Judge Koeltl's Ruling in S.E.C. v. Rorech and Negrin

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

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SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

- against -

JON-PAUL RORECH AND RENATO NEGRIN,

Defendants.

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09 Civ. 4329 (JGK)

OPINION AND ORDER

JOHN G. KOELTL, District Judge:

INTRODUCTION...................................................3

FINDINGS OF FACT...............................................11

I. Background...............................................11

A. The Parties Involved...................................11
1. The Defendants........................................11
2. Deutsche Bank Employees...............................12
3. Investors.............................................14
B. CDSs and Bonds.........................................14
C. The Flow of Information in High Yield Bond Offerings... 17

II. The VNU Bond Offering...................................21

A. The Original Bond Issuance.............................21
B. Deliverability Questions Arose.........................23
C. Investors Expressed Interest in Deliverable Bonds......25
D. The Basis Trade Idea Was Developed.....................27
E. Deutsche Bank Worked to Resolve the Deliverability
Issue.....................................................29

III. The Cellular Phone Calls and Mr. Negrin’s VNU CDS

Trades......................................................34

A. The Cellular Phone Calls Between Mr. Rorech and Mr.
Negrin....................................................34
B. Mr. Negrin’s VNU CDS Trades............................44

IV. Mr. Rorech’s Actions as a Deutsche Bank Salesman........46

A. Mr. Rorech’s and Others’ Efforts to Sell the VNU Bonds. 46
B. Mr. Rorech’s Pitch to Millennium.......................48
C. Whether Mr. Rorech Thought He Was Acting Illegally in
Attempting to Sell the Bonds..............................51

V. Mr. Negrin’s Actions at Millennium.......................56

A. Mr. Negrin’s Practice of Trading VNU CDSs..............57

B. Mr. Negrin’s Reasons for Purchasing the VNU CDSs.......58

VI. Deutsche Bank’s Confidentiality Policies................60

A. Deutsche Bank’s Confidentiality Policy, Its Engagement
Letter with VNU, and Expected Uses of Indications of
Interest..................................................60
B. Deutsche Bank’s Wall-Crossing Procedures...............66
C. Deutsche Bank’s View Whether Their Confidentiality
Policies Were Breached....................................69
D. VNU on Deutsche Bank’s Restricted List.................71

VII. Information About the VNU Bond Issuance in the Market ..74

VIII. Facts Relevant to the Court’s Jurisdiction............77

A. The Relationship Between VNU Bond Prices and Yields and
CDS Prices................................................78
B. The Relationship Between the Value of VNU Bonds and CDS
Prices....................................................83
C. Section 9.9 of the ISDA Definitions....................85

CONCLUSIONS OF LAW.............................................87

I. Subject Matter Jurisdiction..............................88

A. Statutory Provisions...................................88
B. The Meaning of “Based On”..............................90
C. The Price Term of the CDSs Was “Based On” the Price,
Yield, and Value of VNU Securities........................95
D. Section 9.9 of the ISDA Definitions Was a Material Term of
the CDSs and Was “Based On” the Price of Securities.......98

II. Misappropriation Theory................................100

A. Mr. Rorech’s Conduct..................................101
1. Mr. Rorech Did Not Know that Deutsche Bank Would
Recommend that the Sponsors Issue the Holding Company Bonds
at the Time of His Calls with Mr. Negrin................102
2. The Information Mr. Rorech Did Know at the Time of the
Calls Was Not Material..................................105

a. Information Regarding the Potential Restructuring.. 106
b. Information Regarding Customers’ Indications of
Interest..............................................108

3. Sharing the Information Mr. Rorech Did Know Was Not a

Breach of His Duty of Confidentiality...................110
a. Information Regarding the Potential Restructuring.. 111
b. Information Regarding Customers’ Indications of
Interest..............................................112

B. Mr. Negrin’s Conduct..................................114

C. Scienter..............................................117

CONCLUSION....................................................121

2

INTRODUCTION

This is a case about alleged insider trading in credit
derivatives. The Securities and Exchange Commission (the “SEC”)
alleges that the defendants, Jon-Paul Rorech and Renato Negrin,
engaged in insider trading in credit-default swaps (“CDSs”).

While there are different types of CDSs, the CDSs that are
at issue in this case are contracts that provide protection
against the credit risk of a particular company. The seller of
a CDS agrees to pay the buyer a specific sum of money, called
the notional amount, if a credit event, such as bankruptcy,
occurs in the referenced company. If a credit event occurs, the
buyer generally must provide to the seller any of certain debt
instruments that are deliverable pursuant to the CDS contract.
In exchange for this risk protection from the CDS-seller, the
CDS-buyer agrees to make periodic premium payments during the
course of the contract. The CDS-buyer can use the CDS to
provide protection, like insurance, against the possibility that
the debt instruments the buyer holds will seriously deteriorate
in value because of a credit event in the referenced company.
The CDS-buyer could also buy the CDS without owning the
underlying referenced security, a “naked CDS,” in the
expectation that it would increase in value based on any one of
a number of factors including the likelihood that a credit event
will occur in the referenced company.