He said he was confident that Citigroup would earn its status as co-adviser and that it had, and would, continue to bring more "grunt/effort" to the project which should be recognised. 122 The email continued as follows: "I hope you have seen to date that we can hold our own in terms of tactics/strategy - most of the debate to date has been led by us from and [sic] advisory perspective (although we are not disputing and are embrasing [sic] what our co-adviser brings to the deal)."

123 On 30 June 2005, Mr Dempsey sent another email to Mr Chatfield about a meeting that day as well as a number of topics to be discussed in the near future. One of them was the mandate. He said he "would love to get this agreed both in terms of fees and mandate letter." He put forward a proposal with a view to being put on an equal basis to Carnegie Wylie. 124 On 1 July 2005, Mr Dempsey prepared a further draft of the mandate letter. It contained one change of substance from the earlier draft in that it set out the proposed fee structure. Fees were stipulated on a sliding scale based upon acceptance level and offer price. The maximum fee payable was stated as AUD$18 million if more than 90% acceptances were received at an offer price of AUD$7. The draft stated that the fee structure had been agreed to ensure that the interests of Toll and Citigroup were well aligned. 125 On the same day, 1 July 2005, Mr Dempsey sent an internal email to two addressees including Mr Roberts. He said that "fees were now settled" with Toll. He pointed out that if the takeover was fully successful Citigroup would get between AUD$10 million and AUD$18 million and that this was equivalent to the fees payable to Carnegie Wylie. 126 On 7 July 2005, Citigroup prepared a further draft discussion paper containing an analysis of earlier takeovers including the proportion of cash to scrip in the consideration and the premiums offered. 127 On 8 July 2005, the Toll group legal manager sent a copy of the draft mandate letter to Mr Chatfield, marked up to show Toll's suggested changes. There were no changes of substance to the scope of the engagement, the fees payable, or the exclusion of Citigroup's fiduciary capacity. 128 On 12 July 2005, Mr Dempsey sent an email to Mr Chatfield suggesting a price of AUD$7 per share as the appropriate outcome for a negotiated merger with Patrick. He gave some observations as to what this represented as a premium to the Patrick share price. 129 On 19 July 2005, Mr Dempsey sent an email to Mr Chatfield dealing with various topics. One of them was the mandate letter. He said he assumed it was all in order to be signed as he had agreed to all of Mr Chatfield's "no's". He also said he would sign it and send it to Mr Chatfield for signature. 130 On 21 July 2005, Mr Dempsey again emailed Mr Chatfield about signing the mandate letter. He said he was "getting pressure internally" to have the document signed.

July to August 2005: Planning for Bid; Calculation of Premium 131 On 26 July 2005, Deutsche Bank issued a substantial shareholder notice stating that it had acquired a 5.01% shareholding interest in Patrick. This led to speculation about a possible takeover and put some upward pressure on the share price. 132 On 29 July 2005, Mr Lunny sent an internal email to Mr John Hanson of the IBD. The email attached a document containing an analysis of the premium to the Para share price at a range of offer prices from AUD$6.85 to AUD$7.75. 133 On 31 July 2005, a member of the IBD notified a member of the ECM Division of the proposed launch date of Tawny's bid. The timing was said to have shifted to an expected launch date of 8 August 2005 in light of recent market rumours and share price movements. This message was passed on to Mr Bartels. 134 With the anticipated launch date fast approaching, the 'deal team' (made up of Citigroup IBD and Carnegie Wylie personnel) began working on the possibility of addressing defences which may be raised against the takeover bid. The list of defences included an argument that the premium was too low for control. The team's thoughts on the subject were passed on to Mr Little and Mr Chatfield. 135 On or about 7 August 2005, Citigroup prepared a draft announcement to the Australian Securities Exchange ('ASX') in anticipation of the launch of Tawny's bid. Under the subheading "Attractive Premium for Para Shareholders", the document stated that the offer price: "represents a [#]% premium relative to Para's one month VWAP to 26 July 2005, the day prior to speculation regarding an offer for Para emerged."

136 The draft announcement also included provision for other ways in which the premium could be calculated. 137 On 7 August 2005, Mr Dempsey sent an email to Mr Lunny and other IBD personnel, attaching a document with an analysis of responses/strategies to be made by Tawny in answer to issues likely to arise in relation to the transaction. The email had previously been copied to Mr Little and Mr Chatfield. 138 One of the issues identified in the document was that the market would develop different interpretations of the bid premium. The response proposed for this was that Para should focus on pre-bid prices unless prices moved in Tawny's favour during the transaction. 139 On 8 August 2005, Citigroup prepared a working document for a presentation to Tawny on considerations to be taken into account in determining the offer price. The considerations referred to in the working document included reference to the premium calculation. It said that the premium would be calculated so as "to convey the most optically appealing bid". 140 The document also said that the transaction should be marketed as a 24.7% premium to the closing price on 26 July 2005, the date on which market speculation emerged after Deutsche Bank issued its substantial shareholder notice. A graph of recent Para stock price movements showed an increase from AUD$5.60 on 26 July 2005 to AUD$5.97 on 8 August 2005.

8 August 2005: The Mandate Letter is Signed 141 On 8 August 2005, the mandate letter was signed by Mr Dempsey on behalf of Citigroup and by Mr Chatfield for Toll Corporate. Clearly enough, by that date Toll had nominated Toll Corporate as the takeover vehicle. 142 The mandate letter stated that Toll had engaged Citigroup as its joint financial adviser "in connection with a possible Transaction" involving Patrick. The "Transaction" was defined to mean the acquisition, directly or indirectly, by Toll Holdings, of all or a significant portion of the business, assets or securities of Patrick, or any other effort by Toll Holdings to obtain control of a significant investment in Patrick. 143 The mandate letter was set out on Citigroup's letterhead. The following appeared under the subheading "Scope of Engagement": "As we have discussed, in the course of our engagement as your financial adviser, we will perform such financial advisory and investment banking services for the Company in connection with the proposed Transaction as are customary and appropriate in transactions of this type and as you reasonably request. …

Citigroup will advise the Company in connection with, and will be considered by the Company in relation to, any interest rate, currency rate, equity or other hedge program(s) of the Holding Company relating to the Transaction, including assisting in the structuring of such program(s) and managing any related auctions. Citigroup or its related bodies corporate will provide any liability management services (including consent solicitations, debt repurchases or defeasances) desired by the Company in relation to or as a result of the Transaction, subject to the execution of definitive documentation containing mutually agreed fees, terms and conditions with respect to such services.

If the Holding Company successfully completes the Transaction but does not dispose of the Subject's interest in Virgin Blue Holdings Ltd ("Vintage") as part of this Transaction, and subsequent decides to sell Vintage (within the next 12 months) then the Company will consider appointing Citigroup as advisors to the Company in connection with the sale on terms to be mutually agreed."

144 The following appeared in the letter under the heading "Fees and Expenses": "The proposed fee structure for financial advisory and investment banking services has been agreed to ensure the interests of the Company and Citigroup are well aligned and to ensure that Citigroup is rewarded for best achieving the Company's objectives. The fee will be determined based upon the Offer Price to the Subject Company and is intended to reflect two potential situations: 1) greater than 90% of the Subject Company is acquired under the Offer and 2) less than 90% is acquired under the Offer.

For each situation, the Company will pay to Citigroup the cash fees outlined in Table 1 below. (In the event the Offer Price falls within a Price band shown in Table 1, the fee shall be calculated by way of liner interpolation. For all Offer Prices below $7.00, the fee shall be held flat at the $7.00 level. For all Offer Prices in excess of $7.90, the fee shall be held flat at the $7.90 level)."

Table 1 Offer Price Acceptance $7.00 $7.45 $7.90

90% $18m $14m $10m <90% $9m $7m $5m

145 The paragraphs of the mandate letter which included an acknowledgment that Citigroup was not engaged in a fiduciary capacity are important. I will set them out in full: "The Company acknowledges that Citigroup has been retained hereunder solely as an adviser to the Company, and not as an adviser to or agent of any other person, and that the Company's engagement of Citigroup is as an independent contractor and not in any other capacity including as a fiduciary. Citigroup may, to the extent it deems appropriate, render the services hereunder through one or more of its related bodies corporate. Neither this engagement, nor the delivery of any advice in connection with this engagement, is intended to confer rights upon any persons not a party hereto (including members, employees or creditors of the Company) as against Citigroup or our related bodies corporate or their respective directors, officers, agents and employees. Citigroup may, subject to the prior written approval of the Company (such approval not to be unreasonably withheld or delayed), at our own expense, place announcements or advertisements in financial newspapers, journals and marketing materials describing our services hereunder.

The Company acknowledges that it is not relying on the advice of Citigroup for tax, legal or accounting matters, it is seeking and will rely on the advice of its own professionals and advisors for such matters and it will make an independent analysis and decision regarding any Transaction based upon such advice.

The Company should be aware that Citigroup and/or its related bodies corporate may be providing or may in the future provide financial or other services to other parties with conflicting interests. However, consistent with our long-standing policy to hold in confidence the affairs of our customers, we will not use confidential information obtained from the Company except in connection with our services to, and our relationship with, the Company, nor will we use on the Company's behalf any confidential information obtained from any other customer."

146 A further paragraph of the mandate letter dealt with the topic of confidential information supplied to Citigroup. It provided that Citigroup agreed to treat all information obtained by it from Toll, in connection with the engagement, as confidential. There were a number of provisions which stipulated circumstances in which Citigroup would be free to treat such information as not confidential or to make disclosure as required by law.

8 August 2005 to 11 August 2005: Planning for Launch of Bid; Calculation of Premium 147 On 8 August 2005, Mr Dempsey sent an email to Mr Chatfield and others, suggesting an opening offer price of 0.47 Tawny shares and a special dividend of 0.33 Vintage shares per Para share. At current closing prices, this was said to translate to a consideration of AUD$6.98 per share. 148 The email of 8 August 2005 continued: "this headline price equates to only a 17.5% premium on closing price for para on Friday but we will sell it differently. I think we should primarily sell it as 25% premium to the closing price on 25 July but also reference it as a 23% premium to the 1 and 3 month vwap."

149 On the same day Mr Dempsey sent an email to Mr Roberts informing him that the mandate letter had been signed. He said that the anticipated launch date was being kept to a select group; not even people on the fringe of the deal were aware of the date. 150 The anticipated launch date, which was then expected to be 15 August 2005, was subject to further delay. Mr Dempsey informed Mr Roberts in an email of 9 August 2005 that it could be delayed until later that week. 151 On 11 August 2005, Citigroup prepared a briefing paper for a presentation to the board of Tawny. Citigroup stated its belief that a valuation of AUD$6.96 to AUD$7.89 per share was appropriate for Para. This was said to equate to a premium of 23% to 40% to Para's one month VWAP.

11 August 2005: Citigroup Foreshadows Category 1 Restriction 152 Citigroup has in place written policies and procedures setting out the considerations that apply to a decision as to whether a public side employee should be brought 'over the wall', that is to say, over the Chinese wall. These policies are intended to prevent the flow of potentially price sensitive information across the wall. 153 Citigroup also has in place arrangements to monitor trading to determine whether it may have been based on price sensitive information. Transactions undertaken by the private side businesses of Citigroup are recorded on a Compliance Surveillance System known by the acronym 'CSS'. 154 The CSS is essentially a 'Watch List' of proposed private side transactions which is monitored by Citigroup's Compliance and Control Group. Sanctions apply where trading is undertaken that is found to have been based on potentially price sensitive information. Employees' knowledge that monitoring is taking place is intended to prevent the flow of such information across the Chinese wall. 155 Citigroup's written procedures include 'The Guide to Trading Restrictions'. These procedures apply where the CIB acts as a financial adviser in a mergers and acquisitions transaction. When this happens, the people involved in the transaction are moved from the Watch List to another list called the 'Restricted Trading List'. The relevant parties are not placed on the Restricted Trading List before public announcement. According to Mr Monaci, this is because to do so would risk sending a signal about confidential investment banking activities. 156 On 11 August 2005, a member of the Compliance and Control Group sent an email to Mr Bartels setting out the guidelines for a Category 1 restriction. The email stated that more specific information would be issued upon public announcement of the takeover. 157 The terms of a Category 1 restriction were described in the email as follows: "1. Category 1: Unsolicited Agency Trading. This means:

No principal trading No client solicitation to trade (i.e. you can't ring clients to solicit orders); You may only take orders placed by clients on an unsolicited basis (i.e. they must call you); No recommendations; No staff trades."

11 August to 17 August 2005: Further Planning for Takeover Announcement 158 On 11 August 2005, Mr Bartels informed Mr Chatfield that Citigroup had acquired 29,616,134 shares in Patrick which it held in nominee accounts on behalf of Toll. This amounted to a stake of approximately 4.3% of Patrick. 159 On 13 August 2005, Mr Chatfield sent an email to Mr Dempsey and others. He said he wanted Citigroup and Carnegie Wylie to carefully consider some key elements in the takeover. These included determination of the appropriate premium for the opening offer. Mr Chatfield said: "The objective of the proposed starting price is to get credibility and momentum into our bid from the outset and to set target in play".

160 On the same day, 13 August 2005, Mr Dempsey sent an internal email to Mr Bartels and others. He said that an announcement of the takeover bid was getting close and that a rehearsal was planned for 16 August 2005. He also said: "Feedback from client to date is that our team has already distinguished ourselves from our co-advisor and the impact you guys could have in building Paul's confidence the day before launch will enhance the value of our advisory offering.

This transaction if successful will create a $10bn client for which we will be cemented at their 'house bank'".

161 About 10:30pm on 13 August 2005, Mr Dempsey replied to Mr Chatfield's request for advice on the quantification of the premium. Mr Dempsey said that his team had run "various scenarios" and taken a fresh look at relevant precedents. He provided Mr Chatfield with a brief summary of the results of this analysis. 162 On 14 August 2005, a member of the Carnegie Wylie team sent Mr Dempsey and other IBD personnel an analysis of premiums paid in various hostile scrip bids. The analysis was based on a range of share prices for the target company from one day to three months prior to the announcement. 163 A document sent by Mr Dempsey to Mr Chatfield on the same day, 14 August 2005, contained further analysis of premiums paid in other takeovers. As with the Carnegie Wylie analysis the calculations were based on dates from one day to three months prior to the announcement. 164 On 15 August 2005, Citigroup prepared a draft document for discussion of the "Key Transaction Marketing/Selling Themes" for Project Douro. The document anticipated certain key questions that may be asked by the investment community, and proposed draft standard answers. One question was "Is this your final offer?" As to this, the draft answer called for a response which emphasised the premium to Para's pre-announcement price. 165 On the same day, 15 August 2005, Mr Dempsey again notified Mr Bartels, Mr Sinclair, Mr Roberts and others that a rehearsal had been scheduled for 16 August 2005 ahead of a planned announcement of the bid on 17 August 2005. Mr Dempsey's email stated that Toll would be looking for "real time feedback, questions and areas of attack from the target". 166 However, on the evening of 15 August 2005 Mr Bartels received an email from Mr Dempsey advising that the announcement date was likely to be postponed until 22 August 2005, with the effect that the rehearsal would be rescheduled for Sunday 21 August 2005. 167 On 17 August 2005, Citigroup prepared a revised draft of the announcement of the proposed acquisition. The draft included a statement that, based on the closing price on the ASX on "[#]August 2005", for shares in Toll and Virgin, the consideration offered represented: "a premium of [#]% to the Patrick Corporation's [closing Price on one month Volume Weighted Average Price (VWAP) to] [#] August 2005."

18 August 2005: Press Speculation on Toll Bid; Virgin Announces Profit Downgrade 168 On the morning of 18 August 2005, The Sydney Morning Herald and The Age newspapers reported rumours of a possible takeover of Patrick by Toll. 169 The Sydney Morning Herald article appeared under the headline "Toll mum on bid for Patrick". The Age's headline was "Hungry Toll stalks transport titan". 170 Each of the articles reported that Toll was believed to be mulling over a AUD$4 billion plus takeover of Patrick. They also stated that Mr Little had declined to comment on the speculation. 171 At approximately 2:37pm, Virgin made an announcement to the ASX that its profit forecast would be downgraded. 172 At approximately 3:27pm, Patrick also made an announcement to the ASX about profit downgrade. It said that the downgrade of Virgin's profit forecast would also mean a profit downgrade for Patrick. 173 Trading in Patrick shares had opened strongly on 18 August 2005 reaching an intra-day high of AUD$6.13 following the publication of the Sydney Morning Herald and Age articles. The price of Patrick shares fell after the announcement of Patrick's profit downgrade to close at AUD$5.70.

18 August 2005: Re-execution of Custodian & Nominee Appointment 174 On 18 August 2005, Mr Bartels sent an email to Mr Chatfield about the Custodian & Nominee Appointment. He said it had originally been executed by Toll Transport but that the purchaser of the pre-bid stake was Toll Holdings. He asked Mr Chatfield to re-execute the document on behalf of Toll Holdings. 175 The Custodian & Nominee Appointment was re-executed by Toll Holdings and Citigroup on 18 August 2005. The document was executed in the same terms as that which had been signed by Toll Transport. It incorporated Citigroup's standard Terms of Business, which included the terms that I have set out at [106] above.

Market Trading in Patrick Shares on 19 August 2005 176 On the morning of 19 August 2005, the Australian Financial Review's 'Street Talk' column commented on the rumours of Toll's bid. It said that it was the rumour that would not go away and continued as follows: "The view that expansive transport group Toll Holdings is in the throes of preparing a bid for Patrick Corporation has been dead-batted by Toll boss Paul Little a few times now. However, he hasn't actually denied it and few rumours last this long without some substance." (Original emphasis.)

177 Patrick shares had opened at AUD$5.75, which was 5˘ above the previous night's closing price. 178 Nearly 20.5 million Patrick shares changed hands that day. This was more than twice the volume of trading that had taken place the previous day when approximately 9 million shares had been traded. 179 A number of brokers or institutions were active in the market for Patrick shares. These companies and their respective proportions of total value traded, as set out by Mr Bartels, were: "JP Morgan 19.6% Deutsche 11.2% GSJBWere 7.6% ABN Amro 7.6% Citigroup Wealth 7.0% Macquarie Insto 6.9% … Citigroup 2.7%"

180 The closing price of Patrick shares was AUD$6.45.

The Events of 19 August 2005 181 I have already referred in some detail to Mr Manchee's purchases of Patrick shares on 19 August 2005 and to the conversations that took place within Citigroup on that day about that topic. I have also referred to the large volume of trading in Patrick shares on that day. 182 At approximately 3:45pm, a Bloomberg article was published, and was apparently available on trading screens, reporting on the sharp rise in Patrick's share price. The article stated that a reason for the gain was "the continuing ongoing rumours that Toll and Patrick are getting together." 183 The article went on to say that Patrick shares rose 57˘, or 10%, to AUD$6.28 at 3:47pm, having recovered from a 3.9% decline the previous day. 184 A similar story to the Bloomberg article was published by Dow Jones Newswire and available on the "IRESS" trading screen at about the same time. 185 Both the Bloomberg article and the IRESS screen appeared after the 'cigarette on the pavement' conversation between Mr Darwell and Mr Manchee which took place about 3:30pm. They also seem to have been released after Mr Manchee commenced his sales totalling nearly 200,000 Patrick shares at 3:37pm. 186 At just after 4:15pm Mr Dempsey emailed the text of the Bloomberg article to Mr Little, Mr Chatfield, Mr Bartels and others. He had earlier, at 3:33pm, suggested a telephone call to discuss the rumour being out, their readiness for Monday's announcement and their plans for the weekend, that is to say the rehearsal. 187 At nearly 9:15pm, Mr Dempsey sent an internal email to Mr Hanson of the IBD about the text of the proposed takeover announcement. He said to emphasise the attractiveness of the premium, it should be calculated on the closing price on 18 August 2005 "before friday's [sic] 13% climb in share price as consistent rumour over past month took hold".

Sunday 21 August 2005: The Rehearsal 188 On 20 August 2005, the day before the rehearsal, a Carnegie Wylie team member forwarded a premium analysis to Mr Little, Mr Chatfield, Mr Dempsey and others. This appears to be an updated version of the document sent on 14 August 2005 and referred to above at [162]. 189 The document showed different ways in which the premium could be calculated depending on the closing price of Patrick shares on various dates. The dates set out in the document were 19 August 2005, 18 August 2005, 1 month VWAP to 26 July 2005, 1 month VWAP to 19 August 2005 and 3 month VWAP to 19 August 2005. 190 Based on offer prices from AUD$6.50 to AUD$7.00, the calculation of the premium at close of business on 19 August 2005 produced an implied premium which was substantially lower than any of the other selected bases. 191 The Sunday rehearsal on 21 August 2005, held at Citigroup's Sydney offices, was attended by about 20 to 30 persons, all involved in various ways in the preparation for the bid. Mr Little, Mr Chatfield and other officers of the Toll group were present. So too were about 10 Citigroup representatives, representatives of Carnegie Wylie, as well as solicitors from Clayton Utz, who were acting for Toll. 192 The representatives of Citigroup who attended the rehearsal included Mr Roberts, Mr Dempsey and Mr Bartels. I accept Mr Bartels' evidence that the presentation given at the rehearsal was the first occasion on which he became aware of the final bid price. As he explained in his evidence, he was not part of the IBD team advising on the takeover and was not asked to attend advisory meetings or any of the private meetings that occurred during the rehearsal. 193 The rehearsal commenced at about 4pm. At about that time, Mr Bartels received from Mr Lunny a draft equities briefing sheet. This type of document is apparently intended to summarise the ASX announcement and other pertinent information for investors. It is an internal Citigroup document, not used for communications with clients. 194 A final draft of the equities briefing sheet was emailed to Mr Bartels shortly before 8pm. The terms of offer stated in the document included the following: "17.5% premium to Patrick's closing share price on Thurs 18 August 2005 (before market rumours drove stock price up 13% on 19 August 2005)

20.3% premium to one month VWAP to 26 July 2005, the day before media and market speculation arose about a possible takeover bid for Patrick by Toll."

195 Shortly before 9:30pm, Mr Bartels sent an internal email which was copied to certain IBD personnel including Mr Dempsey. The email stated that Mr Bartels had determined that "the Internal Marketing Material for Project Douro" was complete and accurate. The documents included the equities briefing sheet which contained the offer terms I have set out in the preceding paragraph. 196 I accept Mr Bartels' evidence that he was not involved in the determination of the reference points for the calculation of the premium. I also accept that he did not advise on that question. 197 Shortly before 11pm, Mr Bartels sent an email to Mr Roberts, Mr Dempsey and others within Citigroup stating that it was expected that the takeover offer would be announced on Monday morning at 8am. 198 The email went on to say that Citigroup had been working on the project for nearly eight months and that it had accumulated a strategic stake of 4.3%. This was a reference to the pre-bid shareholding in Patrick that Citigroup had acquired on behalf of Toll. The email also stated that there had been "some issues with compliance and legal".

22 August 2005: The Announcement 199 Toll announced its offer for Patrick at 8:30am on Monday, 22 August 2005. The media release stated that under the proposal Patrick shareholders would receive 0.4 Toll shares, $0.75 cash and a special dividend from Patrick of 0.3 Virgin shares, for each share in Patrick. 200 The combined value of the offer was said to equal AUD$6.70 per Patrick share, based on the closing prices on the ASX on 19 August 2005 of Toll and Virgin. This was said to represent "a premium of 20.3% to Patrick's one month VWAP to 26 July 2005, the day before media and market speculation arose about a possible bid by Toll". 201 The media release also contained a statement about the attractive premium for Patrick shareholders in very similar terms to that which was recorded in the equities briefing sheet. I will set out those paragraphs in full as they appeared in the media release: "The combined value of the offer per Patrick share represents a:

"17.5% premium to Patrick's closing share price on Thursday 18 August (before market rumours of a Toll acquisition proposal drove the Patrick stock price up 13% on 19 August)

20.3% premium to Patrick's one month VWAP to 26 July 2005, the day before media and market speculation arose about a possible takeover bid for Patrick by Toll, and a 14.5% premium to the 1 month VWAP to 19 August."

202 Citigroup held an internal briefing session at about 8:30am. Mr Roberts, Mr Sinclair and Mr Bartels were present along with many other senior executives. Mr Monaci was also present together with representatives of the Compliance department. 203 Toll, Patrick and Virgin were added to the Restricted Trading List with a Category 1 restriction immediately after Toll announced the Toll/Patrick transaction. At the meeting, Mr Bartels summarised the effect of the trading restriction which applied to Citigroup employees from that date, and some of the details of the equities briefing sheet.

22 - 24 August 2005: ASX and ASIC Commence Considerations of Whether Insider Trading Occurred 204 On 22 August 2005, a file note produced by the ASX's surveillance division stated that further "enquiries may need to be made into possible insider trading" in Patrick shares between 17 and 19 August 2005. The file note stated that identifying insider trading would be difficult because of the "intense media and market speculation of a bid by Toll Holdings in the lead up" to that period and in particular during the period itself; that is to say between 18 and 19 August 2005. 205 The file note also stated that a separate enquiry was "looking at whether Toll Holdings may have breached its continuous disclosure obligations by not notifying the market earlier of its proposed bid for Patrick". Later, the ASX determined not to pursue Toll because any breach of that obligation was inadvertent. 206 On 24 August 2005, an ASIC file note of a conversation with Mr Darryl Harvey, an analyst in the surveillance division of the ASX, and another ASX officer, Mr David White, records the effect of their discussion about an apparent query raised with the Toll group. The file note states that Mr White was concerned that on 19 August 2005 there was nothing in the press of sufficient specificity to require a response, but the pattern of trading behaviour may indicate that ASX Listing Rule 3.1A.2 was lost. Listing Rule 3.1.A.2 refers to confidential information and is a subparagraph of the exception in Listing Rule 3.1.A to the continuous disclosure requirement in Listing Rule 3.1.

September 2005: ASX Notification to ASIC of Possible Contravention; ASIC Gives Notice to Citigroup Under s 912C of the Corporations Act 207 On 2 September 2005, the ASX notified ASIC pursuant to s 792B(2) of the Corporations Act of its reasons to suspect a contravention by Citigroup of the insider trading provisions. 208 The notification included a graph of trading in Patrick shares for the month of August 2005. It contained the following useful statement of its preliminary enquiries as to trading on those dates: "As can be seen from graph, both the price and volume of PRK began to increase on 18 August 2005. This is most likely due to the Sydney Morning Herald article speculating on a Toll Holdings bid for Patrick … and the announcement by Patrick of a profit downgrade …

The price of PRK opened strongly on 18 August 2005, reaching an intra-day high of $6.13 apparently on the back of the Sydney Morning Herald takeover speculation, before falling in the afternoon and closing at its low for the day of $5.70 following the profit downgrade.

It was at approximately 14:55 on 19 August 2005, that the price of PRK rose strongly. Between 14:55 and the close of trading, the price of PRK increased from $5.99 to a high of $6.53. Turnover during this period also surged. Of the 20,467,906 PRK traded on 19 August 2005, 9,957,898 PRK traded in the period from 14:55 to the close of trading (49% of turnover)."

209 The ASX notification also contained the following observation as to one of the reasons why there was strong speculation in the market about a bid for Patrick: "One other aspect at Citigroup's involvement is the failure by its transport analyst, Jason Smith, to publish any research on Patrick on 19 August 2005. This is particularly noteworthy given that Mr Smith has a high profile and the fact that Patrick had released a profit downgrade on 18 August 2005. It might have been considered unusual that Mr Smith did not publish on 19 August 2005 and this may have triggered some of the buying in PRK by Citigroup in particular."

210 ASIC issued a notice to Citigroup under s 912C(1) of the Corporations Act on 1 September 2005. Section 912C(1) confers power on ASIC to give notice to a financial services licensee directing the licensee to give ASIC a written statement containing specified information about the financial services provided by the licensee or its business. Citigroup responded to the notice on 7 September 2005.

Mr Chatfield's Evidence 211 Mr Chatfield gave evidence before me. No issue arose as to his credit. I accept his evidence. 212 Mr Chatfield has been the Chief Financial Officer of Toll Holdings since 1997. He has been a director since 1998. 213 A substantial part of Toll's business strategy has been to make acquisitions of rival and complementary businesses. A large part of its business has been built through mergers and acquisitions which Mr Chatfield regards as "a core competency" of Toll. 214 In the period of 8 years before August 2005, Toll had made acquisitions of more than 30 other businesses. Four of those were acquisitions of public companies. Mr Chatfield's evidence was that he, and a lot of senior people within Toll, are "well-versed" in acquisitions. 215 Such is Toll's experience in acquisitions that it does not always engage an external adviser. One reason why it would is where the acquisition requires some funding. Another is where a special relationship with government is involved. 216 Before 2005, Toll's management knew large parts of Patrick's business very well. This appears to have been a reference to, inter alia, the joint venture between Toll and Patrick in the intermodal logistics and rail business of Pacific National. 217 During the second half of 2004, Mr Chatfield and other Toll executives had engaged in extensive discussions with the Chairman and Managing Director of Patrick. The discussions broke down towards the end of December 2004. Shortly after that time Toll decided to "accumulate some shares in Patrick". 218 That was the precursor to Mr Chatfield's instruction to Mr Bartels in January 2005 to acquire, discreetly, a stake of up to 4.9% in Patrick. Mr Chatfield put a limit of AUD$6.25 per share on the purchase of that parcel. 219 Mr Chatfield attended the presentations made by Citigroup's IBD to Toll in which Citigroup 'pitched' for the mandate. Mr Chatfield was not involved in the negotiation of the terms of the Custodian & Nominee Appointment but he was involved in the negotiation of fees. 220 Nor was Mr Chatfield involved in the actual negotiation of the wording of the mandate letter. He was engaged in the negotiation of the fees but it was Toll's internal lawyers who assisted Toll's Company Secretary, Mr Bernard McInerney, in the settlement of the written terms of the document. 221 Mr Chatfield did not pay any "particular attention" to the wording of the mandate letter that stated that the fee structure had been agreed to ensure that the interests of Toll and Citigroup were well aligned. Nor did he pay any real attention to the acknowledgment clause which contained the exclusion of a fiduciary relationship. 222 Other investment banks had 'pitched' to Toll to seek the mandate before Citigroup's ultimate appointment as co-adviser. 223 Mr Chatfield was satisfied with the terms of the retainer agreement entered into with Carnegie Wylie. As with the Citigroup mandate letter, Mr Chatfield did not negotiate the actual wording of the Carnegie Wylie agreement. This was again managed by Mr McInerney with advice from Toll's in-house lawyers. 224 By 8 August 2005, and no doubt before that date, it was Toll's desire to market the bid at a price which demonstrated a solid premium to attract Patrick shareholders. Toll also wished to select a price that supported the Toll share price because the offer consisted largely of scrip. 225 Mr Chatfield's view between 8 and 22 August 2005 was that it would have been better for the price of Patrick shares to be lower because that would have produced a higher implied premium. 226 The following exchange took place with Mr Chatfield during examination in chief about his discussions with Citigroup as to the selection of a reference date for the calculation of the premium. "Do you recall yourself being involved in discussions with Citigroup officers during the period 8 to 22 August 2005 about the premium that Toll should offer Patrick shareholders over and above the market price?--- I do.

And are you able to tell his Honour from your recollection the nature of the advice you recall from Citigroup and the discussions you had about how the premium should be calculated for the purposes of being marketed after a bid was made? --- I think we were concentrating on a date in July when there, I think it was the end of July, 26 July, where there was a spike in the Patrick share prices as a result of market rumour that a bid could potentially be made by Toll or somebody else and so we I think reasonably early along decided that that would be the appropriate date to measure our starting premium from. Well, sorry, your Honour, a VWAP which was referencing the date in essence where the market had not been taking into account any potential bid."

227 Later, Mr Chatfield gave the following evidence: "Can you explain to his Honour what, if any, relevance in your mind there was to Patrick's closing price on 19 August 2005 in the considerations which weighed with you on 20 and 21 August before the announcement on 22 August? --- Well, there was no particular, from my point of view, nothing really turned on the Patrick price at 19 August. As I say we had already by that stage had our view that 26 July was the more relevant date."

228 Mr Chatfield, with the advice of Citigroup and others, settled the wording in the takeover announcement that made reference to the premium in respect of the price on 18 August 2005: "Before market rumours of a Toll acquisition proposal drove the Patrick stock price up 13% on 19 August".

229 Citigroup did not inform Mr Chatfield between 19 and 22 August 2005 that Citigroup had traded on its own account in the market for Patrick shares on 19 August 2005. Nor did Citigroup seek permission from Toll to trade on its own account. Mr Chatfield said that if he had been given the choice, he would have preferred Citigroup not to do so. 230 Mr Chatfield, and senior Toll executives, were in a good position, by reason of their extensive experience, to make up their minds about questions of price and strategy for the takeover bid. They were of the view that the opening bid would not be the final price. They considered that the price offered and the premium in the opening bid were only two of the elements in the attractiveness of the offer. 231 In selecting the price of the bid on 22 August 2005 Mr Chatfield was "not particularly" concerned with the share price of Patrick on 19 August 2005. 232 Mr Chatfield's cross-examination concluded with the following exchange: "Now, if I could just ask you some more general questions about your understanding of some things concerning Citigroup. You knew that Citigroup was a large financial conglomerate, didn't you? --- Yes, I did.

And in fact in addition to having Citigroup accumulate shares you had arranged funding for the offer with them?---That is correct.

You knew that Citigroup didn't act exclusively for Toll? --- That is right.

And you were aware that in the multifarious activities that Citigroup engaged in all of the business units, there was a potential that it could do something that might adversely affect Toll's interests? --- Yes.

You knew that Citigroup had a proprietary trading desk? --- Yes.

You knew that the proprietary trading desk could operate for the benefit of Citigroup as long as knowledge of Toll's confidential information didn't leak to the proprietary trading desk? --- That's correct.

You didn't expect that Citigroup would suspend any of its proprietary trading activities during the period of the mandate? --- Well, it's not something I thought about at all.

From your perspective, was there any difference between Citigroup trading on its own account or trading on behalf of other clients in Patrick shares? ---No.

Indeed, one could go further, couldn't one, and say there's no difference from your point of view between Citigroup's trading and the trading of anyone else in the market? --- No, there's no difference.

So long as they were not using Toll confidential information? --- Yes, that's right.

Did you consider that Citigroup had any obligation to inform Toll of its proprietary trading in Patrick? --- No, I didn't. It's not something that I turned my mind to at all. I think we didn't expect one way or another that they would trade directly in Patrick.

It's just something that you didn't turn your mind to? --- Correct.

But you didn't believe that they had any obligation to inform you that they were trading, if they did? --- No, we wouldn't have expected them to, as you say, though, as long as there was no possibility of using confidential information to Toll.

So it follows, doesn't it, Mr Chatfield, that if on 19 August Citigroup had told you that they had been engaged in proprietary trading up to that time, it wouldn't have made any difference to any of the decisions that you made. --- That's correct."

PART III - THE LEGISLATIVE FRAMEWORK AND THE ISSUES THAT ARISE

The Legislation 233 The following statutory provisions are relevant to the issues which arise. 234 Section 912A(1)(aa) of the Corporations Act provides that a financial services licensee must have in place adequate arrangements for the management of conflicts of interest. I will set out the whole of that subsection as follows: "Section 912A General obligations

(aa) have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business …" 235 The obligation to have in place adequate arrangements applies in relation to activities undertaken by the licensee "in the provision of financial services." 236 Section 766A(1)(a) of the Corporations Act provides that a person provides a financial service if it provides "financial product advice". 237 The term "financial product advice" is defined, relevantly, by s 766B(1) as follows: "(1) For the purposes of this Chapter, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that: (a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or (b) could reasonably be regarded as being intended to have such an influence." 238 A financial product includes a security: see s 764A(1)(a) of the Corporations Act. Securities include shares: see s 92(1)(b) of the Corporations Act. 239 Provision is made in s 766A(2)(b) of the Corporations Act for the Corporations Regulations to prescribe the circumstances in which persons are taken to provide, or are taken not to provide, a financial service. 240 Regulation 7.1.29(1) of the Corporations Regulations provides that for the purposes of s 766A(2)(b) of the Corporations Act, a person who provides an eligible service is taken not to provide a financial service if the person provides the service in the course of conducting an exempt service, and as a necessary and integral part of the exempt service. 241 The relevant exemption in the present case is contained in Regulation 7.1.29(3)(c) which provides relevantly as follows: (3) For this regulation, a person who does any of the following provides an exempt service: (c) provides advice on the acquisition or disposal, administration, due diligence, establishment, structuring or valuation of an incorporated or unincorporated entity, if the advice: (i) is given to a person who is, or is likely to become, an interested party in the entity; and (ii) to the extent that it is financial product advice - is confined to advice on a decision about: (A) securities of a body corporate, or related body corporate, that carries on or may carry on the business of the entity; or (B) …; and (iii) does not relate to other financial products that the body corporate or the trustee of the trust may acquire or dispose of; and (iv) is not advice for inclusion in an exempt document or statement." 242 The Corporations Act and the ASIC Act both contain provisions prohibiting misleading and deceptive conduct. The Corporations Act prohibition is contained in s 1041H(1) which is as follows: "(1) A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive." 243 The ASIC Act prohibition is found in s 12DA(1) of the ASIC Act which provides: "(1) A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive." 244 Section 12CA(1) of the ASIC Act prohibits unconscionable conduct in the following terms: "(1) A person must not, in trade or commerce, engage in conduct in relation to financial services if the conduct is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories." 245 The insider trading prohibitions are contained in Part 7.10, Division 3 of the Corporations Act. 246 Section 1042A of the Corporations Act defines "information" to include: "(a) matters of supposition and other matters that are insufficiently definite to warrant being made known to the public; and (b) matters relating to the intentions, or likely intentions, of a person". 247 Section 1042A of the Corporations Act also defines the term "inside information". The definition is as follows: "inside information means information in relation to which the following paragraphs are satisfied:

(a) the information is not generally available; (b) if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of particular Division 3 financial products." 248 The term "material effect" is also defined in s 1042A of the Corporations Act. The definition is as follows: "material effect, in relation to a reasonable person's expectations of the effect of information on the price or value of Division 3 financial products, has the meaning given by section 1042D."

249 Section 1042C(1) of the Corporations Act deals with the meaning of when information is "generally available". It provides: (1) For the purposes of this Division, information is generally available if:

(a) it consists of readily observable matter; or (b) both of the following subparagraphs apply: (i) it has been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in Division 3 financial products of a kind whose price might be affected by the information; and (ii) since it was made known, a reasonable period for it to be disseminated among such persons has elapsed; or (c) it consists of deductions, conclusions or inferences made or drawn from either or both of the following: (i) information referred to in paragraph (a); (ii) information made known as mentioned in subparagraph (b)(i). (2) None of the paragraphs of subsection (1) limits the generality of any of the other paragraphs of that subsection." 250 Section 1042D of the Corporations Act is as follows: "For the purposes of this Division, a reasonable person would be taken to expect information to have a material effect on the price or value of particular Division 3 financial products if (and only if) the information would, or would be likely to, influence persons who commonly acquire Division 3 financial products in deciding whether or not to acquire or dispose of the first‑mentioned financial products."

251 The relevant prohibition on insider trading is contained in s 1043A(1) of the Corporations Act. That subsection is as follows: "(1) Subject to this Subdivision, if:

(a) a person (the insider) possesses inside information; and (b) the insider knows, or ought reasonably to know, that the matters specified in paragraphs (a) and (b) of the definition of inside information in section 1042A are satisfied in relation to the information; the insider must not (whether as principal or agent):

(c) apply for, acquire, or dispose of, relevant Division 3 financial products, or enter into an agreement to apply for, acquire, or dispose of, relevant Division 3 financial products; or (d) procure another person to apply for, acquire, or dispose of, relevant Division 3 financial products, or enter into an agreement to apply for, acquire, or dispose of, relevant Division 3 financial products. Note 1: Failure to comply with this subsection is an offence (see subsection 1311(1)). For defences to a prosecution based on this subsection, see section 1043M.

Note 2: This subsection is also a civil penalty provision (see section 1317E). For relief from liability to a civil penalty relating to this subsection, see sections 1043N and 1317S."

252 The statutory defence of Chinese walls is enshrined in s 1043F of the Corporations Act which is as follows: "A body corporate does not contravene subsection 1043A(1) by entering into a transaction or agreement at any time merely because of information in the possession of an officer or employee of the body corporate if:

(a) the decision to enter into the transaction or agreement was taken on its behalf by a person or persons other than that officer or employee; and (b) it had in operation at that time arrangements that could reasonably be expected to ensure that the information was not communicated to the person or persons who made the decision and that no advice with respect to the transaction or agreement was given to that person or any of those persons by a person in possession of the information; and (c) the information was not so communicated and no such advice was so given."

The Issues 253 The following issues arise in these proceedings. The Conflicts Case 1. Whether the terms of the mandate letter were so precise in the regulation of what Citigroup could do, that there was no scope for the creation of any fiduciary duty by Citigroup to Toll. 2. Whether the exclusion of the fiduciary relationship in the mandate letter required Toll's informed consent. 3. Whether Toll gave its informed consent to the exclusion of a fiduciary relationship. 4. Whether it is an answer to a claim of breach of fiduciary duty that the relevant information (namely the entitlement to engage in proprietary trading) would not have affected Toll's decision. 5. Whether Citigroup had any of the five actual or potential conflicts alleged by ASIC. 6. Whether: (a) Citigroup was providing financial services to Toll for the purpose of s 912A(1)(aa) of the Corporations Act. (b) Citigroup's services were exempt services under Reg 7.1.29(3)(c), including whether Virgin carried on the business of Patrick for the purposes of subparagraph (c)(ii)(A). 7. Whether Citigroup had adequate arrangements in place for the management of conflicts of interest in accordance with s 912A(1)(aa) of the Corporations Act. 8. Whether Citigroup engaged in misleading or deceptive conduct under s 1041H of the Corporations Act or s 12DA of the ASIC Act by reason of the failure of Messrs Bartels, Roberts, Sinclair, Monaci and Scott to inform Toll that Citigroup had acquired shares in Patrick. 9. Whether Citigroup engaged in conduct that was unconscionable within the meaning of the unwritten law, under s 12CA of the ASIC Act by being in any of the five positions of conflict referred to above. The Insider Trading Case Case No 1 10. Whether Mr Manchee was an officer of Citigroup. 11. Whether Mr Manchee made a supposition that Citigroup was acting for Toll on a takeover of Patrick. 12. Whether the supposition was communicated to Mr Manchee by Mr Darwell. 13. Whether an uncommunicated supposition can constitute information within s 1042A of the Corporations Act. 14. Whether that supposition was generally available. 15. Whether the supposition would have had a material effect on the price of Patrick shares. Case No 2 16. Whether Messrs Bartels, Roberts, Sinclair, Scott and Monaci were in possession of the following information on 19 August 2005: (a) Citigroup was acting for Toll on the proposed bid for Patrick; (b) Citigroup knew that there was a substantial likelihood that Toll would launch the bid in the near future. 17. Whether that information was generally available. 18. Whether that information would have had a material effect on the price of Patrick shares. 19. Whether Citigroup's Chinese wallswere adequate arrangements within the provisions of s 1043F of the Corporations Act.

PART IV - THE CONFLICTS CLAIMS: THE ROLE OF INVESTMENTS BANKS AND A CONSIDERATION OF LEGAL PRINCIPLES

The Role of Investment Banks in the Financial System 254 The role and importance of investment banks in the efficient operation of the financial system has been reviewed in two recent articles: see Tuch A, "Investment Banks as Fiduciaries: Implications for Conflicts of Interest" (2005) 29 MULR 478; Tuch A, "Obligations of Financial Advisers in Change-of-Control Transactions: Fiduciary and Other Questions" (2006) 24 C&SLJ 488. 255 As Mr Tuch observes, the term "investment bank" is not capable of precise definition but the influence and importance of investment banks in the financial system is vast; they are integral to the efficient operation of the system: see 29 MULR at 484. 256 Major investment banks are listed public companies which operate internationally. They describe themselves, and are referred to, as global financial services firms and financial services conglomerates. They provide a diverse range of services including financial advisory services to corporations on mergers and acquisitions, issuing, buying and selling securities, investment research and transaction financing. This is not an exhaustive list: see 29 MULR at 485-486. 257 In a consultation paper published in 1992 by the United Kingdom Law Commission entitled Fiduciary Duties and Regulatory Rules (Consultation Paper No 124), the UK Law Commission pointed out that the organisational structure of the modern financial conglomerate has enhanced the possibility that the providers of these services will be exposed to potential conflicts of interest or duty with or to their clients: see Law Commission Consultation Paper at [1.1], [2.2], [2.4.12]. 258 The UK Law Commission observed at [2.2.1] that conflicts of interest and of duty and interest that arise from the organisational structure of financial conglomerates are primarily due to three factors. These are first, the range of products and services provided by the firms, second, the breadth of their customer bases and, third, the different capacities in which they conduct their businesses. 259 Mr Tuch goes so far as to observe that these factors have the result that conflicts are regarded as an inescapable feature of the business of investment banking: see 29 MULR at 487. 260 The Law Commission Consultation Paper gives examples of conflicts which may occur in takeovers. One such example is where the investment bank's corporate advisory department is advising a corporation which is making a hostile share swap bid for another company but another department of the bank, such as the department managing discretionary share trading accounts, is selling shares in the bidder. This could have the effect of depressing the bidder's share price contrary to its interests: see Law Commission Consultation Paper at [2.4.12(viii)]. 261 This example is indistinguishable from the events which occurred in the present case. Purchase by another department of the bank of shares in the target company may well be contrary to the bidder's interests. 262 As Mr Tuch points out, clients who are involved in, or considering undertaking, transactions such as mergers and acquisitions, will ordinarily engage an investment bank to provide financial advisory services for the transaction. He states that for large transactions it is usual to engage several investment banks. He also observes that, typically, the parties will enter into an engagement letter which details the terms of the contract between the parties: see 29 MULR at 488. 263 The financial advisory services supplied by an investment bank in a takeover involve decisions that go to the very core of the transaction. They include advising on the merits of entering into the transaction, valuation analyses, recommendations on strategy, advising as to timing, structure, and pricing of the transaction, advising on finance, and assisting in implementation of the takeover: see 29 MULR at 489. 264 Investment banks, together with the law firm(s) engaged by the client, work together as a team; they are integrated into the client's working group for the acquisition. They are involved in almost every aspect of it. A relationship of trust and confidence is implicit in the investment banks' role. It is not unusual for fees of tens of millions of dollars to be earned: see 29 MULR at 489, 505. 265 The thesis put forward by Mr Tuch is that the relationship between the client and the investment bank engaged to advise on a takeover is fiduciary in character. He comes to this view after a careful analysis of the authorities and their application to the nature and importance of the role of investment banks in such transactions: see 29 MULR at 505, 509. A similar view was suggested in the Law Commission Consultation Paper at [2.4.6] - [2.4.7]. 266 However, as is recognised by the UK Law Commission and by Mr Tuch, the question of whether a fiduciary relationship exists, and the scope of any duty, will depend upon the factual circumstances and an examination of the contractual terms between the parties: see Law Commission Consultation Paper at [2.4.8], [3.3.1]; 29 MULR at 500-501. 267 No doubt, for this reason, investment banks have developed contractual techniques to modify or displace fiduciary obligations: see Law Commission Consultation Paper at [3.1.1]; 29 MULR at 502. The question of whether the mandate letter between Toll and Citigroup is effective to exclude a fiduciary relationship between the parties is at the heart of the present case. 268 The other techniques developed by investment banks to deal with potential conflicts of interest are structural techniques under which the bank is organised in a way which effectively manages conflicts, or perhaps eliminates them. A favoured technique for dealing with conflicts that arise from carrying on a financial services business in a conglomerate is the use of Chinese walls: see Law Commission Consultation Paper at [4.5.1], [4.5.4] and [4.5.5]. 269 An issue which arises in the proceedings is whether Citigroup's Chinese walls were sufficient to eliminate or adequately manage conflicts of interest: see [252] above; see also Issues 5, 7 and 19 below.

The Identification of a Fiduciary Relationship 270 As Gaudron and McHugh JJ observed in Breen v Williams (1996) 186 CLR 71 at 106, "Australian courts have consciously refrained from attempting to provide a general test for determining when persons […] stand in a fiduciary relationship". It may be, as their Honours said, that the term "fiduciary relationship" defies definition. This is because of the difficulty of stating a comprehensive principle suitable for application to different types of relationships that carry different obligations: see Hospital Products at 69 per Gibbs CJ; News Limited v Australian Rugby Football League Limited (1996) 64 FCR 410 at 538 per Lockhart, von Doussa and Sackville JJ. 271 The courts have recognised certain classes of persons as falling within established categories of fiduciary relationships. Examples of these include trustee and beneficiary, agent and principal, solicitor and client, director and company, employee and employer, and partners: see Hospital Products at 68 per Gibbs CJ, at 96 per Mason J. 272 Apart from the established categories, perhaps the most than can be said is that a fiduciary relationship exists where a person has undertaken to act in the interests of another and not in his or her own interests but all of the facts and circumstances must be carefully examined to see whether the relationship is, in substance, fiduciary: see Hospital Products at 71-72 per Gibbs CJ; News Limited at 541 per Lockhart, von Doussa and Sackville JJ. 273 Other factors that have been referred to in the authorities as pointing to the existence of a fiduciary relationship will also be important. But they will be so only to the extent that they disclose an expectation in one party that the other will act in his or her interests. 274 This is encapsulated in the following remarks of Professor Finn (as his Honour then was) in "The Fiduciary Principle": see Youdan TG (ed), Equity Fiduciaries and Trusts (Law Book Co, 1989) at p 46-47: "What must be shown, in the writer's view, is that the actual circumstances of a relationship are such that one party is entitled to expect that the other will act in his interests in and for the purposes of the relationship. Ascendancy, influence, vulnerability, trust, confidence or dependence doubtless will be of importance in making this out, but they will be important only to the extent that they evidence a relationship suggesting that entitlement. The critical matter in the end is the role that the alleged fiduciary has, or should be taken to have, in the relationship. It must so implicate that party in the other's affairs or so align him with the protection or advancement of that other's interests that foundation exists for the 'fiduciary expectation."

275 Lockhart, von Doussa and Sackville JJ considered that these remarks contain an important question "if not the question": see News Limited at 541. La Forest J also agreed with Professor Finn's remarks in Lac Minerals Limited v International Corona Resources Limited (1989) 61 DLR (4th) 14 at 26.

The Co-existence of Contractual and Fiduciary Relationships and the Effect of Exclusion Clauses 276 In Hospital Products, Mason J observed at 97 that "contractual and fiduciary relationships may co-exist". His Honour said that if a fiduciary relationship is to exist between parties to a contract, the fiduciary relationship must conform to the terms of the contract. He went on to say that: "The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction."

277 The observations of Gummow J in Breen v Williams at 132-133 are to the same effect. But his Honour also pointed out that a contractual term may be so precise in its regulation of what a party may do that there is no scope for the creation of a fiduciary duty. 278 It follows from these statements of principle that it is open to the parties to a contract to exclude or modify the operation of fiduciary duties. This was the view of the Law Commission Consultation Paper which was reached after a careful examination of the authorities: see at [3.3.12]. 279 That view is supported by both Australian and English authority: see Chan v Zacharia (1984) 154 CLR 178 at 196 per Deane J; News Limited at 539 per Lockhart, von Doussa and Sackville JJ; Noranda Australia Limited v Lachlan Resources NL (1988) 14 NSWLR 1 at 17 per Bryson J; Woolworths Limited v Kelly (1991) 22 NSWLR 189 at 225 per Mahoney JA; Kelly v Cooper [1993] AC 205 at 213-214 per Lord Browne-Wilkinson. See also Henderson v Merrett Syndicates Limited [1995] 2 AC 145 at 206 per Lord Browne-Wilkinson. 280 It may well be that a fiduciary cannot exclude liability for fraud or deliberate dereliction of duty but beyond that there appears to be no restriction in the law to prevent a fiduciary from contracting out of, or modifying, his or her fiduciary duties, particularly where no prior fiduciary relationship existed and the contract defines the rights and duties of the parties: see Law Commission Consultation Paper at [3.3.13]; see also Law Commission, United Kingdom, Fiduciary Duties and Regulatory Rules, Report No 236 (1995) at [2.11], [7.3]. 281 The effect of the Australian and English authorities referred to above is that where a fiduciary relationship is said to be founded upon a contract, the ordinary rules of construction of contracts apply. Thus, whether a party is subject to fiduciary obligations, and the scope of any fiduciary duties, is to be determined by construing the contract as a whole in the light of the surrounding circumstances known to the parties and the purpose and object of the transaction: see Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451 at [22] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ; Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at [40] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ; Lion Nathan Australia Pty Limited v Coopers Brewery Limited (2006) 156 FCR 1 at [46] per Weinberg J. The same approach applies to exclusion clauses: see Darlington Futures Limited v Delco Australia Pty Limited (1986) 161 CLR 500 at 510 per Mason, Wilson, Brennan, Deane and Dawson JJ; Andar Transport Pty Limited v Brambles Limited (2004) 217 CLR 424 at [122] per Callinan J.

An Adviser May Have Fiduciary Obligations 282 In Hadid v Lenfest Communications Inc [1999] FCA 1798 at [817], Lehane J observed that advisers may, and often do, have fiduciary obligations. 283 A fiduciary relationship arises between a financial adviser and its client where the adviser holds itself out as an expert on financial matters and undertakes to perform a financial advisory role for the client: see Daly v The Sydney Stock Exchange Limited (1986) 160 CLR 371 at 377 per Gibbs CJ, 385 per Brennan J; Aequitas v Sparad No 100 Limited (formerly Australian European Finance Corporation Limited) (2001) 19 ACLC 1006 at [307] per Austin J. 284 The same principle will usually apply to financial advisers and corporate advisers. Each will owe fiduciary obligations to the client because each undertakes to act in the client's interests and not solely in its own interests: see Aequitas at [310] per Austin J. This is consistent with the principle stated by Mason J in Hospital Products at 96-97. 285 A person may be in a fiduciary relationship as to some aspects of the relationship but not others: see New Zealand Netherlands Society 'Oranje' Incorporated v Kuys [1973] 2 All ER 1222 at 1225-6 per Lord Wilberforce; see also Noranda Australia v Lachlan Resources at 15-17 per Bryson J. Thus, a bank which gives its customers financial advice in the course of a transaction that includes an advance of money to the client may be in a fiduciary relationship with the client in its role as adviser. The bank may be expected to act in its own interests in ensuring the security for the loan but it will undertake fiduciary obligations to the client if it creates an expectation that it will advise in the customer's interests on the wisdom of the investment: see Commonwealth Bank of Australia v Smith (1993) 42 FCR 390 at 391 per Davies, Sheppard and Gummow JJ. 286 Vulnerability of the client is one of the indicia of the fiduciary relationship. But this would appear to flow from the special opportunity of the adviser to abuse the expectation of loyalty: see Breen v Williams at 134 per Gummow J; Aequitas at [313] per Austin J; cf News Limited at 541 per Lockhart, von Doussa and Sackville JJ; Hospital Products at 97 per Mason J.

The Scope of the Fiduciary Obligations 287 The subject matter over which any fiduciary obligations will extend must be determined by the character of the venture or undertaking: see Birtchnell v The Equity Trustees, Executors and Agency Company Limited (1929) 42 CLR 384 at 408 per Dixon J; United Dominions v Brian at 13 per Mason, Brennan and Deane JJ; News Limited at 539 per Lockhart, von Doussa and Sackville JJ. This is to be ascertained from the terms of the agreement and the course of dealing between the parties: see News Limited at 539 per Lockhart, von Doussa and Sackville JJ; Australian Breeders Co-operative Society Limited v Jones (1997) 150 ALR 488 at 514 per Wilcox and Lindgren JJ; Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at [194] per Spigelman CJ, Sheller JA and Stein JA. 288 The scope of the fiduciary duties will vary and is to be determined according to the nature of the relationship and the facts of the case: see Hospital Products at 69 per Gibbs CJ, 102 per Mason J. 289 The distinguishing or over-riding duty of a fiduciary is the obligation of undivided loyalty: see Gibson Motorsport Merchandise Pty Limited v Forbes (2006) 149 FCR 569 at [11] per Finn J; Beach Petroleum at [201] per Spigelman CJ, Sheller JA and Stein JA; Bristol and West Building Society v Mothew [1998] Ch 1 at 18 per Millett LJ. 290 In Australia, the duty of loyalty is proscriptive rather than prescriptive in nature: see Breen v Williams at 113 per Gaudron and McHugh JJ, 137-138 per Gummow J; Pilmer v Duke Group Limited (In Liq) (2001) 207 CLR 165 at [74] per McHugh, Gummow, Hayne and Callinan JJ. 291 This duty embodies "the twin themes" of preventing undisclosed conflict of duty and interest (or of duty and duty), and of prohibiting misuse of the fiduciary position: see Chan v Zacharia at 198-199 per Deane J; Gibson Motorsport at [12] per Finn J. 292 The nature of the fiduciary obligation is encapsulated in the following remarks of Millett LJ in Bristol and West Building Society v Mothew at 18: "The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr. Finn pointed out in his classic work Fiduciary Obligations (1977), p. 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary."

Informed Consent 293 A person occupying a fiduciary position will be absolved from liability for what would otherwise be a breach of duty by obtaining a fully informed consent: see CBA v Smith at 393 per Davies, Sheppard and Gummow JJ. 294 There is no precise formula for determining whether fully informed consent has been given; it will be a question of fact in all the circumstances of each case: see Maguire v Makaronis (1997) 188 CLR 449 at 466 per Brennan CJ, Gaudron, McHugh and Gummow JJ; see also CBA v Smith at 393 per Davies, Sheppard and Gummow JJ. 295 In order to be exonerated, a fiduciary must give full and frank disclosure of all material facts: see Kuys at 1227 per Lord Wilberforce. Consent need not be given expressly; it may be implied in all the circumstances: see Woolworths v Kelly at 212 per Samuels JA, at 234 per Mahoney JA; see also Our Lady's Mount Pty Limited (as trustee) v Magnificat Meal Movement International Inc (1999) 33 ACSR 163 at [128] per Muir J. 296 The sufficiency of disclosure may depend on the sophistication and intelligence of the person to whom disclosure is required to be made: see Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22 at [107] per Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ.

A Special Instance of Conflict 297 The authorities which deal with time charging by solicitors reveal a special instance where a solicitor has a conflict between his or her own interest in earning fees, and the duty to the client. A central question in these proceedings is whether the principles stated in the authorities on solicitors apply where the alleged fiduciary relationship is not one of the established categories. 298 A solicitor who wishes to enter into a time charging costs agreement with the client must make full disclosure to the client of all the implications of such an agreement: see Foreman at 435-437 per Mahoney JA; Re Morris Fletcher v Cross' Bill of Costs [1997] 2 Qd R 228 at 243 per Fryberg J; McNamara Business & Property Law v Kasmeridis [2007] SASC 90 at [28] - [31] per Doyle CJ. 299 This principle applies whether or not the costs agreement is made before the solicitor is instructed: see Symonds v Raphael (1998) 148 FLR 171 at 186-187 per Baker and Burton JJ; see also McNamara at [38] per Doyle CJ. The reason given in those authorities for the proposition that the solicitor must make full disclosure even before the contract of retainer is that the fiduciary relationship may arise before the solicitor is actually retained: see United Dominions v Brian at 11-12 per Mason, Brennan and Deane JJ. 300 In Foreman, Mahoney JA said at 435 that fiduciary obligations, including full disclosure, exist not only in the carrying out of an agreement already made between a solicitor and client "but also in respect of the making of it."

301 Mr Walker submitted that this observation by Mahoney JA indicates that the disclosure obligation applies to the making of a contract where a person who would otherwise be in a fiduciary relationship seeks to exclude fiduciary obligations in the terms of the contract. 302 However, I do not consider that this submission provides an answer to the conundrum presented by the apparent exclusion of the fiduciary relationship in the present case. There are two reasons for this. 303 First, the authorities dealing with solicitors' costs agreements have, as their foundation, the Court's inherent jurisdiction over solicitors and the fiduciary nature of the solicitor and client relationship as an established fiduciary category: see McNamara at [29] per Doyle CJ. 304 Indeed, in Foreman at 435, Mahoney JA specifically pointed out that a solicitor is in a fiduciary position vis-ŕ-vis the client and/or in a position of influence. Hence the need for the solicitor to give the client advice that would enable a proper understanding of the operation and effect of a time based costs agreement: see McNamara at [28] per Doyle CJ. 305 This points to a limitation of the principle to those who fall within an established category of fiduciary relationship or, at very least, to those who carry fiduciary obligations before the execution of the contract, as in United Dominions v Brian. 306 The second reason why the principle is not applicable in the present proceedings is that ASIC's case was that the fiduciary relationship between Citigroup and Toll arose from the mandate letter. ASIC specifically eschewed any suggestion that the fiduciary relationship arose prior to the execution of the mandate letter on 8 August 2005. 307 It follows that there is no place in these proceedings for the application of the principle that a person who is already subject to fiduciary obligations must obtain the client's fully informed consent to the exclusion or modification of those obligations.

Chinese Walls 308 A favoured technique for dealing with conflicts of interest which arise from the carrying on of business by large financial institutions is the use of Chinese walls. They are widely used by institutions in Australia, the United Kingdom, the United States and Canada: see Prince Jefri Bolkiah v KPMG [1999] 2 AC 222 at 238 per Lord Millett; see also Law Commission Consultation Paper at [4.5]. 309 Chinese walls are a means of restricting the flow of information between different departments of the same organisation: see Bolkiah at 238 per Lord Millett; see also Law Commission Consultation Paper at [4.5.1]. 310 In Bolkiah at 238, Lord Millett described Chinese walls as a technique for "managing" conflicts of interest. The use of this word is significant because it suggests that Chinese walls do not eliminate conflicts; they are no more than a technique for managing conflicts of interests which continue to exist. 311 Indeed, this is a distinction which is recognised in s 912A(1)(aa) of the Corporations Act. It imposes a duty upon a financial services licensee to have in place adequate arrangements for "the management of conflicts of interest". The statutory requirement is to be contrasted with the duty in equity of a fiduciary to eliminate or avoid conflicts: see Breen v Williams at 108 per Gaudron and McHugh JJ. Of course, one way of managing conflicts would be to eliminate them but s 912A(1)(aa) does not require a licensee to take that step: see the discussion by Mr Tuch, 29 MULR at 514-515. 312 Support for the proposition that Chinese walls do not eliminate conflicts may be found in the Law Commission Consultation Paper. At [4.5.1], the UK Law Commission referred to a paper by Professor Finn, "Fiduciary Law and the Modern Commercial World", Norton Rose Oxford Law Colloquium (1991) at p 13. Professor Finn pointed out that the vice is not the possibility of misuse of confidential information but, rather the "compromising of a fiduciary's duty of loyalty." 313 Further support may be found in the discussion of the authorities by the New South Wales Court of Appeal in Beach Petroleum at [199] - [206] per Spigelman CJ, Sheller JA and Stein JA. The duty of a fiduciary is one of undivided loyalty. The "no conflict" rule is based on practical considerations and recognises that the fiduciary's over-riding duty may be swayed by a conflicting interest. The existence of a Chinese wall cannot, of itself, overcome the prohibition against a fiduciary acting at the same time both for and against the same client. Indeed, it exposes the vice to which Professor Finn referred. 314 However, as the UK Law Commission observed, a financial conglomerate may obtain protection against any allegation of breach of the duty of loyalty if the client consents to the company carrying on business using Chinese walls as part of its organisational structure. The extent of the duty of loyalty would then be determined according to the contractual arrangements between the parties: see Law Commission Consultation Paper at [4.5.1]. 315 The scope of any duty, and the extent to which the existence of Chinese walls may protect against an allegation of breach would be determined not only by the express terms of the contract but also by any implied terms: see Kelly v Cooper at 213-215 per Lord Browne-Wilkinson. 316 Cases dealing with claims brought by former clients of solicitors and accountants to restrain the firm from acting against it show a willingness by the courts to accept the concept of Chinese walls as a means of quarantining information within the firm: see Bolkiah at 237-238 per Lord Millett; Photocure ASA v Queen's University at Kingston (2002) 56 IPR 86 at [61] per Goldberg J. 317 The relief sought in those cases turned upon the question of whether there was a risk of disclosure or misuse of confidential information. Lord Millett said in Bolkiah at 237-238 that there is no rule of law that Chinese walls are insufficient to eliminate the risk of disclosure but the Court should restrain the firm from acting unless satisfied that effective measures have been taken to prevent disclosure. 318 Thus, the question of whether Chinese walls are effective will be a question of fact in each case, although Lord Millett emphasised that the wall must be "an established part of the organisational structure", not created ad hoc: see Bolkiah at 239. The same approach must be taken in determining whether Chinese walls constitute adequate arrangements for the management of conflicts of interest within s 912(1)(aa) of the Corporations Act. 319 In Bolkiah, Lord Millett at 238 drew upon the observations in the Law Commission Consultation Paper to illustrate the type of organisational arrangements which would ordinarily be effective: see also Law Commission Consultation Paper at [4.5.2]. These are: - the physical separation of departments to insulate them from each other; - an educational programme, normally recurring, to emphasise the importance of not improperly or inadvertently divulging confidential information; - strict and carefully defined procedures for dealing with situations where it is thought the wall should be crossed, and the maintaining of proper records where this occurs; - monitoring by compliance officers of the effectiveness of the Chinese wall; - disciplinary sanctions where there has been a breach of the wall. 320 Nevertheless, warnings have been sounded in other authorities about the risk of leakage through Chinese walls. Thus, for example, Bryson J said in D & J Constructions Pty Limited v Head & ors trading as Clayton Utz (1987) 9 NSWLR 118 at 123: " …it is not realistic to place reliance on such arrangements in relation to people with opportunities for daily contact over long periods, as wordless communication can take place inadvertently and without explicit expression, by attitudes, facial expression or even by avoiding people one is accustomed to see, even by people who sincerely intend to conform to control."

321 A reminder that Chinese walls may sometimes be porous is to be found in the recent decision of Bergin J in Asia Pacific v Optus.

PART V: THE CONFLICTS CLAIMS - DETERMINATION OF ISSUES

Issue 1 - Fiduciary Relationship, Construction of the Mandate Letter 322 The authorities to which I have referred above at [276] - [281] make it clear that the question of whether any fiduciary relationship existed between Citigroup and Toll is to be determined by the proper construction of the mandate letter. 323 In Chan v Zacharia, Deane J said in plain terms at 196 that the parties to a partnership agreement could provide "that any fiduciary relationship between the partners was excluded." The observations of Mahoney JA in Woolworths v Kelly at [225] were to the same effect. His Honour said that fiduciary duties could be "varied or released" by contract. Also, in News Limited, a Full Court of this Court (Lockhart, von Doussa and Sackville JJ) said at 539 that whether there are any fiduciary obligations at all may depend on the terms of the contract. 324 It is difficult to see that the words of the mandate letter have anything other than their plain meaning. Citigroup was retained solely as an adviser to Toll, as an independent contractor and not as a fiduciary. The engagement of Citigroup as an "independent contractor and not in any other capacity" suggested that the parties had in mind the distinction between independent contractors and employees or agents; see for example Stevens v Brodribb Sawmilling Company Pty Limited (1986) 160 CLR 16 per Mason, Wilson, Brennan, Deane and Dawson JJ. Thus, these words also point against the assumption of any fiduciary capacity. 325 It is true, as is shown by Daly, Hadid and Aequitas, that an adviser may have fiduciary obligations to the client. But for the express terms of the mandate letter, the pre-contract dealings between Citigroup and Toll would have pointed strongly toward the existence of a fiduciary relationship in Citigroup's role as an adviser. 326 I have set out the pre-contract dealings in some detail because they were referred to by Mr Walker and they contain all of the indicia of a fiduciary relationship of adviser and client. 327 In summary, Citigroup gave Toll advice as to the wisdom and merits of making a bid for Patrick. Citigroup gave strategic advice which involved the use of its financial acumen, judgment and expertise to further Toll's interests. Citigroup worked closely with Toll as is evidenced by the presentations made before the execution of the mandate, as well as the large number of communications between them, both oral and by email. 328 Moreover, Citigroup actively "pitched" to obtain the mandate and it sought a primary role, comparing itself favourably with Carnegie Wylie from an advisory perspective. It emphasised its "access to global players" and its abilities, not just as a funder but also as an adviser. It promised to back the transaction "to the hilt even if it gets a little hairy". 329 In addition, Citigroup gave advice to Toll about many aspects of the transaction, including, in particular, extensive advice, prior to the execution of the mandate letter, as to the pricing of the offer and the calculation of the premium. Citigroup's advice was that the premium should be calculated so as "to convey the most optically appealing bid". 330 There were substantial negotiations as to the fees payable to Citigroup, and Citigroup ultimately secured success fees in the range of AUD$10 million to AUD$18 million. Fees of that order are testimony in themselves to a finding that Citigroup held itself out as an expert adviser on mergers and acquisitions, which points to the existence of a fiduciary relationship: see Daly at 377 per Gibbs CJ, 385 per Brennan J; Aequitas at [307], [310] per Austin J. 331 The mandate letter does not spell out the advisory services to be supplied by Citigroup, other than to describe them as financial advisory and investment banking services in connection with the proposed transaction as are customary and appropriate. 332 Customary financial advisory services would include those described by Mr Tuch, such as advising on the merits of entering into the transaction, strategic advice and advising on timing, structure and pricing: see [263] above. The services which would be considered to be appropriate would also be determined by reference to those supplied by Citigroup before the execution of the mandate letter, as part of the relevant factual matrix. 333 However, ASIC did not suggest that the factual matrix, or the object or purpose of the mandate letter, could bear upon the proper construction of the acknowledgment that the relationship between the parties was not fiduciary. 334 Nor did ASIC argue that the words "including as a fiduciary" should be limited or read down by anything else in the terms of the lengthy acknowledgment. 335 It is true, as Frankfurter J said in Securities and Exchange Commission v Chenery Corporation 318 US 80 (1942) at 85, that "to say a man is a fiduciary only begins the analysis": see the citation in Beach Petroleum at [185] per Spigelman CJ, Sheller JA and Stein JA. But it is otherwise where the parties acknowledge that they are not in a fiduciary relationship. In my view, those words mean what they say and should be enforced accordingly, unless the mandate letter was vitiated as a matter of law. 336 ASIC did not contend that the mandate letter was unenforceable in accordance with its terms. There was of course no allegation of mistake or misrepresentation. Nor did ASIC argue that the exclusion of a fiduciary relationship was contrary to the regulatory obligations imposed on Citigroupby s 912A(1)(aa) of the Corporations Act to have in place adequate arrangements for the management of conflicts of interest. 337 It seems to me to follow that the exclusion of the fiduciary relationship was effective, notwithstanding the fact that Citigroup undertook to provide financial advisory services to Toll and that both parties' interests were "well aligned" in the fee structure set out in the mandate letter. 338 The exclusion of the fiduciary relationship in the mandate letter is to be contrasted with the more extensive acknowledgments contained in the Custodian & Nominee Appointment. There, the form of appointment authorised Citigroup to have a variety of specified conflicts and to carry on business through the operation of Chinese walls: see [106] above. See also the form of mandate letter entered into between Toll and Citigroup in an earlier transaction: see [77] above. 339 However, those documents cannot bear upon the proper construction of the mandate letter itself. At most, they may point to Toll's informed consent to proprietary trading by Citigroup: see Issue 3 below.

Issue 2 - Whether Informed Consent was Required 340 ASIC submitted that the acknowledgment in the mandate letter that Citigroup was neither an agent nor a fiduciary raises the question of the ability of a person who would otherwise be a fiduciary to include in the retainer letter a provision limiting or excluding that role. 341 ASIC advanced eleven propositions in support of its contentions that the acknowledgment in the mandate letter was ineffective without Toll's informed consent. 342 I do not propose to set out each of the propositions. The first was that a fiduciary relationship, if it is to exist, must accommodate itself to the terms of the contract. For reasons given above, the proposition is plainly correct but it does not provide an answer favourable to ASIC upon the terms of the mandate letter. 343 The remaining propositions have at their core the submission that where the inclusion of a particular term in "a putative fiduciary's retainer agreement" would create an actual or potential conflict between the interests of the fiduciary and those of the client, then the "would be fiduciary" must obtain the informed consent of the client to the inclusion of that term. 344 This submission is said to be based upon the principles stated in the authorities dealing with time charging by solicitors: see Foreman and the other authorities referred to at [298] - [300] above. ASIC submitted that the principle is not limited to solicitors and applies generally to all fiduciaries. 345 However, for reasons given above at [303] - [306], I do not consider that this principle applies in the present case. In particular, even if the principle stated by Mahoney JA in Foreman is of general application to fiduciaries, it cannot apply unless the fiduciary is within an established category or is subject to fiduciary obligations before entering into the contract. 346 To hold otherwise would be to say that a person who is not a fiduciary may nevertheless owe an obligation which flows from a fiduciary relationship. That could hardly be correct. 347 The decision of a Full Court in ABCOS v Jones, on which ASIC relied, does not support its argument. ABCOS v Jones was a case where a fiduciary, who was involved in a professional capacity in the establishment of a thoroughbred horse-breeding venture, sought to limit the extent of his fiduciary duty to give advice in respect of certain matters. It was not a case involving a contractual acknowledgment that there was no fiduciary relationship. It was held that that clause was ineffective in the absence of informed consent, however I do not consider that this case is authority for the general proposition asserted by ASIC. In my view, the case was one which was decided on its own facts. 348 It follows in my view that, with the exception of ASIC's first proposition, the eleven propositions put forward by ASIC do not apply to these proceedings. I do not consider that Citigroup was bound to obtain Toll's informed consent to the exclusion of the fiduciary relationship.

Issue 3 - Whether Toll Gave Informed Consent 349 I do not need to deal with this issue because I have found that Citigroup was not obliged to obtain Toll's informed consent to the insertion in the mandate letter of the clause excluding a fiduciary relationship. Nevertheless, I will consider the issue briefly. 350 Citigroup relied on the Custodian & Nominee Appointments which were executed before and after the execution of the mandate letter on 8 August 2005. A form of appointment was executed by Toll Transport on 17 June 2005. It was re-executed by Toll Holdings, in the same terms, on 18 August 2005. Both of these forms of appointment contained express disclosures permitting Citigroup to trade on its own account in securities which it had been instructed to acquire on behalf of Toll. 351 It is true that the Custodian & Nominee Appointment and the mandate letter formed integral parts of the overall contractual relationship between Toll and Citigroup. However, it seems to me that the mandate letter expanded Citigroup's retainer and laid down the contractual terms which applied to Citigroup's particular role as an adviser on the Patrick takeover. 352 I accept, as ASIC submitted, that informed consent may be express or implied. But I do not consider, as Citigroup submitted, that if consent was necessary for the exclusion of the fiduciary relationship in the mandate letter, it was to be found in the Custodian & Nominee Appointment. In my view, the consent which was given to the principal trading and conflicts of interest in relation to the more limited retainer did not amount to an implied consent to an exclusion of the fiduciary relationship in the expanded retainer of the mandate letter. 353 This seems to me to follow from the approach taken in ABCOS v Jones, although that case turned on its own facts. Of course, all the facts and circumstances must be considered to see whether fully informed consent is to be implied. But consent given in the context of a limited retainer will not necessarily imply consent where the scope of the retainer is subsequently extended. 354 Nevertheless, the question of informed consent has to be considered in light of Mr Chatfield's evidence, and in particular, the concessions he made in cross-examination: see [232] above. 355 Citigroup did not obtain Toll's express consent to trade on its own account in the context of its advisory role in the Patrick takeover, but in my view informed consent is to be implied from Toll's knowledge of Citigroup's structure and method of operations. Toll's experience and "core competency" in mergers and acquisitions must also be taken into account in determining this question: see Farah at [107] per Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ. 356 Although Mr Chatfield would have preferred Citigroup not to trade on its own behalf, he knew that Citigroup was a large financial conglomerate which did not act exclusively for Toll. He also knew that Citigroup had a proprietary trading desk which could operate for the benefit of Citigroup so long as knowledge of Toll's confidential information did not leak to the proprietary traders. 357 It is true that Mr Chatfield did not turn his mind to the question of whether Citigroup would suspend its proprietary trading during the period of the mandate, but the effect of his evidence was that he accepted that Citigroup could trade for third parties or for itself, so long as it did not use Toll's confidential information. 358 Moreover, Mr Chatfield did not believe that Citigroup had any obligation to inform Toll if it engaged in proprietary trading, so long as there was no possibility of Citigroup using Toll's confidential information. 359 I do not consider that the circumstances of the present case are identical with those of Kelly v Cooper where the Privy Council held that there was to be implied in a contract with a real estate agent, a term that the agent was free to act for other principals selling similar properties. Such a term was implied because the practice is notorious and it would otherwise be impossible for the estate agents to perform their ordinary business functions: see Kelly v Cooper at 214 per Lord Browne-Wilkinson. 360 In my opinion, there is nothing in the relationship of investment banker/financial advisor and client which requires a conclusion that it is an inherent part of the business of investment banking for the banker to engage in trading in its client's target's shares. 361 But, in my opinion, in the particular circumstances of this case, for the reasons given above, Toll had sufficient knowledge of the real possibility of proprietary trading by Citigroup to amount to informed consent.

Issue 4 - Does it Matter Whether the Information was Relevant to Toll's Decision 362 Citigroup relied upon the concession made by Mr Chatfield in cross-examination that if on 19 August 2005 Citigroup had told him it had engaged in proprietary trading "it wouldn't have made any difference" to the decisions which Toll made: see [232] above. 363 ASIC sought to meet this by submitting that a fiduciary who has not obtained informed consent does not escape the consequences of that failure by showing that the information which was not disclosed would not, as a matter of fact, and with hindsight, have affected the client's decision. 364 This submission was said to be supported by the decision of the Privy Council in Brickenden v London Loan & Savings Co [1934] 3 DLR 465 at 469 per Lord Thankerton. His Lordship there said that once the court has determined that the non-disclosed facts are material, speculation as to what course the beneficiary would have taken, if disclosure had been made, is not relevant. 365 Brickenden has been followed in this Court in CBA v Smith at 394 per Davies, Sheppard and Gummow JJ. It has also been followed and explained by the New South Wales Court of Appeal in Beach Petroleum at [435] - [450] per Spigelman CJ, Sheller JA and Stein JA. 366 Their Honours said in Beach Petroleum at [444] that Brickenden is not authority for the general proposition that in no case involving breach of fiduciary duty may a court consider what would have happened if the duty had been performed. This is because Brickenden is now to be understood in light of the decision of the House of Lords in Target Holdings Limited v Redferns [1996] 1 AC 421. Their Lordships there said at 439 that causation is to be determined using commonsense and hindsight: see Beach Petroleum at [432] per Spigelman CJ, Sheller JA and Stein JA. I respectfully agree with the views of the Court of Appeal. 367 A different formulation of the test is to be found in the judgment of Hutley JA in Walden Properties Limited v Beaver Properties Pty Limited [1973] 2 NSWLR 815 at 846-7. However, his Honour's remarks are explained by the learned authors of Equity Doctrines and Remedies (4th ed, Butterworths LexisNexis, 2002) at [5 - 120]. 368 I do not need to decide the issue of causation. ASIC's submissions assumed, contrary to my finding, that Citigroup and Toll were in a fiduciary relationship. Whilst the issue of causation does not need to be determined, it seems to me that in light of the observations of the New South Wales Court of Appeal in Beach Petroleum, ASIC's submission that "the expectations, or inclination to give permission of the beneficiary Toll are irrelevant", should be rejected.

Issue 5 - The Five Alleged Breaches of Duty 369 ASIC alleges five separate breaches of fiduciary duty by Citigroup. These claims fail because I have come to the view that Citigroup was not in a fiduciary relationship with Toll. Nevertheless, I will address each of the five alleged conflicts because there are other reasons why those claims would fail even if Citigroup did owe fiduciary duties to Toll. 370 I will deal with the five "conflicts" in the order in which they were pleaded. All of them are said to be conflicts of interest and duty. The First Conflict 371 The first conflict is said to have arisen once Citigroup acquired its own interest in Patrick shares on 19 August 2005. Citigroup is then said to have had a fiduciary duty to disclose to Toll, as its adviser, all relevant knowledge in relation to decisions to be made by Toll about the bid. The duty is said to be based on the decision of the High Court in Daly, in particular the reasons of Brennan J at 385. 372 The duty of disclosure pleaded in the first conflict is said to be a duty to furnish Toll with all relevant knowledge possessed by Mr Bartels which may reasonably be regarded as relevant to the making of Toll's decision as to whether the premium for the bid should be marketed by reference to the closing price of Patrick shares on Friday, 19 August 2005 or the closing price on Thursday, 18 August 2005: see Further Amended Statement of Claim [59]. 373 It is then said that it was relevant for Toll, when making a decision as to how to market the bid, to know that the market activity in Patrick shares on 19 August 2005 "had been materially contributed to by Citigroup's own actions" in acquiring its stake in Patrick for the purpose of making profits for itself: see Further Amended Statement of Claim [60]. 374 Citigroup is said to have preferred its own interests in maintaining its relationship with Toll, free from a perception by Toll that Citigroup's Chinese walls had failed, to its duty to inform Toll of its purchase of Patrick shares on 19 August 2005; "such information being relevant to Toll's decision as to how to market the bid in light of the market activity on Friday 19 August 2005": see Further Amended Statement of Claim [62]. 375 There is force in Citigroup's submission that Australian law does not recognise a fiduciary duty to make full disclosure. The strong weight of judicial authority is that fiduciary duties are proscriptive rather than prescriptive; accordingly, a fiduciary does not have a positive duty to disclose information: see Breen v Williams at 113 per Gaudron and McHugh JJ, 137-138 per Gummow J; Pilmer at [74] per McHugh, Gummow, Hayne and Callinan JJ; Aequitas at [283] - [287] per Austin J; Dresna Pty Limited v Linknarf Management Services Pty Limited (In Liq) [2006] FCAFC 193 at [132] per Gyles J; P & V Industries Pty Limited v Porto (No 2) [2007] VSC 64 at [29] per Hollingworth J. 376 It may follow that Brennan J's observations in Daly are to be confined in the manner discussed by Austin J in Aequitas at [287]. ASIC asserted that Daly was referred to by the High Court in Pilmer without disapproval at [70]; but I do not consider that their Honours' remarks amounted to a clear acceptance of the reasoning of Brennan J. However I do not need to consider this question because in my view the claim fails at a factual level. 377 The principal reason for this is that ASIC has not established that it was relevant to Toll when making a decision as to how to market the bid that the market activity in Patrick shares on 19 August 2006 had been materially contributed to by Citigroup proprietary trading: see Further Amended Statement of Claim [60]. 378 In fact, Mr Chatfield's evidence was that "nothing really turned on the Patrick price at 19 August", that there was no difference between trading in Patrick shares by Citigroup or anyone else in the market, and that even if Citigroup had been trading in Patrick shares, it had no obligation to tell Toll it had done so, and it would not have made any difference to Toll's decisions on the day. The pertinent parts of Mr Chatfield's evidence are set out at [227] - [232] above. The Second Conflict 379 The second conflict, as with the first, also raises the question of whether Australian law recognises the positive duty to furnish information consistently with that stated in Daly. 380 The second conflict is said to arise from the following knowledge, as at about 7pm on 19 August 2005, on the part of Messrs Roberts, Sinclair, Monaci and Scott: - that Mr Dempsey and the private side employees of Citigroup in the IBD who were assisting him, were advising Toll on the bid; - that Citigroup had acquired a substantial shareholding in Patrick on its own account on 19 August 2005; - that they were concerned about how the acquisition of Citigroup's stake would be perceived by Toll and by the market; - that there was a perception that Toll and the market might infer that Citigroup's Chinese walls had failed. 381 Citigroup is then said to have had a duty (through Messrs Roberts, Sinclair, Monaci and Scott) to inform Toll that it had engaged in substantial trading in Patrick shares on 19 August 2005. Thus Citigroup is said to have had a conflict of interest and duty: see Further Amended Statement of Claim [66], [70]. 382 The case, as pleaded, is confined by the particulars. The relevance of the information about Citigroup's trading in Patrick shares is said to be so that Toll could give consideration as to whether: - it wished to terminate Citigroup's retainer; - to seek independent legal advice as to its rights against Citigroup; - to seek to renegotiate Citigroup's fees in light of its trading. 383 In my view this claim fails on the facts. This is demonstrated most clearly by ASIC's failure to prove that the information had any relevance to the persons to whom the information was said to be relevant, namely Mr Chatfield and Mr Little. 384 ASIC called Mr Chatfield to give evidence but it chose not to lead any evidence from him on the relevance of the information. I can therefore infer that Mr Chatfield's evidence would not have assisted: see Commercial Union Assurance Company of Australia Limited v Ferrcom Pty Limited (1991) 22 NSWLR 389 at 418-419 per Handley JA. 385 The other person identified in the particulars, Mr Little, was not called by ASIC to give evidence. The plain inference is that his evidence would not have assisted. The Third Conflict 386 The third conflict is said to have arisen because it was likely that the fact that Citigroup had acquired "such a substantial body of shares" would come to the notice of private side employees providing corporate advisory services, namely Mr Dempsey and his team, or to those providing investment banking services, namely Mr Bartels and his team, or their superiors, Mr Roberts and Mr Sinclair, or the Compliance department and in-house lawyers: see Further Amended Statement of Claim [75]. 387 ASIC contends that if that occurred, there was a real risk that the private side employees would have "a real concern" that the acquisition of the Patrick shares might create a perception in Toll that Citigroup's Chinese walls had failed: see Further Amended Statement of Claim [76]. 388 ASIC goes on to allege that the possibility of this perception "created a real and substantial risk" that the duty of Citigroup's private side employees to provide disinterested advice to Toll might conflict with the desire of those employees to ensure that Toll did not think that Citigroup's Chinese walls had failed: see Further Amended Statement of Claim [77]. 389 This conflict, although pleaded only as a potential one, is said by ASIC to have been real and substantial. ASIC submits that this is demonstrated by the fact that it became an actual conflict in the form of the first and second conflicts. However, I have found that those two conflicts are not made out. 390 Moreover, there is force in Citigroup's submission that the alleged conflict of interest is too remote. There must be "a conflict or a real or substantial possibility of a conflict": see Hospital Products at 103 per Mason J. In fact , Mason J went even further at 104, quoting the statement of Judge Learned Hand in Phelan v Middle States Oil Corporation (1955) 220 F (2d) 593 at 602-603 that the conflict rule does not apply: "… not only when the putative interest, though in itself strong enough to be an inducement, was too remote, but also when, though not too remote, it was too feeble an inducement to be a determining motive".

391 Support for the view that the interests identified in the present case were too remote is also to be found in the remarks of the majority in Pilmer at [83] per McHugh, Gummow, Hayne and Callinan JJ. Their Honours said that it is not sufficient to say generally "that there was a hope or expectation of future dealings". Most professional advisers would hope, as their Honours said, that the proper performance of the task would lead the client to retain them again. 392 As Lord Upjohn said in Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606 at 637-638, there must be a "real conflict of duty and interest and not some theoretical or rhetorical conflict". The Fourth Conflict 393 The fourth conflict, as pleaded at [79] - [88] of the Further Amended Statement of Claim, is that it was in the interests of Toll that the price of Patrick shares not go up during trading on 19 August 2005. 394 By placing itself in this position of conflict, Citigroup is said to have breached its fiduciary duty to Toll. The claim fails because of the absence of a fiduciary relationship but I will deal with the other elements of the claim contained in the pleading. 395 ASIC contends that the reason why it was in Toll's interest that the price not increase is that it would affect the credibility of the bid. The case, as pleaded, is that if the price of Patrick shares went up during the course of 19 August 2005 so that the premium appeared to be substantially eroded, it would be necessary to market the bid by reference to the premium over the closing price on 18 August 2005. ASIC contends that this would reduce the credibility of the bid. 396 The reason why it is said to have been in Citigroup's interests for the price of Patrick's shares to increase was to enable it to make a profit on the shares purchased by Mr Manchee. 397 At a general level there is some support for the proposition that Citigroup's interest in making a profit on Mr Manchee's parcel of shares conflicted with Toll's interest that the price of Patrick shares not increase on 19 August 2005. However, a closer analysis of the evidence leads me to the view that the conflict alleged by ASIC was not established. 398 Mr Chatfield said that in "general terms" it would have been better for the price of Patrick shares to be lower during the period from 8 to 22 August 2005 because that would have produced a higher premium. He continued by saying: "It would have potentially varied our view depending on where the price was in terms of how we would start the process of the bid".

399 But that evidence must be contrasted with Mr Chatfield's evidence as to what actually took place in determining the way in which the bid premium was calculated. His evidence was that the date that was selected as the appropriate date from which to measure the premium was 26 July 2005. The effect of his evidence is that this decision was made before 19 August 2005. This is supported by contemporaneous documentary evidence: see the email of 8 August 2005 at [148] above. 400 Indeed, Mr Chatfield said in the passage set out at [227] above that nothing really turned on the Patrick price at 19 August 2005. Toll had, by then, reached the view that 26 July 2005 was the more relevant date. That was the date which was featured in the ASX announcement on 22 August 2005, although a number of other reference dates were used which reflected the discussion at the planning session over the weekend prior to the announcement. 401 Moreover, I do not consider that the evidence establishes that the selection of 18 August 2005 as one of the reference dates for calculation of the premium reduced the credibility of the bid. In the independent expert's report prepared for Patrick by Lonergan Edwards & Associates Limited and included in Patrick's Target's Statement, the independent experts made their own calculation of the implied premium. In doing so, they excluded the price on 19 August 2005 because it appeared to have reflected speculation of the bid. 402 This approach is supported by the evidence of ASIC's expert, Mr Andrew Sisson. He conceded in cross-examination that one of the factors that investors consider in calculating the premium is the share price of the target prior to speculative price increases. 403 It follows from what I have said about Mr Chatfield's evidence, and from the expert evidence as to how investors view the premium, that ASIC has not established that Toll had the interest alleged, namely that the price of Patrick shares not rise during trading on 19 August 2005. 404 Although it is unnecessary for me to deal with the question of whether Citigroup had the competing interest alleged by ASIC, I will deal with it briefly. 405 In my view, Citigroup did have an interest in the price of Patrick shares rising above the price paid by Mr Manchee. I reject Citigroup's submission that Citigroup's interest in profiting from Mr Manchee's parcel was not properly characterised. Citigroup pointed to its greater interest in earning fees of up to AUD$18 million on the mandate and its interest in developing a strong relationship with Toll. But in my view these interests do no more than beg the question. They do not answer it. 406 Mr Monaci, Citigroup's senior Compliance officer, conceded that the trading restriction imposed on announcement of the takeover was a rudimentary part of the arrangements to avoid or deal with conflicts of interest between adviser and client. 407 Mr Monaci also accepted that, once the bid was announced, there would be a conflict of interest where Citigroup acquired a stake in the target on its own account when the client is trying to buy those securities. 408 Furthermore, Mr Monaci conceded that Citigroup's interests in proprietary trading before an announcement is made are identical to its interests after announcement of the bid. But he stubbornly, and in my view wrongly, adhered to the view that there was no conflict pre-announcement, in the circumstances in which it was put to him by Mr Walker. 409 Nevertheless, the factual propositions which underlie ASIC's pleaded claim as to Toll's interests in the Patrick share price on 19 August 2005 were not put to Mr Monaci. Accordingly, his evidence does not assist ASIC in establishing the existence of the fourth conflict pleaded in the Further Amended Statement of Claim. The Fifth Conflict 410 The fifth conflict is said to have arisen during the afternoon or early evening of 19 August 2005 when Messrs Roberts, Scott, Monaci, Sinclair and Bartels became aware that Citigroup had acquired a substantial shareholding in Patrick on its own account. 411 Citigroup is then said to have breached its fiduciary duty to Toll because it was in a position where there was a real and substantial risk of a conflict between Citigroup's interest in the price at which Patrick's shares were trading and its duty to provide disinterested and loyal advice to Toll. 412 The pleaded case is confined by the particulars. Two risks are asserted. The first is that Citigroup had an interest in preserving its reputation free from a perception that its Chinese walls had failed. The second is that senior management might be required to make a decision as to whether the bid price should be increased. It is said that this could occur if Mr Dempsey or Toll sought senior management's views as to the issue of the bid price. 413 The claim fails because I have found that Citigroup did not owe fiduciary duties to Toll. If Citigroup had been acting in a fiduciary capacity, some support for the claim would have been found in the evidence of Mr Sinclair and Mr Chatfield. 414 Mr Sinclair was concerned about the "potential reputational issue" for Citigroup from inferences or speculation which could be made by its Equity clients as a result of active trading on the public side of the Chinese wall. 415 Mr Chatfield did not believe that Citigroup had any obligation to inform Toll of its proprietary trading in Patrick shares but he said this was subject to the proviso that "there was no possibility of using confidential information" of Toll. 416 However, the claim would ultimately fail at a factual level because there was no evidence to support the allegation that there was a risk that Mr Dempsey may seek the views of any of Messrs Roberts, Sinclair, Monaci, Scott or Bartels on the question of the bid price. 417 ASIC fairly conceded, in its opening, the difficulties in its case that arise from the failure of Mr Dempsey to give evidence. It conceded that no one on Mr Dempsey's team knew of Mr Manchee's trading and that it was difficult to predict how Mr Dempsey or his team in the IBD would have acted if they had known. But this difficulty is brought about by ASIC's failure to exercise its powers to examine Mr Dempsey under s 19 of the ASIC Act and its failure to subpoena him to give evidence in these proceedings. 418 ASIC submitted that the question of how Mr Dempsey would have acted did not arise because Mr Roberts decided to phone Mr Bartels rather than Mr Dempsey to ask whether Toll should be informed of Citigroup's trading. I do not regard this as an answer because it was for ASIC to establish that there was a real risk that Mr Dempsey would seek the views of Messrs Roberts, Scott, Monaci, Sinclair or Bartels on the question of the price of the bid and whether it should be increased. 419 I should add by way of postscript on this issue, that I do not regard Mr Roberts' decision to telephone Mr Bartels rather than Mr Dempsey as in any way sinister or self-serving. Nevertheless, I found Mr Bartels' attempt to defend the decision to be wholly unconvincing. 420 It is plain that Mr Bartels had a limited role in the transaction. He was at pains to stress the limitations of his involvement. The documentary record is replete with the high level of contact between Mr Dempsey and Mr Chatfield. Yet Mr Bartels went so far as to say that he was a more obvious choice than Mr Dempsey to provide the answer to how Toll was likely to react to the news of Citigroup's proprietary trading.

Issue 6 - Construction of s 912A(1)(aa) of the Corporations Act and Reg 7.1.29(3) of the Corporations Regulations 421 Section 912A(1)(aa) of the Corporations Act requires a financial services licensee to have in place adequate arrangements for management of potential conflicts of interest. I have set out above the terms of the subsection and the relevant terms of the exemption contained in Reg 7.1.29(3)(c) of the Corporations Regulations and will not repeat them. 422 ASIC did not concede that as a matter of construction the obligation in s 912A(1)(aa) only applies to a licensee who occupies a fiduciary position. However, ASIC did concede that in the present case that is how the conflict is said to arise. That is, the subsection is not engaged unless Citigroup and Toll were in a fiduciary relationship. 423 It follows that s 912A(1)(aa) is not engaged in this case because I have found against ASIC on the fiduciary question. Nevertheless, I will deal briefly with a number of preliminary questions of construction that were raised in these proceedings. Financial Services 424 Section 912A(1)(aa) applies only where a financial service is provided. ASIC relied on two separate types of services, namely 'corporate advisory services' provided by Mr Dempsey's team and 'investment banking services' provided by Mr Bartels' team. 425 It seems to me to be clear that Mr Dempsey's team provided financial services to Toll. This is because: - Patrick shares are a security and hence a financial product within s 764A(1) of the Corporations Act; - during the relevant period Mr Dempsey and his team made statements of opinion and provided reports to Toll which were intended to influence Toll in making decisions in relation to the acquisition of a financial product, namely Patrick shares; - it follows that the provision of those opinions and reports constituted financial product advice within the meaning of s 766B(1)(a) of the Corporations Act. Hence, they amounted to the provision of financial services under s 766A(1)(a) of the Corporations Act; 426 It is unnecessary for me to determine whether Mr Bartels or his team provided financial services because the real issue would be whether the exemption contained in Reg 7.1.29(3)(c) is engaged. It seems to me that if it had applied to 'corporate advisory services', it would apply equally to Mr Bartels' 'investment banking services'. The Exemption 427 Citigroup's advice was given to Toll which was a person who was, or was "likely to become, an interested party" in Patrick: see Reg 7.1.29(3)(c)(i). In my view, in this context "likely" means a real and not remote chance: see for example Global Sportsman Pty Limited v Mirror Newspapers (1984) 2 FCR 82 at 87 per Bowen CJ, Lockhart and Fitzgerald JJ; Boughey v The Queen (1986) 161 CLR 10 at 21 per Mason, Wilson and Deane JJ. It seems to me that Toll's past record of success in takeover bids, its core competence in the field, and the planning and effort which went into this bid made it likely, even as at 8 August 2005, that Toll would become an interested party within the meaning stated in the authorities. 428 Citigroup's advice was not advice for inclusion in an exempt document or statement: see Reg 7.1.29(3)(c)(iv). 429 The substantial question which arises is the proper construction and application of Reg 7.1.29(3)(c)(ii)(A). The real question of whether the exemption was engaged turns upon whether Virgin could be said to carry on the business of Patrick. That is because, for the exemption to apply, the advice must be confined to advice on a decision about: "securities of a body corporate [Patrick], or related body corporate [Virgin] that carries on or may carry on the business of the entity [Patrick]".

430 ASIC conceded that this regulation would normally have the effect of exempting investment bankers from providing financial services, and hence from the operation of s 912A(1)(aa) of the Corporations Act. However, as ASIC submitted, for much of the life of the takeover bid, the proposal included an in specie dividend made up of shares in Virgin. 431 ASIC submitted that although Virgin was a subsidiary of Patrick and therefore properly characterised as a related body corporate, it could not be said that it carried on the business of Patrick. Thus it submitted that Reg 7.1.29(c)(ii)(A) was not engaged and additionally, that the advice related to "other financial products" within Reg 7.1.29(c)(iii). 432 The phrase "carries on or may carry on the business" must be construed in context so that it is consistent with the language and purpose of all of the provisions of the statute: see Project Blue Sky Inc v Australian Broadcasting Authority (1988) 194 CLR 355 at [69] per McHugh, Gummow, Kirby and Hayne JJ. I also accept that the phrase is to be construed in light of the modern corporate practice of carrying on business as a corporate group. 433 But the difficulty which arises is, how can it be said that Virgin, as a 62.4% owned subsidiary of Patrick, carried on the business of that entity. ASIC submitted that to say so would be to find that Virgin, a listed company conducting the business of an airline, was carrying on the business of its major shareholder, Patrick, a listed company carrying on the business of a stevedore. 434 Subparagraph (c)(ii)(A) must be read with s 20 of the Corporations Act which provides as follows: "A reference in this Act to a person carrying on a business, or a business of a particular kind, is a reference to the person carrying on a business, or a business of that kind, whether alone or together with any other person or persons."

435 Thus, for the exemption to apply, it would be necessary for me to find, in accordance with s 20 of the Corporations Act, that Virgin carried on the business of Patrick alone or with other persons. 436 That may seem to be a surprising finding to make. But in Patrick's Annual Report for 2005 it described the business of the Patrick Group as: "transport logistics with particular emphasis on seaborne trade movements and operating a passenger airline".

437 The 2005 Annual Report also referred to Patrick's Air Division as consisting largely of the Group's interest in Virgin. 438 I have therefore come to the view that, applying the approach to construction stated in Project Blue Sky, Virgin can be said to have been carrying on the business of Patrick, notwithstanding that it was not carrying on the whole of that business. I reject ASIC's submission that the "business" that Patrick had in relation to Virgin is properly characterised as "the business of owning 62.4% of Virgin Blue". 439 It also follows from this that Virgin shares are not "other financial products" and therefore that the advice did not fall within Reg 7.1.29(3)(c)(iii) of the Corporations Regulations. 440 On this finding, the exemption contained in Reg 7.1.29(3)(c) would have been engaged so that Citigroup would not have been providing financial services to Toll for the purpose of s 912A(1)(aa) of the Corporations Act.

Issue 7 - Adequate Arrangements under s 912A(1)(aa) of the Corporations Act 441 For reasons stated above at [423], s 912A(1)(aa) of the Corporations Act was not engaged. Nevertheless, I will deal briefly with the question of whether Citigroup had in place adequate arrangements for the management of conflicts of interest. 442 ASIC's case was that without Toll's explicit permission to engage in proprietary trading in Patrick shares, Citigroup had no arrangements, "still less adequate ones", for dealing with conflicts which may arise from the purchase of Patrick shares. 443 The essence of ASIC's case therefore was that "adequate management" required the elimination of unauthorised conflicts by obtaining express consent. I reject that submission because it seems to me to be inconsistent with the plain meaning of s 912A(1)(aa). 444 First, the subsection uses the words "management of conflicts of interest". I do not see that "management" requires elimination of a possible conflict, although of course it would be open to a licensee to take that further step if it chooses to do so. 445 Second, the phrase "management of conflicts of interest" assumes that there will be potential conflicts which must be managed by adequate arrangements rather than totally eliminated. 446 Thus, in my view, whether particular arrangements are adequate is to be determined as a question of fact. 447 ASIC did not call any lay or expert evidence as to industry standards or as to what might constitute adequate arrangements for the management of conflicts of interest that may arise in the investment banking business. 448 Nevertheless, as I have said above at [310], [318] - [319], in Bolkiah, Lord Millett referred to Chinese walls as a technique for managing conflicts of interest and he described the types of organisational structures that would ordinarily be effective. 449 Mr Monaci's statement of evidence set out in great detail the measures which Citigroup has in place. These appear to me to comply with the requirements stated by the UK Law Commission and adopted by Lord Millett in Bolkiah. I will not repeat the evidence but the paragraph numbers of Mr Monaci's statement which describe the arrangements are as follows: - physical separation by departments, [85] - [94]; - educational programmes, [95] - [106], especially [103] and [105]; - procedures for dealing with crossing the wall, [109] - [116]; - monitoring by compliance officers, [117] - [123] and [131] - [144]; - disciplinary sanctions, [100]. 450 Mr Monaci also referred in other parts of his statement to Citigroup's policies and procedures for the identification and management of conflicts of interest that arise in its business. He referred to some of the written policies which apply to Citigroup's Australian operations. They were set out at [147] of his statement. 451 Mr Monaci said at [149] that Citigroup's written policies are available to all employees and regular training is provided. He said at [150] that the written policies make clear that employees must be alert to the possibility of conflicts and "escalate any issues in relation to actual, apparent or potential conflicts of interest." 452 Mr Monaci was not challenged on his evidence as to the adequacy of the arrangements. I have therefore come to the view that they would have been adequate for the purposes of s 912A(1)(aa) of the Corporations Act. 453 Nevertheless, having seen Mr Monaci in the witness box, it seems to me that the warning sounded by Bryson J in D & J Constructions is apt. That is to say, it is not always realistic to place reliance on arrangements comprising Chinese walls: see [320] above. 454 Adequate arrangements require more than a raft of written policies and procedures. They require a thorough understanding of the procedures by all employees and a willingness and ability to apply them to a host of possible conflicts. 455 Mr Monaci's entire statement was the result of reflection by him in hindsight which he did not take into account in the particular circumstances that arose on 19 August 2006. The 83 page statement was prepared for him in draft by his solicitors and adopted by him. 456 In my respectful view, Mr Monaci's evidence would have been more convincing if he had personally involved himself in its preparation.

Issue 8 - Misleading and Deceptive Conduct 457 ASIC alleged separate counts of misleading and deceptive conduct under s 1041H of the Corporations Act and s 12DA of the ASIC Act. 458 Each of those sections prohibits misleading or deceptive conduct in relation to financial services. The relevant difference between them is that there is no equivalent to Reg 7.1.29 under the ASIC Act. Accordingly, no question arises under s 12DA as to whether Citigroup's services were exempt. 459 The first claim, in relation to s 1041H of the Corporations Act, was that Citigroup's conduct was misleading by the failure of Mr Bartels to inform Toll that Citigroup had acquired shares in Patrick: see Further Amended Statement of Claim [112] - [114]. 460 The second claim, in relation to s 12DA of the ASIC Act, was that Citigroup had engaged in misleading or deceptive conduct by the failure of any of Messrs Roberts, Sinclair, Monaci or Scott to inform Toll of their knowledge that Citigroup had purchased shares in Patrick: see Further Amended Statement of Claim [115] - [117]. 461 Both counts of misleading or deceptive conduct are founded upon a fiduciary duty to disclose in accordance with Daly. The claims fail in the absence of any finding of fiduciary relationship between Citigroup and Toll and particularly my rejection of any Daly duty in the circumstances of the present case.

Issue 9 - Unconscionable Conduct 462 Section 12CA(1) of the ASIC Act prohibits conduct in relation to financial services if the conduct is unconscionable within the meaning of the unwritten law. 463 ASIC contends that by being in the five alleged positions of conflict, Citigroup breached its fiduciary duty to Toll and that each breach of fiduciary duty was unconscionable conduct within the meaning of the unwritten law of a State or Territory. 464 There is a dispute as to the reach of the similar provision to s 12CA(1) contained in s 51AA of the Trade Practices Act 1974 (Cth): see Australian Competition and Consumer Commission v Berbatis Holdings Pty Limited (2003) 214 CLR 51 at [5] - [7] per Gleeson CJ, at [38] - [46] per Gummow and Hayne JJ, at [75] - [77] per Kirby J, at [160] per Callinan J. 465 I do not need to enter this debate because the claim depends upon ASIC establishing that Citigroup was under a fiduciary duty to Toll, which it breached by failure to avoid the five alleged conflicts of interest. The claim fails for the reasons given above.

PART VI: THE FIRST INSIDER TRADING CLAIM - DETERMINATION OF ISSUES 466 The first insider trading claim is that Citigroup, through Mr Manchee, sold 192,352 shares in Patrick, at or shortly after 3:37pm on 19 August 2005 while in possession of inside information. The inside information is said to be a supposition made by Mr Manchee at about 3:30pm during the 'cigarette on the pavement conversation' with Mr Darwell, that Citigroup was acting for Toll in relation to the takeover of Patrick: see Further Amended Statement of Claim [143] - [150]. 467 I have already set out most of the relevant factual material but it is necessary to supplement it briefly. The key events of the afternoon of 19 August 2005 are largely uncontroversial, although there is a real issue as to what, if any, supposition Mr Manchee made in his conversation with Mr Darwell. 468 The standard of proof of the claim is the balance of probabilities but I must take into account the gravity of the matters alleged: see s 140(2)(c) of the Evidence Act. This would appear to correspond with common law principles so that the well known test stated in Briginshaw v Briginshaw (1938) 60 CLR 336 applies: see Heydon JD, Cross on Evidence (7th ed, LexisNexis Butterworths, 2004) at [9130]; cf Odgers S, Uniform Evidence Law (7th ed, LawBook Co, 2006) at [1.4.100].

The Relevant Facts 469 As stated above, Mr Manchee was one of five traders on the proprietary trading desk; he reported to Mr Darwell; his daily trading limit was AUD$10 million: see [53] - [54] above. 470 Mr Manchee's evidence was that his trading style was to look at chart patterns and relative performance of stocks to look for trading ideas. I accept his evidence on this matter.

471 Between 10:14am and 3pm on 19 August 2005, Mr Manchee purchased exactly one million shares in Patrick at prices between AUD$5.90 and AUD$6.05. He sold 25,000 Patrick shares at 3:04pm, at approximately AUD$6.03, to see whether there was still demand for Patrick shares at that price. He purchased a further 167,352 shares in Patrick between 3:05pm and 3:19pm at prices between AUD$6.05 and AUD$6.10.

472 By 3:19pm, Mr Manchee's total purchases of Patrick shares was approximately 1,140,000. His total exposure to the stock was about AUD$7 million which was well within his daily trading limit.

473 It is important to bear in mind that no allegation is made that Mr Manchee was in possession of inside information when he purchased Patrick shares in the period up to 3:19pm on 19 August 2005.

474 I will not repeat the terms of the conversation between Mr Darwell and Mr Manchee which I have set out at [56] above. Nor will I repeat the terms of the conversation(s) between Mr Sinclair and Mr Darwell that preceded it: see [50] - [51] above.

475 Mr Manchee went downstairs within five minutes of receiving the phone call from Mr Darwell and the conversation between them took place on the pavement outside Citigroup's offices. Mr Manchee did not trade in Patrick shares between the time when Mr Darwell asked him to go downstairs and the time of the conversation on the pavement.

476 Mr Manchee's evidence was that Mr Darwell asked him "Why are you being so aggressive in Patricks?" or "Why are you buying so many?". Mr Darwell's evidence of the conversation did not put the question in those terms. His evidence was: "A Privilege … He came down with me and we discussed his position. Privilege. He told me that he thought he was - I asked him how many was he buying. He told me that he was about done, or he bought about as many shares as he thought he would. I then said to him, 'I advise you to not buy any more'." 477 Mr Darwell's evidence of the conversation is not inconsistent with the version given by Mr Manchee. Having regard to the substantial number of Patrick shares purchased by Mr Manchee, I accept that the conversation was in the terms given by Mr Manchee. 478 After the 'cigarette on the pavement conversation', Mr Manchee returned to his desk. He sold 192,352 Patrick shares at prices between AUD$6.20 and AUD$6.45 between 3:37pm and approximately 4:05pm on 19 August 2005.

Issue 10 - Whether Mr Manchee was an Officer of Citigroup 479 A threshold question arises as to whether Mr Manchee's knowledge is to be attributed to Citigroup. The effect of s 1042G(1)(a) of the Corporations Act is that, even if Mr Manchee was in possession of inside information, his knowledge is not attributable to Citigroup unless he was an officer of that body corporate. 480 The term "officer" is defined in s 9 of the Corporations Act. Mr Manchee was not a director or secretary of Citigroup. The question of whether he was an officer therefore turns on whether he was a person: - who made, or participated in making, decisions that affected the whole, or a substantial part, of the business of Citigroup; - who had the capacity to affect significantly the financial standing of Citigroup; - in accordance with whose instructions or wishes the directors of Citigroup were accustomed to act. 481 The last category of persons who fall within the definition are those who may be described as "shadow officers": Ford's Principles of Corporations Law, (13th ed, (LexisNexis Butterworths, 2007) at [8.020]. There is, of course, no suggestion that Mr Manchee occupied that category. 482 ASIC submitted that as a matter of common sense Mr Manchee fell within the definition because of his large daily trading limit of AUD$10 million. That submission seems to me to more naturally apply to the second category than the first but I will deal with the question of whether either of those categories applied to Mr Manchee. 483 The first and second categories set out above are to be found in subparagraphs (b)(i) and (b)(ii) of the definition of officer in s 9 of the Corporations Act. In my view, both of those categories are concerned with identifying persons who are involved in management of the corporation. This is borne out by an examination of the legislative history and the case law in which these two limbs of the definition have been applied. 484 The current definition of "officer" was introduced into s 9 of the Corporations Act by the Corporate Law Economic Reform Program Act 1999 (Cth). However, there were then two overlapping definitions of the term "officer" because s 82A of the Corporations Act alsocontained a definition 485 Section 82A of the Corporations Act was repealed by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth). The Explanatory Memorandum to the CLERP (Audit Reform and Corporate Disclosure) Bill 2003 (Cth) makes it clear that the purpose of repealing s 82A was to address the potentially confusing operation of the two overlapping provisions: see Explanatory Memorandum at [5.572]. 486 It is important to note that the definition of "officer" in s 82A included an employee. The amendments to the Corporations Act which repealed s 82A dealt with the position of employees by making express reference to them where it was intended that particular provisions of the Corporations Act extend to employees: see Explanatory Memorandum at [5.574]. 487 Thus, the CLERP (Audit Reform and Corporate Disclosure) Act expressly distinguished between officers and employees. An example of this is to be seen in s 1043F of the Corporations Act, the Chinese walls provision. 488 It is also important to bear in mind that, as is noted in Ford's Principles of Corporations Law at [8.020], the origin of the extended definition of "officer" is to be found in Parliament codifying, at least in part, the principles stated by Ormiston J in Commissioner for Corporate Affairs v Bracht [1989] VR 821. 489 In Bracht, Ormiston J considered the proper construction of s 227 of the Companies (Victoria) Code which prohibited a person who was bankrupt from taking part in the management of a corporation. His Honour considered at 830 that the concept of "management" comprehended: "activities which involve policy and decision-making, related to the business affairs of a corporation, affecting the corporation as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions may have some significant bearing on the financial standing of the corporation or the conduct of its affairs".

490 The language of subparagraphs (b)(i) and (b)(ii) of the definition of "officer" corresponds, in large measure, with Ormiston J's description of the concept of management. What emerges from this is that an officer is involved in policy making and decisions that affect the whole or a substantial part of the business of the corporation. 491 Moreover, this is reflected in the distinction drawn in the Corporations Act between officers and employees and it is supported by authorities that have considered the statutory definition. 492 In Re HIH Insurance Limited (in prov liq); ASIC v Adler (2002) 41 ACSR 72 per Santow J, a question arose as to whether Mr Adler, who was a director of the parent company but not of the subsidiary, was an "officer" of the subsidiary company. Santow J held that he was an officer of the subsidiary under subparagraphs (b)(i) and (b)(ii) of the definition. 493 The reason Santow J found that Mr Adler was an officer was that as a director of the holding company and a member of its investment committee, he participated in decision making as to how the funds of the HIH group were invested. His Honour said it was for this reason that Mr Adler was a person whose decisions clearly affected the whole or a substantial part of the business of the subsidiary as well as someone with the capacity to affect significantly the subsidiary's financial standing: see at [73] - [75]. 494 The findings of Santow J on this question were unaffected by the decision of the Court of Appeal: see Adler v ASIC (2003) 46 ACSR 504 per Mason P, Beazley and Giles JJA. 495 So too in Re Dwyer v Lippiatt; Dwyer v Backpackers R US.Com Pty Limited (2004) 50 ACSR 333, White J found that a person who was not a director and who described himself as a consultant, was an "officer" within subparagraph (b)(i) of the definition because he was intimately involved in all the important decisions affecting the corporation. Her Honour said at [68] there could be no doubt about the person's importance to the "drive and direction" of the company and that it was likely he also fell within the other limbs of the definition. 496 It is true, of course, that the meaning of "officer" must be considered in its particular statutory context: see for example Bracht at 827-828 per Ormiston J. Duties of honesty, care and diligence are imposed on officers by ss 180 - 184 of the Corporations Act. But it seems to me that, if anything, this reinforces the view I have expressed as to the requirement that an officer occupy a management role. 497 In my view, Mr Manchee did not fall within either subparagraph (b)(i) or (b)(ii) of the definition of "officer". ASIC has not established that he had any involvement in policy making or decisions that affected the whole or a substantial part of the business of Citigroup. Mr Manchee was one of five proprietary traders employed by Citigroup. There was no evidence that anyone reported to him or that he had any responsibilities apart from proprietary trading. 498 The proprietary trading desk is one of four trading desks in the Equity Derivatives Division which is itself a subdivision of Equities, one of six divisions in the CIB. The CIB is one of Citigroup's three businesses. Mr Manchee's trading was subject to daily limits and to the direction of his risk manager, Mr Darwell. 499 It is true that Mr Manchee's daily limit was large when expressed in dollar terms and could potentially amount to considerable financial exposure over a number of days. But I do not consider that this of itself is sufficient to make him a person who had the capacity to affect Citigroup's financial standing within subparagraph (b)(ii). A loans officer at a large branch may, for example, in general terms, have the capacity to affect the bank's standing if he or she lends recklessly, but the loans officer is an employee, not an officer of the corporation. 500 In any event, even if the amount of Mr Manchee's trading limit is a factor which bears upon the question of construction and application of subparagraph (b)(ii), it has not been demonstrated that a AUD$10 million figure was significant in the very substantial business conducted by Citigroup. 501 It follows in my opinion that the first insider trading claim fails because Mr Manchee was not an officer.

Issue 11 - Whether Mr Manchee Made the Supposition 502 Even if Mr Manchee was an officer of Citigroup, ASIC's case cannot succeed in the absence of a finding that Mr Manchee made the supposition that Citigroup was acting for Toll in relation to the takeover of Patricks. That is the supposition that was pleaded in [143] - [145] of the Further Amended Statement of Claim. 503 It seems to me that the case must fail unless I find that Mr Manchee made the supposition in precisely those terms. This is because the authorities establish the central importance of the identified information to the statutory scheme: see R v Hannes (2000) 158 FLR 359 at [26] - [27] per Spigelman CJ. Reference has also been made to the level of precision required in formulating the charge: see Hannes v Commonwealth Director of Public Prosecutions (No 2) 60 ACSR 1 at [377], [415] per Barr and Hall JJ. 504 In my opinion, ASIC has not established that Mr Manchee made the pleaded supposition. There are two reasons for this. First, counsel for ASIC did not ask Mr Manchee whether he had made the supposition in those terms, either in the course of the s 19 examination, or in oral evidence before me. 505 The second reason for the finding is that the facts point against the view that Mr Manchee made the supposition. This is because, after his conversation with Mr Darwell, he sold nearly 200,000 shares, rather than retain them or, still worse, buying more. To this must be added the evidence of Mr Manchee that he thought Mr Darwell was concerned with risk of overexposure to Patrick shares. That provides a rational explanation for the sale. 506 The questions which were put to Mr Manchee in the s 19 examination were concerned with whether he supposed that Mr Darwell's statement had "something to do with the rumours about a Toll takeover" and that Mr Darwell "knew something about Citigroup's involvement": see [58] - [60] above. 507 There are difficulties in reconciling Mr Manchee's earlier answers in his s 19 examination with his later denial. He conceded that "perhaps" he supposed at the time of the conversation that Mr Darwell might know something about Citigroup's involvement in the rumoured Toll takeover that he could not tell Mr Manchee. However, the examination on this topic concluded with his denial that it was obvious that the reason Mr Darwell was telling him to stop buying was that he knew something about Citigroup's involvement that he could not tell Mr Manchee. 508 In my view, Mr Manchee's concession that "it could have occurred" to him or that "perhaps" he thought that Mr Darwell may have known something, was properly made. In cross-examination before me, he attempted to resile from an earlier concession in this line of questioning, namely "I suppose there was a possibility that he was unable to communicate something to me." He said in cross-examination that he thought he was answering a hypothetical series of questions in his s 19 examination. 509 Mr Manchee was cross-examined effectively by Mr Walker as to whether the questions that were asked in the s 19 examination were hypothetical. Initially, I was troubled by Mr Manchee's answers in cross-examination but I have come to the view that he did not really understand the meaning of "hypothetical". What he meant by "hypothetical" was that it referred to a chance or possibility rather than a certainty. 510 I therefore find that Mr Manchee acknowledged that it was possible that it occurred to him at the time that one possibility was that Mr Darwell knew something about Citigroup's involvement in the takeover. But that was not a concession that these matters actually occurred to him at the time. His earlier concession that he "probably" made an assumption was not concerned with Citigroup's involvement in the rumoured takeover. 511 It follows in my view that there is no inconsistency between Mr Manchee's concessions and his subsequent denial. What he denied was that it was "obvious" to him that Mr Darwell knew something that Mr Manchee had not previously conceded. 512 But even if I were to find that it did occur to Mr Manchee that Mr Darwell was telling him to stop buying because Mr Darwell knew "something about Citigroup's involvement", that is not the pleaded supposition which was that Citigroup was acting for Toll on the takeover. For reasons explained above, I could not be satisfied that Mr Manchee made that supposition without it being put directly to him. It is not an inference which is open from Mr Manchee's concessions, even if they are read in the way that ASIC suggests. A supposition as to "some involvement" begs the question as to what it was. 513 I accept Mr Manchee's evidence that Mr Darwell asked him why he was being so aggressive in his purchases of Patrick. This seems to me to be an important piece of evidence because it explains the reasons given by Mr Manchee for the sale of his shares after the conversation, that is to say, that he thought Mr Darwell was concerned with risk. I accept that evidence. There are two reasons for this. 514 First, Mr Darwell was the head of Equity Derivatives and was Mr Manchee's risk manager. It would have been natural for Mr Darwell to have expressed concern about such a topic. 515 Second, Mr Darwell's evidence shows that he was astute to ensure that confidential information should remain quarantined. He said that in his own mind he thought there may be some truth in the rumours about the takeover and that Citigroup might be involved but he made no enquiry of Mr Sinclair lest he be put in a position where he could not function in his job: see [52] above. In my opinion, he would therefore have been careful to ensure that no hint, either veiled or otherwise, was given to Mr Manchee. It was therefore likely that he asked questions of Mr Manchee as to why he was making such large purchases of Patrick shares.

Issue 12 - Whether Mr Darwell Made and Conveyed the Supposition 516 ASIC submitted that Mr Darwell made the supposition that Citigroup was acting for Toll in relation to the Patrick takeover. It is unnecessary for me to make that finding because it is irrelevant to ASIC's first insider trading case. That case is based entirely upon Citigroup's knowledge, through the information possessed by Mr Manchee. Nevertheless, I will deal with the question briefly. 517 ASIC tendered extracts from the transcript of Mr Darwell's s 19 examination but Citigroup did not require ASIC to call him as a witness in the proceedings before me: see s 77(b) of the ASIC Act. The extracts were therefore admitted into evidence without objection. 518 In my opinion the transcript extracts do not establish that Mr Darwell made the supposition that Citigroup was acting for Toll in relation to the takeover of Patrick. Nor, to the extent that it may have any bearing on the second insider trading claim, does the transcript establish that he made a supposition that Toll would launch a bid for Patrick in the near future. 519 Mr Darwell conceded that when Mr Sinclair spoke to him he thought that there may be some truth in the rumours he had heard. The following exchange then took place: "Q And that Citigroup may be involved in some capacity?

A Privilege. That was what I thought in my own mind."

520 But an acceptance of the proposition that Citigroup may be involved in "some capacity" is not a concession that Mr Darwell made the supposition that ASIC contends, that is, that Citigroup was acting for Toll in relation to a takeover bid for Patrick. Nor does it address the question of whether Mr Darwell made any supposition about the likely date of the launch of the proposed bid. 521 It may be accepted that if Mr Darwell made the supposition a question would then arise as to whether he conveyed it to Mr Manchee. However, I find that he did not make the supposition, and that even if he had, he kept it to himself. I am satisfied on the evidence before me that Mr Darwell's words did not convey a hint or suggestion that Citigroup was acting for Toll on the takeover. 522 However, the communication between Mr Darwell and Mr Manchee, and indeed the earlier communications between Mr Sinclair and Mr Darwell, reveal the potential fragility of Chinese walls. 523 Mr Sinclair reacted very quickly, as a senior and responsible employee, to the news that the public side was trading, in large volume, in Patrick shares. He realised immediately the possible impact of this on the reputation of Citigroup and took steps to find out what had happened. Of necessity, this entailed crossing the Chinese wall. The very fact of the crossing and the words he used risked sending a tip to those on the public side, but this was unavoidable. 524 Ultimately, it seems to me that the risk of tipping the proprietary trading desk was avoided by the astute way in which Mr Darwell handled the situation and the discreet terms he used in his communication with Mr Manchee. 525 But such a result may not always prevail in the pressured environment of investment banking.

Issue 13 - Whether an Uncommunicated Supposition can Constitute Information 526 There was much debate between the parties as to whether Mr Manchee's supposition had to be communicated to him. The debate as to this question stems from paragraph (a) of the definition of "information" in s 1042A of the Corporations Act. That paragraph defines information to include "matters of supposition and other matters that are insufficiently definite to warrant being made known to the public". 527 The legislative history provides guidance as to the reach of the definition. Section 75A of the Securities Industry Act 1970 (NSW) created the offence of insider trading where a person, through his or her association with a corporation or body, had "knowledge of specific information relating to the corporation" and acted on that information to the benefit of himself or herself or to enable another person to gain an advantage by using that information. 528 In Ryan v Triguboff [1976] 1 NSWLR 588, Lee J dealt with the question of whether a deduction formed by the defendant could constitute "specific information" within s 75A of the Securities Industry Act. His Honour held at 597 that the deduction could not constitute "specific information" within the section because that expression required information that was capable of being pointed to and identified, and that it "must be capable of being expressed unequivocally". 529 The Corporations Legislation Amendment Act 1991 (Cth) amended the earlier provisions regulating insider trading which were contained in the Corporations Act 1989, Corporations Law and Australian Securities Commission Act 1989. The Corporations Legislation Amendment Act formed part of the arrangements for a national scheme for corporate regulation which came into operation on 1 January 1991. 530 The Corporations Legislation Amendment Act reformed the regulation of insider trading in light of the recommendations of the Report of the House of Representatives Committee on Legal and Constitutional Affairs entitled "Fair Shares for All - Insider Trading in Australia", (AGPS, 1989). 531 The Corporations Legislation Amendment Act introduced a new definition of "information" which was found in s 1002A(1) of the Corporations Act 1989. That definition was in identical terms to the present definition contained in s 1042A of the Corporations Act. 532 The amendment was explained in [319] - [320] of the Explanatory Memorandum to the Corporations Legislation Amendment Bill 1991 (Cth) as follows: "[319] Doubt was also expressed as to whether the term 'information' would be interpreted as encompassing supposition, intentions and other matter not sufficiently certain to require its release to the public, notwithstanding the broad interpretation given to the term in Commissioner for Corporate Affairs v Green [1978] VR 505 at 511.

[320] Proposed section 1002A(1) provides definitions of 'information' and 'securities', in relation to a body corporate, to apply for the purposes of the insider trading provisions. The definition of information is an inclusive one, with information being taken to include supposition and other matters insufficiently definite to warrant being made known to the public and matters relating to the intentions, or likely intentions, of a person."

533 Thus, it can be seen that the purpose of the extended definition was to make it plain that the term was not to be confined to "specific information" consisting of an existing fact that was capable of being expressed unequivocally, as stated by Lee J in Ryan v Triguboff. 534 It is also apparent that the new definition was to include in the concept of information, factual knowledge obtained by means of a hint or veiled suggestion from which the receiver of it can impute other knowledge: see Commissioner for Corporate Affairs v Green [1978] VR 505 at 511. 535 This approach to construction has been adopted in relation to s 128 of the Securities Industry Act 1980 (NSW), the successor to s 75A of the Securities Industry Act and precursor to s 1002A of the Corporations Act 1989: see Hooker Investments Pty Limited v Baring Bros Halkertson & Partners Securities Limited (1986) 10 ACLR 462 at 467-468 per Young J; R v Rivkin (2004) 184 FLR 365 at [126] - [127] per Mason P, Wood CJ at CL and Sully J. As Young J said in Hooker Investments v Baring Bros, at 468, information goes further than knowledge and: "may include a rumour that something has happened with respect to a company which a person neither believes nor disbelieves".

536 In Hannes v DPP at [410], Barr and Hall JJ quoted with approval the statement of McInerney J in CCA v Green that, in many cases, a hint may suggest information or may enable an inference to be drawn as to information. Their Honours also said at [411] that an inference "may be drawn with varying degrees of certainty as to its accuracy" but such an inference nevertheless remains information. They observed that there is no clear distinction between information conveyed orally or by conduct. 537 In my view it follows from what was said by McInerney J in CCA v Green, by Young J in Hooker Investments v Baring Bros and by Barr and Hall JJ in Hannes v DPP that information can be non-specific and that what is drawn from it by way of inference is also included within the statutory definition of information. Moreover, the information, whether in the form of a hint or a rumour, must be communicated orally or by conduct, for example by observation of the words or conduct of others. 538 It also seems to follow from this that an inference may be a supposition or a matter of supposition, and therefore falls within the definition of information in s 1042A. The supposition would therefore be that which the person drew from the hint or other non-specific information received from another. 539 It was submitted on behalf of Citigroup that the legislative history shows that the inclusive definition of "information" in s 1042A of the Corporations Act was not intended to extend the ordinary meaning of the word "information" to encompass uncommunicated thought processes. 540 Citigroup pointed to the expression "matters of supposition" in the definition and submitted that a distinction was to be drawn between such a "matter" and a mere supposition. Mr Myers submitted that "information" is something which is necessarily communicated. 541 Reference was made in Citigroup's written submissions to difficulties which would arise where a court is required to assess whether a person's supposition, as opposed to the facts or material on which it is based, would have been likely to have a material effect on the price of the securities. Citigroup argued that this would undermine s 1042D, which provides that the materiality of information is to be assessed objectively. 542 However, it seems to me that Citigroup's submissions are contrary to the views expressed in Hannes v DPP at [410] - [412] per Barr and Hall JJ. It seems to me to follow from this that whilst the hint or other non-specific information must be communicated by words or conduct, the inference or supposition drawn from it is "information" within the statutory definition. 543 The answer to the practical difficulties raised by Citigroup seems to me to have also been given in Hannes v DPP at [415] per Barr and Hall JJ. Their Honours noted that the kind of information which may affect a securities market may be quite imprecise. But if the information in question is so imprecise that it is unlikely to affect the market, the charge will not be made out. See also their Honours' remarks at [412]. 544 Thus, although I have come to the view that Mr Manchee did not make the supposition alleged in the pleadings, I would reject the submission that his own internal thought processes were incapable of constituting "information" within s 1042A of the Corporations Act.

Issue 14 - Whether the Information was Generally Available 545 The test for whether information is generally available is contained in s 1042C of the Corporations Act. Two alternative tests are stated. These are: - that it consists of readily observable matter: s 1042C(1)(a); or - that: (i) it has been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in securities of a kind whose price might by affected by the information; and (ii) since it was made known, a reasonable period has elapsed for it to be disseminated among such persons: s 1042C(1)(b). 546 The question of whether a matter is "readily observable" is one of fact. Observability does not depend on proof that persons actually perceived the information; the test is objective and hypothetical: see R v Firns (2001) 51 NSWLR 548 at [88] per Mason P. 547 Where the information is a "matter of supposition", the question of whether it is generally available depends on whether the supposition is capable of being made or drawn by other investors based on readily observable matter or information that has been made known in the manner stated in s 1042C(1)(b)(i) of the Corporations Act: see s 1042C(1)(c). 548 ASIC called Mr Sisson to give expert evidence. However, his first report dated 31 October 2006 did not deal with the question of whether the "information" relied on by ASIC was generally available. Mr Sisson did address the question briefly in a later report dated 16 March 2007, in reply to the evidence of Citigroup's expert, Mr Richard Mews. 549 Mr Sisson answered the question of whether an observation, deduction, conclusion or inference, that is, that Citigroup was acting for Toll in relation to its proposed takeover of Patrick, was generally available by asking whether it was "carried out by a sufficient number of people". He also dealt with the issue briefly in cross-examination, stating that if the matter is known by one person who keeps it to himself or herself, the information is not generally available; it has to be akin to a market-wide reaction. 550 Overall, I found Mr Sisson to be a fair and objective witness whose opinions I would, for the most part, accept. He seemed to me to be conscious of his overriding duty to assist the Court on matters relevant to his expertise. 551 However, in my view, the test applied by Mr Sisson as to whether the information was generally available was not in accordance with that which has been recognised by the authorities. There are two reasons for this. First, the test of whether material is readily observable is not whether the particular matter was widely observed but whether it could have been: see R v Firnsat [88], [91] per Mason P; see also Hannes v DPP at [626] per Barr and Hall JJ. 552 The second reason is that s 1042C(1)(c) of the Corporations Act does not appear to involve a consideration of whether the market has had a reasonable time to absorb the information: see the analysis of the extrinsic material in [55] - [56] of the judgment of Mason P in R v Firns. His Honour was of the view that Parliament's intention was not to "penalise individual initiative and diligence." 553 Thus, it seems to me that Mr Sisson's evidence on this question must be rejected. The effect of what he did was to ask whether it was generally available by considering the question of whether it was generally known. 554 Nevertheless, it does not follow that I must find that the information was generally available. Citigroup submitted that I should make this finding upon the basis of the evidence of its expert, Mr Mews. But I am not satisfied that Mr Mews' evidence establishes the proposition for which Citigroup contends. 555 Mr Mews expressed the opinion that "a reasonable and diligent investor" would have been able to observe or deduce from "readily observable material" prior to the start of trading on 19 August 2005 that there was a "substantial likelihood" that Toll would make a takeover bid for Patrick, "in the near future" and "that Citigroup was acting for Toll" in relation to any such proposal. 556 Mr Mews set out in considerable detail the information which he assumed to be generally available at the opening of trading on 19 August 2005 and which he relied upon to support his opinion. This information included: - substantial media commentary and speculation as to the likelihood of a takeover bid by Toll for Patrick; - Toll's repeated unwillingness to give a direct answer to questions about the rumours; - the profit downgrade of Patrick published the previous day; - Citigroup's role as the dominant broker in Patrick's stock; - the accumulation of a substantial number of Patrick shares by Citicorp Nominees Pty Limited; and - the absence of any report from Citigroup's respected transport analyst, Mr Jason Smith, following Patrick's profit downgrade. 557 However, I prefer Mr Sisson's opinion that this evidence is more persuasive after the event than it apparently was on 19 August 2005. 558 The position seems to me to be analogous to that which was referred to by Spigelman CJ in R v Hannes at [254] - [257]. Here the supposition that Citigroup was acting for Toll in relation to the Patrick takeover was one essential part of the "information" on which the claim was based. As Spigelman CJ said at [257], if it was generally available, one would expect to find it in the contemporaneous reports. Yet no such evidence was available, even in the form of speculation or rumour. 559 Mr Mews and Mr Sisson agreed that when one is considering whether information in the form of a deduction is generally available, the analogy of a jigsaw puzzle is apt. But as Mr Sisson said, if all pieces other than those from a small area are removed, as Mr Mews appears to have done, it is relatively easy to fit the remaining pieces together to reach the desired conclusion. 560 Counsel for Citigroup pointed to the evidence of Mr Harvey to support a finding that the information was generally available. Mr Harvey was called by ASIC to give evidence on its behalf. 561 Mr Harvey's evidence confirmed the heightened speculation in the market up to, and on, 19 August 2005, that Toll would make a bid for Patrick. His evidence also suggested that the "clue" to the large movement in Patrick's share price on 19 August 2005 was the fact that Mr Smith did not publish any analysis of Patrick shares on that day notwithstanding the previous day's profit downgrade. Citigroup submitted that this supported the opinion expressed by Mr Mews. 562 However, it seems to me that the view I reached about Mr Mews' evidence applies equally to that of Mr Harvey. Although Mr Harvey acknowledged that the absence of a report from Mr Smith may have triggered some of the activity in Patrick shares, this was a clue that was only available with the benefit of hindsight. 563 Citigroup submitted that even if the relevant supposition was not generally available at the opening of the market on 19 August 2005, it was widely known to the market by 3:37pm which is the relevant time for determining the first insider trading claim. 564 Mr Sisson conceded that the likelihood of a Toll takeover bid became more generally known as the day's trading progressed. Indeed, he said the situation was "more equivocal" by 3:37pm because information relating to the likelihood of a bid for Patrick appears to have become more generally available during the course of the day. 565 But the supposition for which ASIC contends is that Citigroup was acting for Toll in relation to the takeover of Patrick. It seems to me, as I have said above, that the link to Citigroup is an essential part of the allegation. Mr Sisson's concession did not extend to the market knowledge of such a link. Nor do I consider it to be supported by Mr Mews' evidence or by that of Mr Harvey. I have come to this view notwithstanding Citigroup's submission that Mr Mews was only cross-examined in a perfunctory manner.

Issue 15 - Whether the Information was Price Sensitive 566 In order for the information to be taken to have the necessary material effect on the price of Patrick shares, it had to be information that "would, or would be likely to, influence persons" who commonly acquire shares in deciding whether or not to acquire or dispose of Patrick shares: see s 1042D of the Corporations Act. 567 In his first report of 31 October 2006, Mr Sisson expressed the view that "the certain knowledge that Toll had engaged a major investment bank to act on its behalf would undoubtedly have had a material impact" on the price of Patrick shares. However, the difficulty with this evidence is that it does not accord with the pleaded supposition. It cannot therefore support the proposition that the information was price sensitive. 568 Mr Mews addressed the question directly. He saw no basis for suggesting that knowledge of the supposition that Citigroup was acting for Toll in relation to a possible takeover of Patrick by Toll would have affected the market at 3:37pm when Mr Manchee disposed of nearly 200,000 Patrick shares. 569 Mr Sisson came close to conceding the correctness of this view in his report of 16 March 2007. He said that in the circumstances which existed at that time, it was possible to argue that the relevant information would have had little "further impact" on the price of Patrick shares because the share price had already moved to a price which reflected a substantial likelihood of a takeover, although "not necessarily with Citigroup acting for the bidder". 570 What is missing from Mr Sisson's concession is a consideration of the price sensitivity of that part of the information which focuses upon Citigroup's role as acting for the bidder. As I have said several times, that was a part of the supposition which ASIC contended that Mr Manchee made. 571 Although I have found that much of the supposition as alleges that Citigroup was acting for Toll was not generally available, in my opinion, if it had been available, the better view is that it would not have had the requisite material effect at the time when the first insider trading is alleged to have taken place. That was Mr Mews' evidence and Mr Sisson's concession comes sufficiently close to agreeing with it.

PART VII - THE SECOND INSIDER TRADING CLAIM - DETERMINATION OF ISSUES

Issue 16 - Possession of the Information 572 The second insider trading claim focuses upon Citigroup's purchases and sales of Patrick shares throughout the course of trading on 19 August 2005. 573 The substance of the claim is that Citigroup acquired and sold the shares on that day while Messrs Roberts, Sinclair, Bartels, Darwell, Monaci, Scott and Manchee were in possession of inside information. The inside information is said to be that Citigroup was acting for Toll in relation to its proposed takeover of Patrick and that Citigroup knew there was a substantial likelihood that Toll would launch a takeover bid for Patrick in the near future: see Further Amended Statement of Claim [153], [154]. 574 It is unnecessary to consider in any detail which of the relevant Citigroup personnel were "officers" of the company. Plainly, Mr Roberts as CEO was an officer within the definition contained in s 9 of the Corporations Act. So too, it seems to me, were Mr Sinclair as head of Equities and Mr Bartels as head of ECM. This was conceded by Mr Myers. 575 Each of Mr Roberts, Mr Sinclair and Mr Bartels knew at the opening of trading on 19 August 2005 that Citigroup was acting for Toll in relation to the proposed bid and that it was likely that Toll would launch the bid on Monday 22 August 2005. Each was notified on 15 August 2005 of the scheduled rehearsal of the launch of the bid and each of them was subsequently notified of the rescheduled launch set for 22 August 2005. 576 It follows that Citigroup was aware, through the knowledge of those officers at least, of the elements of the inside information alleged by ASIC in the second insider trading claim.

Issue 17 - Whether the Information was Generally Available 577 To suggest that information as to the proposed timing of the announcement was generally available would be contrary to the strategy employed by Citigroup and Toll that this information was not to be disclosed prior to the announcement.

Issue 18 - Whether the Information was Price Sensitive 578 Moreover, it seems to me to be likely that information as to the timing of the bid would have been price sensitive within the test stated in s 1043D of the Corporations Act. This seems to me to be borne out by the fact that Patrick shares opened on the day of the announcement at AUD$7.15, being 10.9% above the closing price on Friday 19 August 2005, and, during the course of very heavy trading on 22 August 2005, rose to AUD$7.38.

Issue 19 - The Chinese Walls Defence 579 The substantial question which arises on the second insider trading claim is whether Citigroup had in operation on 19 August 2005 arrangements that could reasonably be expected to ensure that the information was not communicated to the person who traded in the shares, namely Mr Manchee: see s 1043F of the Corporations Act. That is to say, were Citigroup's Chinese wall arrangements adequate, within the requirements of paragraph (b) of that section. 580 In order to make good the Chinese walls defence, Citigroup must establish that the transaction met each of the requirements of paragraphs (a), (b) and (c) of s 1043F of the Corporations Act: see [252] above. The first of these is satisfied because the decision to buy or sell the Patrick shares was made by Mr Manchee who was not the person who was in possession of the relevant information. 581 The third requirement is also satisfied. This is stated in s 1043F(c) which must be read in light of s 1043F(b). What is required is that the inside information not be communicated to the person who made the decision to enter into the transaction and that no advice "with respect to the transaction", was given by a person in possession of the information. 582 Here, the only communication with Mr Manchee was the 'cigarette on the pavement' conversation which took place with Mr Darwell at 3:30pm. I have already held that Mr Darwell did not communicate to Mr Manchee the information which was the subject of the second insider trading claim, namely that Citigroup was acting for Toll and that Toll would launch a bid for Patrick in the near future. 583 The only remaining question in relation to the third requirement is whether it can be said that advice was given to Mr Manchee with respect to the transaction by a person in possession of the information. No advice was given to Mr Manchee with respect to his purchases of shares before 3:30pm. The relevant transaction therefore is the sales that took place between about 3:37pm and about 4:05pm. 584 It may well be that Mr Darwell's communication to Mr Manchee can be characterised as advice, that is to say, advice not to purchase any more shares. But s 1043F(b) is satisfied even if advice was given with respect to the transaction, so long as it is not given by a person who is in possession of the information. For reasons stated above, Mr Darwell was not in possession of the relevant information. 585 Thus, the only question is whether Citigroup had in place arrangements which satisfied paragraph (b) of s 1043F. I referred at [449] - [452] above, when dealing with the adequacy of Citigroup's arrangements for the management of conflicts of interest, to Mr Monaci's evidence as to Citigroup's physical arrangements and its policies and procedures. I found, albeit with some reservations, that they were adequate to meet the obligations imposed by s 912A(1)(aa) of the Corporations Act: see [452] - [456]. 586 Although ASIC did not cross-examine Mr Monaci as to the adequacy of the arrangements set out in his statement, it contended that there were two reasons why the Chinese walls defence must fail. The first was that Citigroup had no mechanism to bring a trader such as Mr Manchee 'over the wall'. The second was that Citigroup had no effective arrangements to prevent the fourth conflict of interest, which was caused by its purchase of the Patrick shares, from arising. 587 In attacking the absence of any mechanism to bring Mr Manchee across the wall, Citigroup pointed to the ad hoc nature of what took place once the private side became aware of Mr Manchee's trading. 588 It is true, as ASIC submitted, that what took place was unscripted. Moreover, Mr Manchee remained isolated from the information only as a result of the oblique nature of the communications and, in particular, by Mr Darwell's circumspect behaviour in conveying his concerns in a way which did not suggest the existence of price sensitive information. 589 But it would be wrong to conclude that there were no arrangements in place to bring a trader such as Mr Manchee across the Chinese wall. Mr Monaci referred in his statement to Citigroup's written policies which require private side employees not to communicate 'material non-public information' to persons on the public side without involving legal or compliance personnel to assess the materiality of the information and, when appropriate, to implement 'wall crossing' procedures. He also said that: "Any private side person wishing to talk about non-public information with (or otherwise convey such information to) persons from the public side of the information barrier (Chinese wall) are required to pre-clear such communications with legal or Compliance."

590 Assuming Mr Sinclair's statement to Mr Darwell to be 'material non-public information', it would follow that Mr Sinclair's initial communication with Mr Darwell was not in accordance with Citigroup's written procedures. This is because he obtained no prior clearance, as Mr Monaci implicitly recognised in saying "Wait, hang on, Paul is public side". 591 I do not consider that Mr Sinclair is to be criticised. But what the unscripted actions of Mr Sinclair and Mr Darwell show is the practical impossibility of ensuring that every conceivable risk is covered by written procedures and followed by employees. 592 However, the arrangements required to satisfy s 1043F(b) of the Corporations Act do not require a standard of absolute perfection. The test stated in the section is an objective one. It is, "arrangements that could reasonably be expected to ensure that the information was not communicated". 593 In my view, the arrangements referred to by Mr Monaci in his written statement were sufficient to meet the requirements of s 1043F(b). They did not, in express terms, anticipate the situation which arose on 19 August 2005 but they laid down general procedures which could reasonably be expected to ensure that legal or compliance officers of Citigroup vetted any communication of potentially price sensitive information to prevent it crossing the Chinese wall. 594 ASIC submitted that a proper arrangement in the run up to the announcement of the bid would have been to bring proprietary traders such as Mr Manchee across the Chinese wall. It pointed out that those arrangements existed in relation to analysts. 595 However, I do not consider that there is any evidentiary support for the proposition that this step was required in order to put in place appropriate arrangements in relation to proprietary traders. I accept Mr Monaci's evidence that there are policy considerations which underlie the question of when to bring employees across the Chinese wall. This is because, to bring a trader such as Mr Manchee over the wall risks sending a signal to the market about confidential investment banking activities. 596 The findings which I have made also answer ASIC's submission that Citigroup had no arrangements in place to prevent the fourth conflict of interest from arising. 597 What underlies both aspects of ASIC's attack on the adequacy of Citigroup's Chinese walls is its contention that adequate arrangements for the management of conflicts of interest entailed the receipt of Toll's informed consent to proprietary trading. But it would follow from this that Chinese walls could never amount to a defence in the absence of informed consent. Mr Walker conceded as much in his closing address. 598 To make such a finding would be contrary to the express recognition of the Chinese walls defence in s 1043F of the Corporations Act. I therefore reject the submission.

CONCLUSION AND ORDERS 599 The conflicts claims and the insider trading claims fail for the reasons set out above. 600 The conflicts claims depended upon the existence of a fiduciary relationship between Citigroup and Toll. The claims failed at the outset because the mandate letter excluded the existence of such a relationship. The propositions of law relied upon by ASIC to impose a duty on Citigroup to obtain Toll's express consent to propriety trading were not engaged. 601 The law does not prevent an investment bank from contracting out of, or modifying, any fiduciary obligations. ASIC's view of the proper construction of s 912A(1)(aa) of the Corporations Act is consistent with this. 602 In his article in 29 MULR at 505, Mr Tuch refers to public policy reasons that support the imposition of fiduciary obligations on investment banks. He says that permitting investment banks to have interests conflicting with their clients' damages community confidence in the integrity of the relationship and may erode public confidence in the securities and investment markets. However, this is a matter for the legislature, not the courts. 603 The first insider trading claim failed because Mr Manchee was not an "officer" of Citigroup and because he did not make the supposition alleged by ASIC. 604 The second insider trading claim failed because the Chinese walls defence contained in s 1043F of the Corporations Act was engaged. Nevertheless, 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. 605 Accordingly, I will order that the application be dismissed. I see no reason why costs should not follow the event but I will hear argument if either of the parties wishes to contend for a different costs order. I certify that the preceding six hundred and five (605) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

Counsel for the Plaintiff: Mr B Walker SC, Mr J Stevenson SC, Mr N Perram SC and Ms J Single

Solicitor for the Plaintiff Australian Securities and Investments Commission

Counsel for the Defendant: Mr AJ Myers QC, Mr DEJ Ryan SC, Mr RA Dick and Mr M Thangaraj

Dates of Hearing: 26 - 29 March & 11 April 2007

ASIC The Australian Securities and Investments Commission ASX Australian Stock Exchange CIB Corporate and Investment Bank CSS Compliance Surveillance System ECM Equity Capital Markets IBD Investment Banking Division VWAP Volume Weighted Average Price

Bartels, Mark Citigroup, Head of ECM Chatfield, Neil Toll, CFO Darwell, Paul Citigroup, Head of Equity Derivatives Dempsey, Grant Citigroup, Co-Head, Melbourne Coverage, Investment Banking Hanson, John Citigroup, IBD Financial Advisory Deal Team Member Harvey, Darryl ASX, Analyst in the Surveillance Division Little, Paul Toll, CEO Lunny, Christian Citigroup, IBD Financial Advisory Deal Team Member Manchee, Andrew Citigroup, Proprietary Trader, Equities Matheson, Les Citigroup, Country Officer for Citigroup in Australia McLeod, Jason Citigroup, Co-Head of IBD Coverage, Melbourne McInerney, Bernard Toll, Company Secretary Mews, Richard Citigroup's expert Monaci, Peter Citigroup, Managing Director, Head of Capital Markets and Global Banking & Compliance for Asia Pacific CIB Roberts, Stephen Citigroup, CIB CIO Scott, Warren Citigroup's General Counsel, Australia and New Zealand Sinclair, Malcolm Citigroup, Head of Equities Sisson, Andrew ASIC's expert Smith, Jason Citigroup, Transport Analyst Stanley, Stephen Toll, Senior Executive White, David ASX officer Wylie, John Carnegie Wylie & Company Pty Limited