Deutsche Bank AG salesman Jon-Paul Rorech broke no law by giving a hedge-fund manager information on a bond sale, his lawyer said as U.S. regulators’ first trial alleging insider-trading of credit-default swaps came to a close.
“Everything he knew he was allowed to share with customers,” attorney Richard Strassberg said today in his summation. U.S. District Judge John G. Koeltl in Manhattan, who heard the nonjury civil trial that began April 7, said he will rule on the case at a future date.
The U.S. Securities and Exchange Commission accuses Rorech, 39, of illegally feeding information to Renato Negrin, 46, a former Millennium Partners LP portfolio manager, who bought swaps to reap a $1.2 million profit when the 2006 deal was announced, according to the civil complaint filed in May.
The defendants contend the SEC has no jurisdiction over swaps and no basis for bringing the case.
The commission’s suit focuses on efforts by Dutch media company VNU Group BV, later renamed Nielsen Co., to restructure its debt in 2006 as part of a 7.5 billion euro ($9.9 billion) leveraged buyout.
The agency didn’t accuse Frankfurt-based Deutsche Bank or New York-based hedge fund Millennium of wrongdoing. Rorech is on paid leave from Deutsche Bank.
In July 2006, VNU, whose units include the Nielsen TV- ratings company, announced a $1.67 billion bond offer by subsidiaries. Investors were concerned that the bonds weren’t “deliverable,” or couldn’t be used to settle existing VNU credit-default swaps, according to the trial evidence.
On July 24, 2006, Deutsche Bank announced the offer would be restructured to include a 200 million euro tranche of bonds issued by the holding company that would be covered by the swaps.
The SEC said Rorech tipped Negrin to the restructuring before that announcement. Negrin bought 20 million euros of swaps, and profited by selling them after the deal was announced and the swap price rose.
“Mr. Negrin had perfectly legitimate reasons to buy the credit-default swaps,” his lawyer Lawrence Iason said in his closing argument. “It was because he thought the credit-default swaps were underpriced.”
Credit-default swaps, financial instruments based on bonds and loans, are used to speculate on a company’s ability to repay debt. The contracts, typically expiring after five years, pay if a borrower fails to meet obligations. The contracts can be settled either by cash or the physical debt obligations, depending on the terms.
Rorech and Negrin argued that the SEC has no jurisdiction over the credit-default swaps because they’re private contracts, not securities. The SEC argued the price of the swap is based on the price of the bond.
The defendants also tried to show during the trial that Rorech discussed the holding-company tranche with potential bond buyers such as Negrin as part of figuring out how to structure the debt issue.
“It was my custom and practice to share information about potential changes back and forth with the market” to get feedback, Mark Fedorcik, Deutsche Bank’s global head of leveraged-debt capital markets, testified April 14.
Deutsche Bank also didn’t expect a potential order for as much as $100 million of the holding-company bonds to be kept confidential, said Strassberg, Rorech’s lawyer at Goodwin Procter LLP in New York.
Both Rorech and Negrin took the stand in the trial.
The SEC says the fact that the men, when discussing the VNU deal, twice switched from recorded landlines to their cell phones is evidence they knew what they were doing was wrong.
Rorech didn’t learn that Deutsche Bank would recommend the holding-company tranche to the private-equity sponsors until three hours after the second mobile-phone call, Strassberg said.
“The cell-phone calls don’t tell us anything about the intent that is at issue in this case,” Strassberg said.
The same information the SEC says Rorech gave Negrin in those calls he gave to other customers on recorded calls, Strassberg said.
“The SEC has been wholly unable to carry its burden on any element in this case,” Strassberg said. “It’s time for this nightmare for Mr. Rorech to end.”
Richard G. Primoff, a lawyer for the SEC, said in his summation that Rorech knew before the cell-phone calls that Deutsche Bank was leaning toward recommending the holding- company tranche.
The evidence showed Negrin asking Rorech on the recorded line for something he could “grab onto” about the odds of such a restructuring, the SEC lawyer said.
“All of this, I think, adds up to a very strong likelihood of what was said on the cell-phone calls,” Primoff said.
Negrin is liable because he knew, or should have known, Rorech had a duty to keep the information private, the SEC claims.
“He knows sales people are on the public side and normally only have public information,” said Iason, Negrin’s lawyer, of Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer PC in New York. “There is no evidence to support the commission’s claims against Mr. Negrin.”
The SEC is seeking permanent injunctions prohibiting Rorech and Negrin from violating securities laws. It also wants them to give up Negrin’s personal trading profit, which it says is $240,000, or 20 percent of the $1.2 million gained. The agency wants to hold both of them responsible for the disgorgement, in addition to civil penalties.
Under U.S. securities law, investing based on material information from someone who is required to keep it confidential constitutes insider trading.
The case is Securities and Exchange Commission v. Rorech, 1:09-cv-04329, U.S. District Court, Southern District of New York (Manhattan).
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