Manipulating the traders trading inside?

More on the Citigroup "insider trading" ASIC allegations is coming to light (see Chinese wall goes up in smoko and Update to Citigroup ASIC matter). It seems where there's smoko, there's fire.

But first, get the big picture so the details do not overwhelm. Toll was making a hostile takeover bid for Patrick. Obviously, it was in Toll's interests that it be able to buy Patrick at the lowest price possible. Citigroup was steering the takeover for Toll, and probably not pro bono.

Citigroup has a propretary trading desk where it tries to beat the rest of the punters out there trading the markets by buying stocks low and selling them higher. The theory is that these traders should have only such knowledge as is available to the broad market, because the small guys just would not throw their money away to these big guys if the small guys felt the big guys had some inside track. Which of course they do, so that is why the big guys want for all the world to make it APPEAR like they are just another punter so that they can keep the small guys in the game. That just makes it so much easier for them to keep taking their chips.

To keep up this nice illusion of a level playing field, there are laws and regulations that ask these guys not to manipulate the market and not to trade on inside information. Now I realise that sounds a smidgen precatory, but when you look at the way the laws are crafted you realise that it is just about impossible to mount a case of market manipulation or insider trading, and the watchdogs have not got much form in pursuing them.

Charges of manipulating the market carry just so much more moral opprobrium than insider trading because it APPEARS to most folks that insider trading is just a passive thing and doesn't really harm anyone, it only benefits the insider. But manipulating anything just sounds so much more intrusive and coersive and meddling. It is important, in these things as in others, to keep up appearances, so if you are going to go down, you want to go down on insider trading and not market manipulation.

So, you've got the Citigroup advisers in the equity section, headed up by Malcolm Sinclair, and you've got these Citigroup punters in the equities derivatives section headed up by Paul Darwell, and you've got this guy Andrew Manchee, working under Darwell, who was the screen jockie doing the punting. You with me on the cast of characters?

Ok, so this is the installment on the story supplied by the Sydney Morning Herald today. As I usually do, I've kind of selectively used and/or mixed up and rearranged quotes, so you ought to go to the source for all the context and juxtiposition, in case I've somehow managed to paint the picture diffently than the Herald's editors preferred. See, How Citigroup's walls fell on Toll and Toll keeps Citigroup despite claims of insider trading .

IT WAS on Friday, August 19 last year that the head of equities at Citigroup, Malcolm Sinclair, first knew he had a problem.

According to a statement of claim lodged by the Australian Securities and Investments Commission in the Federal Court, Sinclair had learned that one of his colleagues in the equities division, Andrew Manchee, was buying shares in Patrick Corporation for Citigroup's proprietary desk - the bank's own account.

Just a day earlier, Patrick Corporation had issued its first profit warning and its shares were down sharply from a record high. The Herald had revealed that day that Toll Holdings was poised to launch a bid for Patrick, so the unexpected weakness in the share price looked attractive amid the takeover speculation.

Manchee began buying and by 3pm had bought 1 million Patrick shares.

Sinclair noticed the trading - and Patrick's rising share price - at about lunchtime.

He contacted the head of equity derivatives, Paul Darwell, to whom Manchee reported.

"Do you know who is buying Patrick's shares?" Sinclair asked Darwell. "We may have a problem with that."

Sinclair was holding back. As head of equities, he worked in a division on the public side of the Chinese wall at Citigroup, dealing with information publicly available to everyone.

But Sinclair's position gave him a dual role and he was also engaged on the private side of the Chinese wall - the deal-making side - and he knew something big was about to happen.

And given Citigroup was acting for Toll, it was clearly not in its interests to see Patrick's share price rise.

But on the other side of Citigroup's Chinese wall, Manchee was buying Patrick shares for Citigroup hoping its share price would rise.

ASIC alleges that when Sinclair spoke to Darwell, Darwell knew of the speculation and rumours of a possible takeover and knew that Sinclair worked on the private side of Citigroup's Chinese wall.

Darwell "made a supposition that Citigroup was acting for Toll in relation to the takeover of Patrick", ASIC alleges, and that supposition was "information" not available to the rest of the market.

Then something "unusual" happened.

Darwell asked Manchee, the trader buying Patrick shares using Citigroup's money, to "go outside for a cigarette".

At 3.30pm on the footpath outside the Citigroup offices, ASIC alleges Darwell "told Mr Manchee to cease buying shares in Patrick".

"It was likely or at least possible that Mr Darwell knew something about Citigroup's involvement in the rumoured takeover of Patrick by Toll that he could not reveal to Mr Manchee," ASIC claims, reiterating the information was not publicly available.

Once back at his desk, Manchee's trading behaviour changed.

Until then, he had bought 1 million Patrick shares, selling just a small parcel as the share price rose throughout the day. And he had kept buying right up until he went downstairs for his chat and smoke with Darwell, including 167,000 shares between 3.05pm and 3.19pm.

But commencing at 3.37pm, Manchee began selling heavily. He offloaded 192,352 shares in less than half an hour by the time the market closed at 4pm.

Even as Manchee dumped Patrick stock, takeover speculation was rife and Patrick shares closed up strongly at $6.45, having opened at $5.75.

Manchee had bought 1.2 million Patrick shares and sold 217,352, representing 8.5 per cent of all trade in Patrick until 3pm and nearly 6 per cent by the close of trade.

It's understood Citigroup made around $130,000 on the trades.

Only when the bid was launched did Citigroup place Patrick shares on a restricted list, preventing trading in its shares on Citigroup's behalf.

The bank denied all of ASIC's charges. "Citigroup does not agree with the allegations made today by ASIC," the bank's head of Australian corporate and investment banking operations, Stephen Roberts, said in a statement.

"This lawsuit challenges an industry practice. If an investment bank had to stop all of its other activities every time it took a corporate advisory mandate, market activity would stall. More importantly, it could prematurely signal to other market players that a deal was afoot."

Nosiree bob, these investment bankers will not give up their proprietary trading without a major fight. See Risque business.