Marketplace Scratch Pad

First insider trading case on CDS

Scott Jagow May 5, 2009

The SEC has charged a former manager at a hedge fund and a salesman for Deutsche Bank with insider trading on credit default swaps. It’s the first SEC enforcement involving CDS.

The SEC says CDS salesman Jon-Paul Rorech of Deutsche Bank tipped off Renato Negrin of Millennium Partners about a bond sale in 2006. Negrin then bought insurance on these bonds and made a $1.2 million profit for his company. The bonds in question were for a Dutch publishing firm called VNU.

From the SEC press release:

“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.”

James Clarkson, Acting Director of the SEC’s New York Regional Office, added, “CDS may still be obscure to the average individual investor, but there is nothing obscure about fraudulently trading with an unfair advantage.

The SEC wants the two men to give up their “unlawful trading profits” and pay fines. Both men deny the charges. Negrin’s attorney says there was no information exchanged AND the SEC has no jurisdiction anyway over a Dutch company’s bonds.

The FT says the SEC has snippets of phone conversations between the two men:

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.

Not sure what to make of this. It’s a case to watch, though. A couple years ago, Fed Chairman Ben Bernanke urged the SEC to crack down on CDS abuses. It’s hard to believe this is the first and only case of insider trading on CDS. The SEC does say it has brought 20 cases against hedge funds the first four months of 2009, more than all of last year.

Maybe it’s a better-late-than-never thing, although it seems pretty darn late. And if the SEC doesn’t have jurisdiction in this case or can’t prove it, it just comes off like the SEC is cracking down on nothing.

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