SEC Files First-Ever Insider Trading Case Involving Credit Default Swaps

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.

Scott W. Friestad, Deputy Director of the SEC’s Division of Enforcement, confirmed that the case was the SEC’s first-ever insider trading enforcement action involving credit default swaps, and stated that “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.”

James Clarkson, Acting Director of the SEC’s New York Regional Office, added that “although CDS market participants tend to be experienced professionals, there must be a level playing field with even the most sophisticated financial instruments.” The case was handled by the SEC Enforcement Division’s Hedge Fund Working Group.

According to the SEC, counsel for the defendants are as follows:

For Rorech: Richard Strassberg, Goodwin Procter LLP
For Negrin: Larry Iason, Morvillo Abramowitz

Read the SEC’s Complaint