District Court Holds That Rule 10b-5 Insider Trading Provisions Apply to Credit Default Swap (CDS) Contracts
By The White Collar Crime and Regulatory Enforcement Group
On June 25, 2010, a District Judge in the Southern District of New York held, in a case of first impression, that the federal insider trading laws apply to credit default swaps, but that, on the facts of the particular case before him, the defendants did not violate the law. The case, Securities and Exchange Commission v. Rorech, is the first enforcement action brought by the SEC alleging insider trading of credit default swaps in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. After a three-week bench trial, the court found that the SEC had failed to prove that the defendants, a hedge fund portfolio manager and a bond salesman for a major investment bank, had misappropriated material confidential information or acted with the requisite scienter. Rorech nonetheless could be an indication of how courts will apply the insider trading provisions to credit default swap transactions.