Insider Trading on Credit Default Swaps


The Securities and Exchange Commission brought its first insider trading enforcement action involving credit default swaps. Renato Negrin, a former portfolio manager at hedge fund investment adviser Millennium Partners L.P., and Jon-Paul Rorech, a salesman at Deutsche Bank Securities Inc., are charged with insider trading in credit default swaps of VNU N.V., an international holding company that owns Nielsen Media and other media businesses.

The SEC’s complaint alleges that Rorech learned information from Deutsche Bank investment bankers about a change to the proposed VNU bond offering. This change was expected to increase the price of the CDS on the VNU bonds. Rorech tipped Negrin about the contemplated change to theVNU bond offering, and Negrin then purchased CDS on VNU for a Millennium hedge fund. When news of the restructured VNU bond offering became public, the price of VNU CDS substantially increased. Negrin closed Millennium’s VNU CDS position at $1.2 million profit.

“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.

It should not come as no surprise that the buying and selling of Credit Default Swaps is subject to the insider trading laws.