Tuesday, May 5, 2009

SEC Launches First CDS Insider Trading Case, Millennium Partners Implicated

In a watershed case, the SEC has launched its first CDS insider trading case implicating Millennium Partners portfolio manager Renato Negrin and Deutsche Bank CDS trader Jon Paul Rorech. According to the SEC, Negrin and Rorech engaged in illegal activity in the CDS of VNU N.V., a Dutch holding company that owns Nielsen Media, and made a $1.2 million profit.
The SEC's complaint alleges that Rorech learned information from Deutsche Bank investment bankers about a change to the proposed VNU bond offering that was expected to increase the price of the CDS on VNU bonds. Deutsche Bank was the lead underwriter for a proposed bond offering by VNU. 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."

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.

In addition to cutting the careers of Negrin and Rorech short, this could be a huge blow to Millennium Partners itself, which has had some serious brushes with the SEC previously, most notably in the mutual fund market timing scandal which ended up costing Millennium a $121.4 million settlement in disgorgement and Izzy a $30 million penalty, as well as prohibiting Izzy from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter for a period of three years;

In addition the SEC stipulated in that case that Millennium must "cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder" and "comply with certain undertakings, including the retention of an Independent Compliance Consultant to review its compliance program and the establishment of a Compliance, Legal, and Ethics Oversight Committee to ensure that Millennium's illegal conduct does not recur." Unforunately, it would seem that this Commttee might have failed just a little bit in its oversight of illegal conduct at the $10 billion hedge fund if the SEC's allegations are proven to be true.

The full SEC complaint is presented below:

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