The US Securities and Exchange Commission (SEC) has charged hedge fund manager Renato Negrin and bond salesman Jon-Paul Rorech with insider trading
The US Securities and Exchange Commission (SEC) has charged hedge fund manager Renato Negrin and bond salesman Jon-Paul Rorech with insider trading in credit default swaps (CDS) of VNU N.V, an international holding company that owns Nielsen Media and other media businesses.
The SEC complaint, the first of its kind involving credit default swaps, alleges that Rorech, a bond and CDS salesman at New York-based Deutsche Bank Securities Inc, illegally tipped off Rorech, a former portfolio manager with hedge fund firm Millennium Partners LP, about a change to a proposed VNU offering that was expected to increase the price of the credit default swaps on VNU bonds. Rorech obtained the information from Deutsche Bank, the lead underwriter for the proposed VNU bond offering.
According to the SEC complaint, Negrin subsequently bought VNU bonds on behalf of a Millennium Partners 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 USD1.2 million.
“This is the first insider trading enforcement action involving credit default swaps,” said Scott W Friestad, Deputy Director of the SEC’s Division of Enforcement. “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. 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, which is investigating fraud and market manipulation by hedge fund investment advisers. The SEC has brought more than 100 cases involving hedge funds in the past five years, including more than 20 this year alone. The SEC already has brought more enforcement actions involving hedge funds in the first four months of this year than all of last year.
The SEC’s complaint charges Negrin and Rorech with violations of the antifraud provisions of the Securities Exchange Act of 1934 and seeks a final judgment ordering them to pay financial penalties and disgorgement of ill-gotten gains plus prejudgment interest. Millennium has agreed to escrow the amount that the SEC is seeking as ill-gotten gains pending a final judgment in this case.