Securities Law Blog

On Friday June 25, 2010, after a three week trial, U.S. District Judge John Koeltl dismissed the lawsuit against Deutsche Bank AG salesman Jon-Paul Rorech and former Millennium Partners LP portfolio manager Renato Negrin. The case marked the first insider trading enforcement action involving credit default swaps (CDS) filed by the Securities and Exchange Commission (SEC).

The original complaint, filed in May 2009, is based on the 2006 buyout of VNU N.V., an international holding company that owned Nielsen Media and other media businesses, by a group of six private-equity firms. The SEC alleged that Rorech learned information from Deutsche Bank investment bankers about a change to the proposed VNU bond offering, on which Deutsch Bank was the lead underwriter, which was expected to increase the price of CDS on VNU bonds. Rorech allegedly tipped off Negrin about the potential change to the bond structure, after which Negrin purchased CDS on VNU for a Millennium hedge fund.

After the announcement of the restructuring became public, the price of VNU CDS significantly increased, generating a $1.2 million profit at the close of Millennium’s VNU CDS position.

The SEC alleged that Rorech and Negrin shared confidential information via telephone on a recorded landline and twice switched to their cell phones, apparently showing that they knew what they were doing was wrong.

Judge Koeltl rejected the recorded calls as substantial evidence to insider trading stating that “the SEC attempts to attribute nefarious content to those calls through circumstantial evidence, there is, in fact, no evidence to support this inference and ample evidence that undercuts the SEC’s theory that the defendants engaged in insider trading.”

Part of Rorech and Negrin’s defense argued that the SEC had no jurisdiction over the CDS because they are private contracts, not securities. Judge Koeltl however agreed with the SEC’s jurisdiction because the swaps are “security-based.”

“The material terms of VNU CDS contracts were based on the price, yield, value, or volatility of VNU’s securities,” the Judge said. “Therefore, the CDS at issue in this case are security-based swap agreements” and are subject to the federal securities laws.

There is no word yet on whether the SEC will appeal the decision.