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The US Securities and Exchange Commission on Tuesday brought its first case of insider trading involving credit default swaps, accusing a bond salesman of passing confidential information to a hedge fund manager that resulted in an instant profit of $1.2m.
In a civil complaint filed in New York, the SEC alleged that a bond salesman for Deutsche Bank, which was working on a high-yield bond issue for VNU, tipped off a former portfolio manager at Millennium Partners about changes in the Dutch publishing company’s debt offering in July 2006.
Most insider trading cases involve the passing of confidential information that is likely to affect the price of a stock. In this case, the SEC alleges that information about changes in VNU’s 2006 debt offering would have had an impact in the credit default swap market, where bond buyers often buy insurance on bonds they own.
According to the SEC complaint, in the days leading up to the restructuring of VNU’s debt offering, Jon-Paul Rorech, a Deutsche Bank bond salesman, passed along detailed information about the bond issue to Renato Negrin, a portfolio manager at Millennium Partners.
The hedge fund, in turn, bought CDSs on the VNU bonds, allegedly because of its access to this information. After the restructured bond issue was announced, the value of the CDSs rose and Millennium realised an immediate profit of $1.2m.
“This is the first insider trading enforcement action involving credit default swaps,” said Scott W.
Friestad, deputy director of the SEC enforcement unit.
“As alleged in our complaint, Rorech and Negrin checked their integrity at the door and schemed to engage in insider trading of CDS to the detriment of investors and our markets.”
Richard Strassberg, the attorney representing Mr Rorech, said the case had “no merit” and that his client would fight the charges. Mr Rorech is currently on leave from Deutsche Bank.
Through his attorney, Mr Negrin also denied the charges, saying that all conversations between him and the bond salesman were appropriate.
The 13-page SEC complaint repeats fragments of recorded conversations the two men had about developments in the bond sale. After Mr Negrin asked Mr Rorech for some way to “handicap” the probability that VNU would issue new bonds at the holding company level, Mr Rorech paused and allegedly said: “You’re listening to my silence, right?”
Mr Negrin then said: “OK, I’ll call you back.” The two men then had a three-minute, unrecorded conversation on their cell phones.
Deutsche Bank and Millennium have not been accused of any wrongdoing.