Tuesday, June 29, 2010

Rorech/Negrin victory, Part II

Let's pick up where we left off yesterday.

Judge John Koeltl has entered judgment in favor of the defendants, Rorech and Negrin, in an insider-trading enforcement action brought a little over a year ago. He ruled in the SEC's favor on the jurisdictional issue, but after that point in the opinion things are all downhill for the agency.

The Judge found, as a matter of fact, that Deutsche Bank has policies in place designed to keep its "public side" employees from obtaining information from its "private side" employees unless they need it and are aware of the importance of confidentiality. Further, the compliance office is to be notified when a "wall-crossing" does occur. Members of the sales force, including Rorech, are on the "private" side of this wall.

Mark Fedorcik, DB's global head of leveraged debt-capital markets (who, I should say at once, was not accused of anything in this matter) plays a critical role in the judge's reasoning, because it was Fedorcik's job, as the judge describes it, to straddle the wall, to "control the flow of information from the private side of the bank to their sales and trading colleagues ... and to potential investors." On the government's theory of the case, Fedorcik shared critical non-public information with his colleague, Rorech, in confidence. Roreck then went and blabbed out of school, to Negrin, who traded on this information.

At the trial in April, Fedorcik testified that he had not initiated any of these "wall-crossing procedures" in the period of July and early August 2006. That is when the bank was marketing VNU's bond offering, which in turn supposedly generated the "insider trading" in CDSs at the heart of the case.

Why didn't Fedorcik initiate any such procedures? A defense counsel asked him whether it was because he didn't believe that he was "in possession of confidential information that was being shared with any salesman?" Fedorcik replied: "That's correct."

Yet on the government's theory Fedorcik was the source of the information. The judge accepts Fedorcik's own account that anything he discussed with Roreck about VNU was already public information, which is fatal to the SEC's case.

As the judge writes, "Information that Deutsche Bank's investment bankers were advising the sponsors on the deliverability issues in general, ands that the sponsors were likely to address the investor demand for deliverable bonds was widely discussed in the marketplace in July 2006."

The takeaway, for investment managers, is that documented walls, procedures related to wall-crossings, anmd so forth are very good. The more thoroughly you can document such matters, the more credibility you buy from a finder-of-fact later if the question arises whether nonpublic information made it across the wall and then out to a trader.

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