possible abuse of inside information by hedge funds and investment banks that have delicate information about new bond offerings

TO BE NOTED: From the NY Times:

"2 Men Accused by S.E.C. in Insider Trading Case

By ZACHERY KOUWE

The Wall Street salesman sounded cryptic: “You’re listening to my silence, right?”

But those few words, spoken to a valuable client in 2006, over a recorded telephone line, have now led to a landmark case of insider trading.

Winks and nods are common currency on Wall Street, but this case, disclosed Tuesday by the Securities and Exchange Commission, is significant because it is the first to focus on the vast, murky market for credit-default swaps, considered by some to be among the most dangerous instruments of the financial crisis.

The S.E.C. claims Jon-Paul Rorech, a salesman at Deutsche Bank, tipped off a money manager at a prominent hedge fund, Millennium Partners, about a deal involving the company that controls Nielsen Media, the television ratings service. Based on that information, the money manager, Renato Negrin, then bought credit-default swaps that rose in value when the deal was made public, eventually earning him a $1.2 million profit, the S.E.C. claims.

“Rorech and Negrin checked their integrity at the door and schemed to engage in insider trading of C.D.S. to the detriment of investors and our markets,” Scott W. Friestad, the deputy director of the S.E.C.’s Division of Enforcement, said in a statement.

Mr. Rorech, 36, through his lawyer Richard M. Strassberg of the law firm Goodwin Procter, denied violating any securities laws. He has been placed on paid leave pending the results of the investigation, which the S.E.C. said was continuing.

Mr. Negrin, 45, through his lawyer, Lawrence Iason, of the law firm Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, denied receiving insider information and said he would fight the charges.

“We have a zero-tolerance policy toward insider trading and Millennium requires every employee to certify annually that they are aware of and in compliance with our policies,” said Israel Englander, the founder of Millennium, which manages $11 billion. The firm has agreed to put the profits in escrow until the case is resolved.

Deutsche Bank said it would continue to look into the matter in cooperation with the S.E.C.

According to the S.E.C., the trouble began in July 2006, when Mr. Rorech, seeking to curry favor with Mr. Negrin, an important client, alerted the money manager to a coming bond offering. The deal was to finance the leveraged buyout of VNU, the Dutch media conglomerate that controls Nielsen. Many financial companies record the telephone calls of employees, and so the conversations were picked up. The men also spoke via cellphone, the S.E.C. said.

Mr. Negrin then bought credit-default swaps — instruments that serve as insurance policies on the bonds, in the case of default — and profited when the deal was announced a week later, the S.E.C. said.

Regulators also claim that Mr. Rorech was prohibited by Deutsche Bank from soliciting trades for credit-default swaps on VNU and other companies before he called Mr. Negrin. While this is the first time credit-default swaps have been the focus of an S.E.C. insider-trading investigation, regulators have recently called for increased transparency and regulation of the market.

The case also raises questions about the possible abuse of inside information by hedge funds and investment banks that have delicate information about new bond offerings and trade credit-default swap contracts. The contracts are primarily bought and sold through private negotiations between investors instead of on a public exchange, and typically bring in hefty fees for investment banks.

The S.E.C. has been examining trades of credit-default swaps since at least 2007 after Ben S. Bernanke, the Federal Reserve chairman, urged regulators to take action to prevent abuses in the market."