## Facts

- The SEC sued Jon-Paul Rorech, a Deutsche Bank high-yield bond salesperson, and Renato Negrin, a Millennium Partners portfolio manager, alleging tipping and trading in credit-default swaps (CDSs) referencing VNU N.V.
- VNU’s leveraged financing involved bonds; only bonds issued by VNU itself (not subsidiaries) were deliverable into VNU CDSs, making the presence of VNU holding-company bonds significant to CDS pricing.
- The SEC alleged that Deutsche Bank’s expected recommendation to add holding-company bonds—and a purported $100 million customer order for such bonds—constituted material nonpublic information.
- The SEC claimed Rorech conveyed this information to Negrin during two unrecorded mobile-phone calls in early July 2006.
- After the alleged calls, Negrin entered into two VNU CDS positions for Millennium that later increased in value when VNU announced changes to the bond offering; Millennium realized approximately $1.2 million in profits.
- The evidence of what was said in the unrecorded calls was largely circumstantial; there was no direct recording or documentary proof of the alleged tip content.
- Evidence at trial indicated Deutsche Bank had not made a firm internal recommendation at the time of the calls, the market was already discussing possible structural changes, and the bank did not treat the information as subject to special confidentiality procedures.
- The court credited evidence that Rorech discussed the potential structure with customers openly and disclosed such discussions to supervisors, undermining an inference of concealment.

## Issues

1. Whether VNU-referencing CDSs were sufficiently tied to “securities” to fall within § 10(b) and Rule 10b-5 as “securities-based swap agreements,” supporting subject-matter jurisdiction and SEC enforcement authority.
2. Whether the SEC proved by a preponderance of the evidence that defendants committed insider trading, including (a) possession and communication of material nonpublic information, (b) confidentiality and breach of a duty of trust or confidence, (c) trading while knowingly in possession of the information, and (d) scienter.

## Decision

- The court held the CDSs at issue were sufficiently connected to VNU bonds (securities) to be covered by § 10(b) and Rule 10b-5 as securities-based swap agreements, and the court had jurisdiction.
- After a bench trial, the court found the SEC failed to prove insider trading by a preponderance of the evidence.
- The court concluded the SEC did not establish that Rorech possessed or tipped material nonpublic information, that any information was confidential and disclosed in breach of a duty, or that defendants acted with scienter.
- The court dismissed the SEC’s complaint.

## Legal Principles

- § 10(b) and Rule 10b-5 may reach fraud and insider trading involving derivative instruments that are sufficiently linked to an underlying security, including CDSs referencing bonds.
- In an SEC insider-trading case, the SEC bears the burden to prove by a preponderance of the evidence that the alleged tip was material and nonpublic and was communicated in breach of a duty of trust or confidence, and that the trader acted with the requisite state of mind.
- Speculative, preliminary, or widely circulating market information is less likely to qualify as material nonpublic information.
- The existence (or absence) of confidentiality practices and expectations within a firm is probative of whether information was treated as confidential and whether a duty-based breach occurred.
- In a bench trial, credibility findings and the weight of circumstantial evidence are central; liability cannot rest on conjecture about unrecorded communications without persuasive supporting proof.

## Conclusion

The court concluded that VNU-referencing CDSs could fall within the reach of § 10(b) and Rule 10b-5, but dismissed the SEC’s insider-trading claims because the evidence did not show a material, nonpublic, confidential tip made in breach of duty or that defendants acted with scienter.


SEC v. Rorech, 720 F. Supp. 2d 367 (S.D.N.Y. 2010)