The SEC initiated an action in federal district court against a portfolio manager at an investment adviser to a hedge fund and a salesman at an investment bank alleging that they had violated Section 10(b) of, and Rule 10b-5 under, the Securities Exchange Act of 1934, by engaging in insider trading in credit default swaps (“CDSs”). According to the SEC, this action is the first such action brought by the SEC alleging insider trading in those types of instruments.
In its complaint, the SEC alleges that the salesman had learned from investment bankers at his firm that a company his firm was advising would be offering a new tranche of bonds in a restructured offering, and that those bonds were intended to be covered by existing CDSs referencing the company’s bonds. The SEC also alleges that upon the closing of the restructured offering, the increase in the supply of the company’s bonds that were covered by existing CDSs would increase the exposure and demand for those CDSs, thus increasing their market prices. The complaint further alleges that the salesman, in violation of his firm’s insider trading policies, passed the information concerning the new tranche to the portfolio manager, along with additional confidential information relating to the orders his firm already had lined up for that tranche, and that the portfolio manager in turn purchased for the hedge fund CDSs referencing the company’s bonds. The complaint then alleges that when the news of the restructured bond offering became public, the price of the company’s CDSs increased as expected, the hedge fund closed its positions in those instruments, making a profit of approximately $1.2 million. The SEC has asked the court to permanently enjoin the defendants from further violations of Section 10(b) and Rule 10b-5, and order them to disgorge their unlawful trading profits plus interest and pay civil penalties.
Goodwin Procter represents one of the defendants in this case.