Judge Dismisses Charges in Major ‘Swaps’ Case

A federal judge dismissed a high-profile insider-trading case against a Deutsche Bank salesman and hedge-fund trader, finding the Securities and Exchange Commission offered “no evidence” to support its allegations.

In a 122-page opinion, U.S. District Judge John Koeltl rejected key components of the SEC’s case against Deutsche salesman Jon-Paul Rorech and Renato Negrin, a manager of the Millennium hedge fund.

The SEC sued both men, alleging they shared confidential information about a debt restructuring and then traded swaps, a type of derivative, based on that information. The defense maintained no inside information was exchanged.

Richard Strassberg, a lawyer for Mr. Rorech, called the decision a “complete vindication” for his client. Mr. Negrin said in a statement, “I’m grateful the court was able to reach the right decision based on all of the evidence. I look forward very much to putting all of this behind me.”

An SEC spokesman said the agency is reviewing the decision.

The case represented the SEC’s first attempt to extend its reach beyond stock and other securities and into the murky field of swaps and other derivatives contracts. The judge found the SEC did have jurisdiction over swaps in this context but didn’t agree with the allegations that the contracts were bought based on inside information.

The decision doesn’t appear to impair the SEC’s jurisdiction over swaps. The financial regulation bill heading toward passage in Congress also makes clear the SEC’s authority.

During a three-week bench trial, the SEC and defense lawyers put on a number of Wall Street witnesses, including the two defendants, who described how information is shared among potential bond investors and traders. The defense maintained the information about potential changes to a debt offering was never considered “nonpublic,” and it said Deutsche Bank’s own internal investigation found no violations of its policies forbidding disclosure of inside information.

Mr. Rorech’s sales call to Mr. Negrin involved a $1.6 billion bond offering for the Nielsen TV-ratings unit of Dutch publisher VNU, which has since been renamed Nielsen Co. Mr. Rorech wanted to know whether Mr. Negrin was interested in buying the Nielsen bonds or credit-default swaps insuring against a default of VNU, according to papers filed by the SEC in the case.

The SEC argued knowledge of a change in the debt structure would be important to buyers and the swaps market, which was reacting to the price. After a series of phone calls, some taking place on cellphones, Mr. Negrin bought swaps in VNU and later sold them, making a $1.2 million profit.

The SEC argued inside information about the deals was passed during two phone calls that took place on unrecorded cellphone lines.

Judge Koeltl said the SEC offered no evidence of what information was allegedly passed during those calls.

“While the SEC attempts to attribute nefarious content to those calls through circumstantial evidence, there is, in fact, no evidence to support this inference and ample evidence that undercuts the SEC’s theory that the defendants engaged in insider trading,” the judge wrote.

The judge said the SEC offered no evidence that Deutsche Bank had decided to recommend changing the deal structure to VNU owners or that a decision was conveyed to Mr. Rorech before he spoke with Mr. Negrin.

The judge also rejected the SEC’s theory that information about a potential debt restructuring was material. He said that immediately after the bond deal was announced, the market was teeming with talk that investors were agitating for a restructuring of the deal.

Source

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