Judge Dismisses SEC’s First Credit Default Swap Insider Trading Case

June 29, 2010

In a client alert in January, we wrote about the first insider trading case brought by the U.S. Securities and Exchange Commission (the “SEC”) involving credit default swaps (“CDSs”). On June 25, 2010, the Court in SEC v. Rorech dismissed the case, however, the decisions made are important to those who trade or are otherwise involved with CDSs.


Last year, on May 5, 2009, the SEC filed a complaint against Jon-Paul Rorech, a bond salesman at Deutsche Bank Securities Inc., and Renato Negrin, a trader at Millennium Partners, L.P., for alleged insider trading in CDSs.

The SEC alleged that in July 2006, Rorech, by virtue of his position at the bank, was privy to discussions regarding the possible restructuring of debt at VNU, N.V. (“VNU”), a Dutch media conglomerate that was taken private, and that Rorech improperly shared that information with Negrin, including in two unrecorded cell phone calls. The SEC alleged that Negrin bought VNU CDSs based on Rorech’s tip, profiting on the trade by $1.2 million.

In August 2009, both Rorech and Negrin filed motions to dismiss the complaint, essentially arguing that CDSs were not securities covered by the insider trading laws. In December 2009, denying the motions to dismiss of Rorech and Negrin, the Court held that whether CDSs were actually “securities-based” was a question of fact that required further proceedings.

In April of this year, the Court conducted a three-week bench trial where both the SEC and Rorech and Negrin put forth their evidence, testimony and legal arguments. On June 25, 2010, the Court issued a 122-page opinion dismissing all claims against Rorech and Negrin.

Importantly for those who work in the CDS market, the Court found that the SEC has jurisdiction over CDSs, finding that “the material terms of the VNU CDS contracts were based on the price, yield, value, or volatility of VNU’s securities. Therefore, the CDSs at issue in this case are security-based swap agreements for the purposes of section 206B of the Gramm-Leach-Bliley Act and are subject to section 10(b)’s antifraud provisions and the rules promulgated, and judicial precedents decided, thereunder.” Op. at 100.1

The Court determined that the discussions between Rorech and his customers, both concerning the likelihood of a potential debt restructuring, and what kind of restructuring his clients preferred, were neither material nor non-public. The court also found that the sharing of customers’ indications of interest was not material non-public information. The Court concluded that

“[b]ecause any information that Mr. Rorech possessed on July 17, 2006, about Deutsche Bank’s alleged intention to recommend a holding company issuance was based on information in the market and was completely speculative in any event, any information Mr. Rorech shared with Mr. Negrin cannot be considered material. Likewise, information regarding Mr. Rorech’s customer’s indication of interest was not material because the demand for deliverable bonds was known in the market.”

Op. at 5-6.

The Court also held that Rorech did not violate Deutsche Bank’s confidentiality policies and, therefore, the SEC had not proven its case under the ‘misappropriation theory’ of insider trading. Finally, with respect to the cell phone calls, the Court found that the SEC provided no evidence of what was said, and in contrast, there was “ample evidence that undercuts the SEC’s theory that the defendants engaged in insider trading.”

If you have any questions regarding this decision, please contact one of the following Litigation Partners:

Mark J. Hyland
(212) 574-1541

M. William Munno
(212) 574-1587

Jack Yoskowitz
(212) 574-1215


1 The financial legislation recently passed by Congress also gives this authority to the SEC.