Opponents of credit default swaps — and the chief executives of major investment banks — have long argued that vile speculators used CDS contracts to manipulate (by which they mean, drive down) share prices.
The allegations made today by the US Securities and Exchange Commission, ground breaking though they are, don’t quite give credence to that particular argument. They are enormously interesting, nonetheless.
Here are the facts of that case, which involves a (former) portfolio manager at Millennium Partners, a salesman at Deutsche Bank and VNU, a Dutch media conglomerate. Via Securities Docket, emphasis ours:
The SEC charged Renato Negrin, a former portfolio manager at hedge fund investment adviser Millennium Partners L.P., and Jon-Paul Rorech, a salesman at Deutsche Bank Securities Inc., with insider trading in credit default swaps of VNU N.V., an international holding company that owns Nielsen Media and other media businesses. The case represents the SEC’s first insider trading enforcement action involving credit default swaps.
The SEC alleges that Rorech learned information from Deutsche Bank investment bankers about a change to the proposed VNU bond offering that was expected to increase the price of the CDS on VNU bonds. Deutsche Bank was the lead underwriter for a proposed bond offering by VNU. Rorech then allegedly tipped Negrin about the contemplated change to the bond structure, and Negrin purchased CDS on VNU for a Millennium hedge fund. When news of the restructured bond offering became public in late July 2006, the price of VNU CDS substantially increased, and Negrin closed Millennium’s VNU CDS position at a profit of approximately $1.2 million.
In all, not dissimilar from alleged insider trading in equities. The SEC’s complaint can be found here.
According to the complaint, Rorech is a 36-year-old Brooklynite employed as a bond and CDS salesman at Deutsche Bank Securities. Negrin, 45, is also a New Yorker and is described in the complaint as “head of a credit trading group of about seven individuals” at Millennium Partners, which the SEC called “an unregistered hedge fund investment adviser.”
Millennium issued the following statement in response to the allegations:
Millennium received a request for information from the SEC regarding this matter and has cooperated fully throughout the process. There is no charge in the SEC’s complaint that Millennium engaged in any improper conduct.
“We have a zero tolerance policy toward insider trading and Millennium requires every employee to certify annually that they are aware of and in compliance with our policies. Millennium employs a small army of compliance personnel who conduct surveillance, review e-mails, and make every effort to deter or prevent any illegal or improper activity,” said Israel Englander, Chairman and Chief Executive of Millennium. “We promote a culture of compliance and a deep commitment to our firm’s code of ethics.”
Meanwhile, Bloomberg reports that both Rorech and Negrin have denied the allegations:
Rorech’s lawyer, Richard Strassberg of Goodwin Procter LLP in New York, said his client denies the SEC claims.
“Mr. Rorech did not commit insider trading or any other violation of the securities laws,” Strassberg said. “He was simply doing his job trying to help the bank and its client, VNU, sell a high-yield bond deal.”
Negrin “flatly denies the charges, and he intends to contest them,” said his lawyer, Lawrence Iason of Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C. in New York. “We are confident he will be vindicated.”
Negrin’s lawyer is also protesting the SEC’s authority to bring the case, according to Bloomberg (emphasis ours):
Iason said the SEC lacks the legal authority to bring the case because the underlying Dutch bonds aren’t subject to the U.S. regulator’s oversight. He also said his client didn’t receive illicit inside information. “I don’t think there’s jurisdiction and I don’t think there’s insider trading here,” Iason said.
Definitely a case to watch.