Deutsche Bank AG salesman Jon-Paul Rorech didn’t illegally disclose information on a bond sale to a hedge-fund manager, a judge ruled in U.S. regulators’ first lawsuit alleging insider trading of credit-default swaps.
U.S. District Judge John G. Koeltl in Manhattan ruled yesterday there was no evidence that Rorech and Renato Negrin, a former Millennium Partners LP portfolio manager, violated laws against insider trading. Information exchanged by the pair in telephone calls, presented by the Securities and Exchange Commission as evidence, wasn’t confidential, Koeltl said.
The SEC accused Rorech, 39, of illegally feeding Negrin, 47, information so he could buy credit-default swaps and profit from the announcement of a debt restructuring by Dutch media company VNU Group BV, according to the civil complaint filed last year. Negrin reaped $1.2 million profit on the deal.
“While the SEC attempts to attribute nefarious content to those calls through circumstantial evidence, there is, in fact, no evidence to support this inference,” Koeltl said in his 122-page ruling. “The SEC has also failed to present any evidence that Mr. Rorech had any motive to provide ‘inside information’ to Mr. Negrin.”
Koeltl, who heard the nonjury civil trial, ruled that the SEC has jurisdiction over swaps. He decided in the defendants’ favor on the insider trading accusation.
“The court’s decision is a complete vindication,” Richard Strassberg, Rorech’s attorney said in a statement. “Trial proved what Mr. Rorech always maintained -- at all times, he acted consistently with Deutsche Bank’s policies and with industry practice.”
In a statement provided yesterday by his lawyer, Lawrence Iason, Negrin said: “As I stated from the outset, I did nothing wrong and I never traded on inside information. Today I’m finally vindicated.”
The commission’s suit focused on efforts by VNU Group, 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.
Koeltl rejected Rorech and Negrin’s argument that the SEC has no jurisdiction over the credit-default swaps because they’re private contracts, not securities. The judge agreed with the SEC that the swaps are “security-based” because their price reflects the bond price, yield or value.
Price, Yield, Value
“The material terms of the VNU CDS contracts were based on the price, yield, value, or volatility of VNU’s securities,” Koeltl said. “Therefore, the CDSs at issue in this case are security-based swap agreements” for the purposes of the Gramm-Leach-Bliley Act and are subject and are subject to federal securities-fraud law.
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” into, 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 revamped 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 change before it was announced. Negrin bought 20 million euros of swaps, and profited by selling them after the deal was made public and the swap price rose.
Credit-default swaps, financial instruments based on bonds and loans, are used to speculate on a company’s ability to repay debt. The contracts pay if a borrower fails to meet obligations. Depending on the terms, the contracts can be settled either by cash or the physical debt obligations.
The SEC said the men, when discussing the VNU deal, twice switched from recorded landlines to their cell phones, showing 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, his lawyers argued during the trial.
Negrin was liable because he knew, or should have known, Rorech had a duty to keep the information private, the SEC claimed.
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).