Traders Checked Their Integrity at the Door

The Securities and Exchange Commission today charged a former portfolio manager at hedge fund investment adviser Millennium Partners L.P. and a salesman at Deutsche Bank Securities Inc. in the first insider trading case involving credit default swaps (CDS).

With the help of the U.K.’s Financial Services Authority, the SEC investigated Renato Negrin and Jon-Paul Rorech, who they now charge with collaborating in a scheme to profit from changes to a proposed bond offering of VNU,  an international holding company that owns Nielsen Media and other media businesses.

According to the SEC’s complaint, Rorech illegally tipped Negrin about the contemplated change to the bond structure, and Negrin then purchased CDS on VNU for a Millennium 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 $1.2 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 noted that while CDS may be too still be obscure to the average individual investor, everyone understands fraudulently trading with an unfair advantage. He called for a level playing field for even the most sophisticated financial instruments.

Image Credit: walknboston, Flickr