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.

Rorech/Negrin victory, Part I

The Securities and Exchange Commission's case against Jon-Paul Rorech of Deutsche Bank and Renato Negrin of the Millennium hedge fund -- a case that the Manhattan federal court derailed Friday -- attracted a good deal of attention when it was first filed, in May 2009.

Here is the Reuters coverage from that time, for example.

The man-bites-dog reason for the interest is that this was the first insider trading case involving what had only then become a headline-worthy sort of instrument in the mainstream media, credit default swaps (CDS). In this case, the CDSs' were bets for or against the solvency of a Dutch media company, VNU, which was a client of Deutsche Bank.

The case was a test of a new theory of jurisdiction for the SEC based upon the Commodity Futures Modernization Act of 2000, which extended the SEC's enforcement authority to "securities-based swap agreement[s]."

Here's an analysis that Law360 did in August.

Those of you who have a PACER subscription can read Judge Koeltl's decision dismissing the case Friday. Be assured, there is no charge for viewing opinions. But be warned, this one is 122 pages long.

The Wall Street Journal this morning has headlned it on p. C1 (the prime real estate for real finance wonks -- let the 'casual reader' look to A1!): "SEC Loss Shows Difficulty of Insider Cases," with the byline to Kara Scannell.

Frankly, I think that headline itself exhibits exactly the wrong emphasis. (Scannell of course can't be blamed for the headline.) We shouldn't worry about the costs imposed upon the poor SEC as it brings tricky enforcement actions pushing the boundaries of its jurisdiction. They'll be all right, the world is full of porn whereby they can console themselves. We should be concerned, rather, by the individuals whose lives are disrupted by the very act of bringing such a case. Courtroom vindication a year later doesn't give you that year of your life back.

The court conducted a non-jury trial of the case from April 7 to April 28 of this year. It has now issued its findings of fact and of law.

The only good news from the pro-enforcement point of view (never my own) is that the court agreed with the SEC about what Congress had meant to do with that CFMA language I quoted above. Koeltl writes, "[The] CDSs at issue in this case are security-based swap agreements for the purposes of section 206B of the Gramm-Leach-Bliley Act and are subject to 10(b)'s antifraud provisions...."

The bad news for enforcers? He didn't buy anything else they tried to sell him.

I hope to come back to this tomorrow.