The world's biggest bank has been cleared of insider trading and conflicts of interest, but questions remain about the effectiveness of its so-called "Chinese walls".

The Australian corporate regulator has been dealt a powerful blow by the Federal Court in Sydney which comprehensively trashed its lawsuit against Citigroup. The Australian Securities and Investments Commission (ASIC) case had attracted world-wide attention because it challenged the business model for the global investment banking industry.

You can read the ruling here.

ASIC had alleged conflicts of interest and insider trading arising out of Citigroup's role advising one of Australia's biggest takeovers, a case I have covered in great detail over the last year. If you want some background on the case, you could start by checking it out here and here.

The case basically revolved around ASIC's claim questioning the effectiveness of Citigroup's "Chinese walls" intended to separate Citigroup's proprietary trading desk, which trades in shares using the bank's own money, and Citigroup's corporate advisory services which regularly deals in information that can send a company's stock up and down. Now, according to ASIC, the wall dividing the two sides was not that secure. Furthermore, it claimed that Citigroup had a fiduciary relationship with the client. Citigroup was advising the client on the takeover, and the other side of the wall was trading in the shares of its takeover target.

But in his ruling, Justice Peter Jacobson said there was no fiduciary relationship because Citigroup had inserted an exit clause in its letter of engagement with the client. That clause expressly stated that Citigroup had been give the job "as an independent contractor and not in any other capacity including as a fiduciary".

The judge said this was not only unambiguous, it wasn't the court's job to settle these matters. That's why you have laws. "The court held that the law does not prevent an investment bank from contracting out of a fiduciary duty; whether it should be able to do so is a matter for the legislature, not the courts."

Still, Justice Jacobson raised concerns about those "Chinese walls". The events, he said, showed that they "may not be as solid as the name implies".

Justin O'Brien, a professor of corporate governance at Australian National University, told me ASIC's case was an "Eliot Spitzer-type case which was morally strong and legally weak".

"If what ASIC had wanted was to embed a greater sense of integrity in the market place, then litigation is not necessarily the best way to advance that strategic goal."

This case is significant because it sends a signal to securities regulators around the world. If you want to take on the big and cashed up investment banks, tread carefully because the reputational damage associated with losing these cases is high.