Public debt markets are more opaque and concentrated than equity markets. Does that make them more susceptible to securities fraud? The SEC may be trying to figure that out.
On Friday, MainFT broke the story of top credit fund Silver Point Capital. Last week, Chaim Fortgang, the company’s (now deceased) bagel-throwing legal eagle, was charged by U.S. market regulators for how he handled material nonpublic information he obtained. He owned it during the Puerto Rico debt crisis five years ago.
The SEC asserts that:
48. . . From September 17, 2019 to February 7, 2020, Silverpoint purchased over $260 million in Puerto Rico bonds. During the same period, while holding MNPI on the same Puerto Rican bonds, Mr. Fortgang had over 500 phone calls with part-time civil servant employees without the involvement of the Compliance Department. At a minimum, these calls must be pre-authorized by Compliance in accordance with the barrier policy so that Compliance can fulfill its obligation to decide whether to approve, monitor, and/or record the call.
49. When Silver Point sold the Puerto Rican bonds it had accumulated during that period, it generated a profit of over $29 million.
50. Silver Point’s deficiencies in establishing and enforcing its Fortgang barrier policies meant that there were hundreds of opportunities for Silver Point to improperly share MNPI with the public sector. , Silver Points posed a significant risk of generating such profits by trading on the MNPI.
Silver Point has not reached a settlement and said it will defend itself in federal court. It promises to be a fun experiment that may get to the heart of a strategy sometimes criticized as “vulture investing.” 🍿
The Silver Points issue comes after another prominent fund, Marathon Asset Management, filed a $1.5 million deal for being too lenient on what is usually referred to in the industry simply as MNPI (particularly its interactions with investment bankers who were conducting MNPI). This happened three months after the charges were settled. live restructuring situation).
Importantly, neither Silverpoint nor Marathon has been accused of insider trading. They simply caused problems with the way they handled classified information. Silver Point said in a statement:
We refused to resolve the matter without any wrongdoing or deficiencies in our information barrier policy or compliance program. Silver Point has always acted legally and ethically.
But Mr. Alphaville feels the Fed is suddenly taking a greater interest in how troubled companies and countries make money on their paper money. As the old joke in financial journalism goes, two things are a trend.
There are not many situations in which shareholders of a public company must sign a “confidentiality agreement” to receive MNPI. Basically the only case is when a company is up for sale or is negotiating with activist investors, and they only apply to a select group of large institutional investors .
But if a company has to negotiate with creditors, dozens of funds can control a large portion of the debt. They can form “special” groups and bring in lawyers and bankers as advisors. The advantage of joining a group is that you can negotiate terms.
The downside is that you must sign a non-disclosure agreement and are subject to ‘restrictions’, meaning you cannot trade during the negotiation period. However, there are sometimes whispers about how cautious (or careless) hedge funds are with MNPI in these situations.
In the case of Silverpoint, the SEC found that the company had a very tight information wall between its “public” trading division and its distinct “private” division, which required long-term equity to participate in restructuring negotiations. He pointed out that there is.
The SEC alleges that Chaim Fortgang, employed by Silver Point as an outside legal consultant, was always subject to the same strict rules. Silver Point argues that lawyers are exempt from such restrictions.
The impasse could lead to an interesting legal battle, as Mr. Fortgang was hired by Silver Point in the early 2000s to leverage his extensive legal experience to benefit Silver Point’s investment positions. Dew. Distressed Debt Funds is full of people with legal backgrounds who have expertise in loans and bonds and who understand the Chapter 11 chess game.
And the SEC alleges in the complaint that, despite the technicalities of his employment agreement, Mr. Fortgang acted as Silver Point’s president and often acted as Silver Point’s sole representative before creditor committees. He pointed out that it looked like he was participating. This is a role that outside lawyers typically don’t take on.
From the SEC complaint:
52. From at least September 17, 2019 until February 9, 2020 (the “Period”), Silver Point entered into confidential mediation as a member of an “ad hoc” creditor committee comprised of Puerto Rican bondholders. Participated.
53. At the same time, Silver Point will keep confidential “all suggestions, opinions, actions, and statements made, whether oral or written, and any information, graphic or physical evidence provided.” He was a signatory to a mediation agreement that required him to do so. The process of mediation (or pre-mediation if mediation is specified). ” The agreement warns that “there may be applicable securities laws or regulations that, depending on the circumstances, prohibit the purchase or sale of securities by persons who hold MNPI.”
54. Fortgang was Silver Point’s sole representative in the confidential settlement for most of the relevant period. Attends mediation sessions on behalf of Silver Point, participates in telephone conversations with other creditors, mediators, and Puerto Rico representatives, provides Silver Point’s view of the economic terms of any transaction, and provides key He served as a negotiator. He also received nonpublic information regarding settlement proposals circulated between the parties and Puerto Rico’s financial situation, much of which constituted MNPI and was marked as such.
55. Silverpoint assigned this role to Mr. Fortgang (rather than a public-side analyst familiar with Puerto Rico bonds), and that the public sector relied on the information wall to provide information on Puerto Rico bonds while mediation was underway. transactions can continue. Silver Point had a MNPI on Puerto Rico bonds).
56. Among the many other hedge funds that participated in the arbitration, Silver Point exploited information barriers and continued to trade Puerto Rico bonds while they were held by MNPI (through Fortgang). It was unique. Other hedge funds involved in the arbitration flatly prohibited their employees from trading Puerto Rico bonds if they removed MNPI from the arbitration.
57. Unbeknownst to the other participants in the mediation, the barrier policy that Silver Point relied on for the transaction was such that, with respect to Fortgang, he was a representative of Silver Point and that he was unable to withdraw from the mediation. Despite receiving MNPI, it was not administered.
Insider trading itself is difficult to prove (recall the case of hedge fund investor Dan Kamensky, who was imprisoned for self-trading shenanigans in Neiman Marcus Chapter 11). (This is nothing more than a secretly recorded phone call.)
And, of course, it is clear that lawyers or anyone else, even if they are ostensibly exempt from information handling requirements, are not actually exempt from the prohibition on insider trading.
Either way, the SEC seems to have clearly signaled to the scavenging community that it’s better to dot the “i’s” and cross the “t’s.”
Read more:
— SEC Complaint Against Silver Point Capital, December 20, 2024 (SEC)
— SEC Settlement with Marathon Asset Management, September 30, 2024 (SEC)
— Silverpoint Statement, December 20, 2024