SEC Brings First Insider Trading Case Involving Credit Default Swaps


On May 5, 2009, the Securities and Exchange Commission (the “SEC”) charged a portfolio manager at hedge fund investment advisor Millennium Partners L.P. (“Millennium”) and a bond and credit default swap (“CDS”) salesman at Deutsche Bank Securities Inc. (“DBSI”) with insider trading in CDS. The SEC’s complaint alleges that the DBSI salesman became privy, through his employment at DBSI, to confidential information concerning the restructuring of an upcoming bond issuance by VNU N.V. (“VNU”), a Dutch media holding company, and passed that information on to a Millennium portfolio manager, who traded based on that information.

DBSI acted as lead underwriter in connection with a new bond offering to be issued by two of VNU’s subsidiaries. These bonds would not be covered by (or “deliverable into”) CDS referencing the bonds of VNU. However, over a two-week period in July 2006, the structure of the bond issuance was modified to include the issuance of a tranche of debt by VNU itself. During the period in which the bond restructuring was being explored, the DBSI salesman provided confidential information regarding the contemplated VNU issuance to the Millennium portfolio manager. Based on these conversations, some of which were conducted on recorded lines, the portfolio manager then allegedly purchased CDS protection on VNU bonds on behalf of one or more hedge funds advised by Millennium.

The restructuring substantially increased the price of CDS referencing VNU bonds. In other words, CDS buyers needed to pay higher premiums to purchase credit protection on VNU bonds because the increase in supply of VNU bonds following the bond restructuring resulted in an increase in demand for protection against defaults on such bonds. According to the complaint, after the bond restructuring was announced, the Millennium portfolio manager closed out his positions on the CDS he purchased based on the confidential information, resulting in a $1.2 million gain. SEC Web Site.