First CDS insider trading case opens

The US Securities and Exchange Commission yesterday brought its first case of insider trading involving credit default swaps, accusing a bond salesman of passing confidential information to a hedge fund manager that resulted in an instant profit of $1.2m.

In a civil complaint filed in New York, the SEC alleged that a bond salesman for Deutsche Bank, which was working on a high-yield bond issue for VNU, tipped off a portfolio manager at Millennium Partners about changes in the Dutch publishing company's debt offering in July 2006.

Most insider trading cases involve the passing of confidential information that is likely to affect the price of a stock. In this case, the SEC alleges that information about changes in VNU's 2006 debt offering would have had an impact in the credit default swap market, where bond buyers often buy insurance on bonds they own.

According to the SEC complaint, in the days leading up to the restructuring of VNU's debt offering, Jon-Paul Rorech, a Deutsche Bank bond salesman, passed along detailed information about the bond issue to Renato Negrin, a portfolio manager at Millennium Partners.

The hedge fund, in turn, bought CDSs on the VNU bonds, allegedly because of its access to this information. After the restructured bond issue was announced, the value of the CDSs rose and Millennium realised an immediate profit of $1.2m.

Deutsche Bank and Millennium have not been accused of any wrongdoing.