March 26 (Bloomberg) -- Citigroup Inc. was concerned about a possible insider-trading probe after the bank traded shares of Patrick Corp., Australia's federal court was told today.

There was ``a perception of potential insider trading,'' Stephen Roberts, Citigroup's head of investment banking in Australia, said on the first day of a Sydney trial in which the world's biggest bank by value is being sued by the Australian Securities & Investments Commission.

Roberts, 50, said he sought assurance from Citigroup's head of compliance, Peter Monaci, that ``he was comfortable that all our controls and procedures were in place with respect to conflict management.''

The trial is the first test of a two-year-old law governing how securities firms manage conflicts of interest between their advisory roles and proprietary trading on their own account. New York-based Citigroup denies any wrongdoing and none of its employees are defendants in the trial.

The regulator's case stems from trades made by one of Citigroup's traders on Aug. 19, 2005, the last business day before Melbourne-based Toll Holdings Ltd. made a hostile A$5.2 billion ($4.2 billion) bid for Patrick, based in Sydney.

A breach in Citigroup's so-called Chinese wall is alleged to have occurred when Paul Darwell, head of equity derivatives, met with trader Andrew Manchee outside the firm's Sydney office for a cigarette break Aug. 19 and told him to stop buying Patrick shares for Citigroup's account, according to a claim filed by the regulator in March last year.

`Questions Asked'

Manchee, who then sold 192,353 Patrick shares, had bought more than 1 million earlier that day. His trades triggered a probe into whether he knew Citigroup was advising Toll on its bid for Patrick, whose shares surged 13 percent on Aug. 19.

``I was concerned given the price appreciation and our proprietary trading that questions would be asked by the regulator,'' Roberts told the court today. Citigroup's head of equity capital markets Mark Bartels said at a meeting on the night of Aug. 19 that ``our client was relaxed'' about the bank trading in Patrick shares for its own account, Roberts said.

Earlier, the court was told Citigroup had a fiduciary duty to get permission from its client, Toll, before buying shares of Patrick for its own account.

In his opening address, Brett Walker, a lawyer for the commission, accused Citigroup of having a conflict of interest with Toll. ``The merchant bank adviser must obtain explicit permission for its own proprietary trading,'' Walker said.

`Utterly Hopeless'

The regulator will call seven witnesses, including Roberts, Citigroup's general counsel Warren Scott, head of equities Malcolm Sinclair, trader Manchee and Neil Chatfield, Toll's chief financial officer, Walker said.

``The case being advanced by Asic is utterly hopeless,'' said Allan Myers, a lawyer for Citigroup. He denied the bank had a fiduciary duty to disclose trading of Patrick stock to Toll.

Citigroup will call Monaci and Bartels to give evidence, said Myers. There was ``no suggestion of sinister motivations'' at the meeting on the night of Aug. 19, he said. It was ``perfectly natural'' to assume Citigroup's trading of Patrick shares would lead to possible enquiries by the Australian Stock Exchange or the securities regulator, he said.

The commission is seeking a fine of as much as A$1 million and orders for Citigroup to keep price-sensitive information on deals away from traders who buy and sell shares for the firm. The trial, before Judge Peter Jacobson, is expected to last three weeks.

The case is Australian Securities & Investments Commission v. Citigroup Global Markets Australia Pty. No. NSD 651 of 2006.

To contact the reporter on this story: Kevin Foley in Sydney on at k.foley@bloomberg.net

Last Updated: March 26, 2007 03:34 EDT