SEC Brings First-Ever Credit Default Swaps Insider Trading Case
Hedge Fund Law Report
On May 5, 2009, the Securities and Exchange Commission (SEC) charged Jon-Paul Rorech, a salesman at Deutsche Bank Securities, and Renato Negrin, a former Millennium Partners, L.P. hedge fund portfolio manager with insider trading in credit default swaps of VNU N.V., a Dutch media conglomerate (VNU). According to the SEC, this case is the first insider trading enforcement action it has brought with respect to credit default swaps (CDSs). Rorech allegedly learned information from Deutsche Bank investment bankers about a change to a proposed VNU bond offering that was expected to increase the price of CDSs on VNU bonds. Rorech then purportedly illegally tipped Negrin about the contemplated change. Negrin then purchased CDSs (which are not registered securities, and are used to insure against the default of debt and certain related credit events) on VNU for a Millennium hedge fund. According to the SEC, when news of the restructured bond offering became public in late July 2006, the price of VNY credit default swaps increased, and Negrin closed Millennium’s VNU credit default position at a profit of about $1.2 million. The SEC seeks an injunction barring further securities laws violations, disgorgement of profits and civil penalties. We detail the SEC’s factual allegations and legal claims.