SEC v. Rorech

720 F. Supp. 2d 367 (2010)

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SEC v. Rorech

United States District Court for the Southern District of New York
720 F. Supp. 2d 367 (2010)

  • Written by Brett Stavin, JD

Facts

Jon-Paul Rorech (defendant) was a high-yield-bond salesperson for Deutsche Bank Securities Inc. (Deutsche Bank). Deutsche Bank served as the underwriter for the issuance of bonds by VNU N.V., a Dutch media-holding company, and its subsidiaries. In this capacity, Deutsche Bank saw a demand for bonds issued by VNU itself, as opposed to the subsidiaries. This was because subsidiary bonds could not be used as deliverable instruments for credit default swaps (CDSs) involving VNU. For any VNU CDSs, the only deliverable instruments would be bonds issued by VNU itself, holding-company bonds. Therefore, holders of VNU CDSs had a demand for holding-company bonds. The Securities and Exchange Commission (SEC) alleged that Rorech passed confidential information to a hedge-fund manager, Renato Negrin, to the effect that Deutsche Bank would recommend to VNU that VNU issue holding-company bonds and that at least one of Rorech’s customers already had placed an order for $100 million of such bonds. Negrin subsequently bought two VNU CDSs, the value of which increased after VNU announced that it would issue holding-company bonds, resulting in a $1.2 million profit for Negrin’s fund. According to the SEC, the confidential information was passed during two unrecorded calls in July 2006. The SEC filed an action against Rorech, alleging insider trading of CDSs. Evidence at trial revealed no direct evidence to support any inference of nefarious conduct. First, there was no evidence that Deutsche Bank had even made the decision to recommend to VNU that VNU issue holding-company bonds at the time Rorech made the phone calls, or that Rorech would have known about the decision if it had been made. Second, the manager of another hedge fund testified that he would not have considered such information material, and his testimony was supported by his own market activity. Third, the evidence showed that the allegedly confidential information might not have been confidential at all, because Deutsche Bank’s compliance officer testified that information was deemed confidential only if there was an expectation or agreement to that effect, which did not exist. Fourth, there was no evidence of deceit, as Rorech disclosed to his supervisors that he was sharing the information with his customers. And fifth, there was no motive, as Rorech’s compensation had little connection to Negrin’s later purchase of the VNU CDSs.

Rule of Law

Issue

Holding and Reasoning (Koeltl, J.)

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