SEC Pursues First Insider Trading Case Related to Credit Default Swaps
The SEC has charged a bond trader and his hedge fund portfolio manager client with insider trading in connection with information affecting the price of credit default swaps. According to the SEC complaint, the bond trader, who was employed by the underwriter for the underlying bond issuer, tipped the portfolio manager about upcoming bond issuance that would increase the price of related CDSs. The SEC alleges that the bond trader knew the information was confidential based on his employer’s policies and training program and that the portfolio manager knew or should have known that the information was material non-public information because he was an experienced securities professional and knew that the bond trader worked for the underwriter. The SEC alleges that the trader benefited through increased commissions and a stronger relationship with his client, and the portfolio manager benefited through enhanced fund performance.
OUR TAKE: We believe that this is the first insider trading case related to credit default swaps brought by the SEC. Most significant is the SEC’s assertion that credit default swaps are “security-based swap agreements” subject to the securities laws.