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Securities and Exchange Commission v. Rorech

June 25, 2010

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
JON-PAUL RORECH AND RENATO NEGRIN, DEFENDANTS.



The opinion of the court was delivered by: John G. Koeltl, District Judge

OPINION AND ORDER

INTRODUCTION ...................................................3

FINDINGS OF FACT...............................................11

I. Background ............................................... 11

A. The Parties Involved ................................... 11

1. The Defendants........................................ 11

2. Deutsche Bank Employees............................... 12

3. Investors............................................. 14

B. CDSs and Bonds ......................................... 14

C. The Flow of Information in High Yield Bond Offerings ... 17

II. The VNU Bond Offering ................................... 21

A. The Original Bond Issuance ............................. 21

B. Deliverability Questions Arose ......................... 23

C. Investors Expressed Interest in Deliverable Bonds ...... 25

D. The Basis Trade Idea Was Developed ..................... 27

E. Deutsche Bank Worked to Resolve the Deliverability Issue ..................................................... 29

III. The Cellular Phone Calls and Mr. Negrin's VNU CDS Trades ...................................................... 34

A. The Cellular Phone Calls Between Mr. Rorech and Mr. Negrin .................................................... 34

B. Mr. Negrin's VNU CDS Trades ............................ 44

IV. Mr. Rorech's Actions as a Deutsche Bank Salesman ........ 46

A. Mr. Rorech's and Others' Efforts to Sell the VNU Bonds .46

B. Mr. Rorech's Pitch to Millennium ....................... 48

C. Whether Mr. Rorech Thought He Was Acting Illegally in Attempting to Sell the Bonds .............................. 51

V. Mr. Negrin's Actions at Millennium ....................... 56

A. Mr. Negrin's Practice of Trading VNU CDSs .............. 57

B. Mr. Negrin's Reasons for Purchasing the VNU CDSs ....... 58

VI. Deutsche Bank's Confidentiality Policies ................ 60

A. Deutsche Bank's Confidentiality Policy, Its Engagement Letter with VNU, and Expected Uses of Indications of Interest .................................................. 60

B. Deutsche Bank's Wall-Crossing Procedures ............... 66

C. Deutsche Bank's View Whether Their Confidentiality Policies Were Breached .................................... 69

D. VNU on Deutsche Bank's Restricted List ................. 71

VII. Information About the VNU Bond Issuance in the Market .. 74

VIII. Facts Relevant to the Court's Jurisdiction ............ 77

A. The Relationship Between VNU Bond Prices and Yields and CDS Prices ................................................ 78

B. The Relationship Between the Value of VNU Bonds and CDS Prices .................................................... 83

C. Section 9.9 of the ISDA Definitions .................... 85

CONCLUSIONS OF LAW.............................................87

I. Subject Matter Jurisdiction .............................. 88

A. Statutory Provisions ................................... 88

B. The Meaning of "Based On" .............................. 90

C. The Price Term of the CDSs Was "Based On" the Price, Yield, and Value of VNU Securities ........................ 95

D. Section 9.9 of the ISDA Definitions Was a Material Term of the CDSs and Was "Based On" the Price of Securities ....... 98

II. Misappropriation Theory ................................ 100

A. Mr. Rorech's Conduct .................................. 101

1. Mr. Rorech Did Not Know that Deutsche Bank Would Recommend that the Sponsors Issue the Holding Company Bonds at the Time of His Calls with Mr. Negrin................ 102

2. The Information Mr. Rorech Did Know at the Time of the Calls Was Not Material.................................. 105

a. Information Regarding the Potential Restructuring .. 106

b. Information Regarding Customers' Indications of Interest .............................................. 108

3. Sharing the Information Mr. Rorech Did Know Was Not a Breach of His Duty of Confidentiality................... 110

a. Information Regarding the Potential Restructuring .. 111

b. Information Regarding Customers' Indications of Interest .............................................. 112

B. Mr. Negrin's Conduct .................................. 114

C. Scienter .............................................. 117

CONCLUSION....................................................121

INTRODUCTION

This is a case about alleged insider trading in credit derivatives. The Securities and Exchange Commission (the "SEC") alleges that the defendants, Jon-Paul Rorech and Renato Negrin, engaged in insider trading in credit-default swaps ("CDSs").

While there are different types of CDSs, the CDSs that are at issue in this case are contracts that provide protection against the credit risk of a particular company. The seller of a CDS agrees to pay the buyer a specific sum of money, called the notional amount, if a credit event, such as bankruptcy, occurs in the referenced company. If a credit event occurs, the buyer generally must provide to the seller any of certain debt instruments that are deliverable pursuant to the CDS contract. In exchange for this risk protection from the CDS-seller, the CDS-buyer agrees to make periodic premium payments during the course of the contract. The CDS-buyer can use the CDS to provide protection, like insurance, against the possibility that the debt instruments the buyer holds will seriously deteriorate in value because of a credit event in the referenced company. The CDS-buyer could also buy the CDS without owning the underlying referenced security, a "naked CDS," in the expectation that it would increase in value based on any one of a number of factors including the likelihood that a credit event will occur in the referenced company.

The CDSs at issue in this case provided for payment if certain credit events occurred at VNU N.V. ("VNU"), a Dutch media holding company. The CDSs referenced a specific VNU security that would have to be delivered in return for the notional amount, although it was possible to deliver certain other securities instead.

In July 2006, Deutsche Bank Securities Inc. ("Deutsche Bank") served as the lead underwriter for a bond offering by two of VNU's subsidiaries. During its efforts to sell the bonds, Deutsche Bank learned that there was demand in the market for bonds issued by the holding company, VNU, rather than by its subsidiaries. This demand existed because the bonds to be issued by VNU's subsidiaries would not be deliverable instruments under the terms of VNU CDSs then in the market. Because VNU was also planning on retiring its then-outstanding deliverable bonds, CDS-holders would be left with only a limited number of bonds that would be deliverable under the CDS contracts. Holders of VNU CDSs, and prospective purchasers, preferred that VNU modify the bond offering to issue at least some bonds at the holding company level.

The SEC alleges that Mr. Rorech, a high-yield bond salesperson at Deutsche Bank, passed confidential information to Mr. Negrin, a portfolio manager for the hedge fund Millennium Partners, L.P. ("Millennium"), regarding plans to modify the VNU bond offering. The SEC alleges that Mr. Rorech told Mr. Negrin during two unrecorded cellular telephone calls on July 14 and July 17, 2006, (1) that Deutsche Bank would recommend to VNU's financial sponsors that VNU issue the holding company bonds and (2) that at least one of Mr. Rorech's customers already had placed an order for $100 million of the holding company bonds.

Mr. Negrin bought two VNU CDSs on behalf of Millennium on July 17 and July 18, 2006. After the July 24, 2006, announcement that VNU's bond offering would be amended to include bonds issued by the holding company, the price of VNU CDSs increased substantially. Mr. Negrin subsequently sold the VNU CDSs for a profit to Millennium of approximately $1.2 million.

The Court conducted a non-jury trial in this case from April 7, 2010, to April 28, 2010. Despite the SEC's allegations of the information passed by Mr. Rorech to Mr. Negrin during the two cellular phone calls, there is no evidence of what was actually said on those calls and neither Mr. Rorech nor Mr. Negrin could recall the substance of the calls. While the SEC attempts to attribute nefarious content to those calls through circumstantial evidence, there is, in fact, no evidence to support this inference and ample evidence that undercuts the SEC's theory that the defendants engaged in insider trading.

First, the SEC produced no evidence that Deutsche Bank had actually decided to recommend that the sponsors issue a holding company tranche at the time of Mr. Rorech's cellular phone calls with Mr. Negrin, and there is no evidence that any such decision was conveyed to Mr. Rorech before the phone calls. Having set forth no evidence that Mr. Rorech either received or shared with Mr. Negrin any allegedly confidential information concerning Deutsche Bank's recommendation, the SEC's allegation of insider trading based on that information fails.

Second, the SEC has failed to prove that either piece of alleged information was material. Immediately after the bond deal was announced, there was widespread discussion in the market regarding investor demand for a restructuring of the VNU bond offering to include deliverable bonds. Even the SEC's own expert, David Barcus, admits that it was publicly known- particularly to sophisticated high yield bond buyers-that, with such strong market demand, Deutsche Bank would be speaking to the sponsors and working with them to try to find a way to issue additional deliverable bonds. Because any information that Mr. Rorech possessed on July 17, 2006, about Deutsche Bank's alleged intention to recommend a holding company issuance was based on information in the market and was completely speculative in any event, any information Mr. Rorech shared with Mr. Negrin cannot be considered material. Likewise, information regarding Mr. Rorech's customer's indication of interest was not material because the demand for deliverable bonds was known in the market. The fact that Jeremy Barnum, a portfolio manager at the hedge fund Blue Mountain Capital Management LLC ("Blue Mountain") who placed the initial $100 million indication of interest, subsequently sold VNU CDSs after having actually learned of Deutsche Bank's intent to recommend the holding company tranche and after having placed his own indication of interest is substantial evidence that these two pieces of information were not considered material to reasonable investors in VNU CDSs.

Third, the evidence also confirms that the information that Mr. Rorech could have shared with Mr. Negrin was not confidential and that Mr. Rorech did not breach any duty to Deutsche Bank. Pursuant to Deutsche Bank's written policy on the use of confidential information, as well as testimony from Deutsche Bank's compliance officer, information is deemed confidential only when there is an expectation or contractual agreement that it will be kept confidential. The evidence does not show that Mr. Rorech possessed any information about Deutsche Bank's decision to recommend that VNU issue the holding company bonds. Any information that he did share with Mr. Negrin, therefore, would have been speculative and his own opinion. If Mr. Rorech shared such information, that would not amount to a breach of his duty of confidentiality to Deutsche Bank. Similarly, Mr. Rorech's customer's indication of interest in holding company bonds was not confidential, because, among other things, Mr. Barnum at Blue Mountain, who submitted the order for holding company bonds, testified unequivocally that he had no expectation of confidentiality in his proposed order. To the contrary, Mr. Barnum, like other customers, expected that Deutsche Bank would discuss his order with other potential investors to generate additional demand for a holding company issuance of bonds. Because Mr. Barnum had no expectation that the information would be confidential, Deutsche Bank did not consider the information confidential and Mr. Rorech did not breach any duty to Deutsche Bank.

The actions and testimony of the capital markets officers who were directly involved in the VNU bond offering-and who were responsible for determining whether information was confidential-confirm that neither piece of information was confidential. Not only did these individuals openly share the alleged "inside" information in this case, but they also never initiated so-called "wall-crossing" procedures for Mr. Rorech during the marketing period for the VNU bond offering. "Wall-crossing" procedures are typically followed if confidential information is shared with employees, like Mr. Rorech, who work with the Bank's public customers and clients. Moreover, other salespeople at Deutsche Bank, including the head of high yield sales in New York and sales supervisors in London, similarly shared information about a potential holding company issuance and customers' orders, further demonstrating that Deutsche Bank did not view such information to be confidential.

Moreover, Deutsche Bank's actions show that the bank did not view the information as confidential. No one at Deutsche Bank, which did its own internal review of this matter, ever advised Mr. Rorech that he had to change the way he shared information with customers when marketing a high yield bond deal. Instead, Mr. Rorech's supervisors praised him for his work on the VNU bond offering, and Deutsche Bank celebrated the performance of its capital markets professionals in creating a holding company tranche to provide additional demand for the bond offering.

Fourth, deceit-or the unauthorized theft of confidential information-is the cornerstone of the misappropriation theory of insider trading liability, on which the SEC's case relies. United States v. O'Hagan, 521 U.S. 642, 652-55 (1997). The SEC has not established that there was any deception in this case. Mr. Rorech disclosed to his supervisors on the sales desk and in capital markets that he was, in fact, sharing information about the potential holding company issuance with his customers, including Mr. Negrin's hedge fund, Millennium. Mr. Rorech was never told to stop sharing such information nor cautioned as to its allegedly confidential nature.

Similarly, Mr. Rorech lacked the requisite intent to be held liable for insider trading. Mr. Rorech believed that, in discussing the information about VNU with prospective investors, he was doing his job as a high yield salesperson. This belief comported with both the custom and practice in the industry as well as the actions of capital markets officers and other Deutsche Bank salespeople on the high yield desk, including Mr. Rorech's direct supervisor, Wight Martindale. It is farfetched to think that Mr. Rorech could believe that the very information shared with outsiders by his supervisor and the head of high yield capital markets would somehow not be appropriate for him to share.

The SEC also has failed to present any evidence that Mr. Rorech had any motive to provide "inside" information to Mr. Negrin, who was neither a personal friend nor his most significant account. This is not a case where a securities firm employee receives undisclosed benefits for his "tips." The only benefit Mr. Rorech allegedly received was any increase in compensation that he received from doing his job of selling securities. The SEC did not even present any evidence as to the significance of Mr. Negrin's CDS order on Mr. Rorech's overall compensation. Mr. Negrin's CDS order of a $10 million VNU CDS from Deutsche Bank appears relatively small compared to the $200 million in VNU bond orders that Mr. Rorech obtained during the same period. In light of all of the evidence that shows that Mr. Rorech believed his conduct was entirely appropriate, the fact that Mr. Rorech and Mr. Negrin had two cellular phone calls during the marketing period of the VNU bond offering is insufficient to establish scienter.

This is only a summary of the case, which is discussed in greater detail below. Having heard the testimony of the witnesses, having assessed their credibility, and having reviewed the evidence and the parties' post-trial submissions, the Court makes the following findings of fact and reaches the following conclusions of law.

FINDINGS OF FACT

I. Background

A. The Parties Involved

1. The Defendants

1. Jon-Paul Rorech began at Deutsche Bank in 2003 at the hedge fund sales desk. (Trial Transcript ("Tr.") 1169:1-18.)

2. In about January 2006, Mr. Rorech transferred to the high yield sales group at Deutsche Bank. (Joint Pretrial Order, Stipulations or Agreed Statements of Fact or Law ("Stipulated Facts" or "Stipulated Law") ¶ 7.)

3. After Mr. Rorech transferred to the high yield sales desk, Wight Martindale, the head of the desk, mentored him. Like other salespeople on the desk, Mr. Rorech learned on the job by watching and working with Mr. Martindale and other more experienced salespeople on the desk. (Tr. 1173:7-1174:8, 1433:25-1434:9.)

4. In 2006, Renato Negrin was a portfolio manager for Millennium Partners, L.P. ("Millennium"), a New York-based hedge fund. (Stipulated Facts ¶ 2.) Mr. Negrin's compensation was based on a percentage of the profits of the portfolio he managed minus certain overhead costs. (Tr. 126:10-13.)

2. Deutsche Bank Employees

5. In 2006, Wight Martindale was the head of the high yield sales group in New York and Mr. Rorech's direct supervisor. (Stipulated Facts ¶ 68.)

6. Christopher Wagner was a salesperson working in the high yield sales group at Deutsche Bank in New York. (Stipulated Facts ¶ 69.)

7. Andrew Kellerman was a salesperson working in the investment grade sales group at Deutsche Bank in New York. (Stipulated Facts ¶ 70.)

8. Mark Fedorcik was an investment banker in the high yield capital markets group at Deutsche Bank and was the senior capital markets professional responsible for marketing the VNU bond offering in the United States. (Stipulated Facts ¶ 65.)

9. David Ross and Paul Cahalan were investment bankers in the high yield capital markets group at Deutsche Bank, AG in London. (Stipulated Facts ¶ 67.)

10. Eve Tournier was the head of credit derivatives trading for Deutsche Bank, AG in London. (Stipulated Facts ¶ 71.)

11. John Aylward and Grigore Ciorchina were credit derivatives traders for Deutsche Bank, AG in London. (Stipulated Facts ¶¶ 72-73.)

12. Sean Hunt was the head of the high yield sales group at Deutsche Bank, AG in London. (Stipulated Facts ¶ 74.)

13. Rachel Bobillier was the head of the hedge fund sales group at Deutsche Bank, AG in London. (Stipulated Facts ¶ 75.)

14. Vikrant Sawhney was an investment banker in the financial sponsors coverage group at Deutsche Bank and was one of the primary points of contact for the sponsor consortium during the course of the VNU bond offering. (Stipulated Facts ¶ 66.)

15. John Eydenberg was an investment banker in the leveraged finance group at Deutsche Bank in New York and was one of the primary points of contact for the sponsor consortium during the course of the VNU bond offering. (Tr. 314:10-18, 407:1-4, 472:17-21.)

16. John Cartaina was a lawyer and a compliance officer at Deutsche Bank in New York in 2006. (Tr. 698:1-699:1.)

3. Investors

17. Randy Masel was an analyst with Mr. Negrin's credit trading group at Millennium in 2006. (Stipulated Facts ¶ 76.)

18. Sean Fahey was a portfolio manager and partner at Claren Road Asset Management LLC ("Claren Road"), a New York-based hedge fund that was one of Mr. Rorech's customers in 2006. (Tr. 117:11-17, 984:20-985:15.)

19. Jeremy Barnum was the head of the London office and a portfolio manager for Blue Mountain, a hedge fund that was one of Mr. Rorech's customers in 2006. (Stipulated Facts ¶ 78.)

20. Geoffrey Sherry was a portfolio manager for Caxton Associates L.P ("Caxton"), a New York-based hedge fund that was one of Mr. Rorech's customers in 2006. (Stipulated Facts ¶ 78.)

B. CDSs and Bonds

21. CDSs are bilateral financial contracts in which the CDS-buyer agrees to make periodic, fixed payments to the CDS-seller in exchange for a promise by the CDS-seller to make a fixed payment (the notional amount) to the CDS-buyer if a specified credit event occurs to the company referenced by the CDS prior to the expiration of the contract. (Tr. 1553:4-14, 1554:2-23; Defs.' Expert Ex. ("DEX") 1 at ¶ 21.)

22. The price or the "spread" of a CDS is the annual premium that the buyer must pay to the seller. The price is expressed as a percentage of the notional amount and is denominated in basis points. One basis point equals .01% of the notional amount. Therefore, a CDS price of 100 basis points would indicate that the annual premium amount would be 1% of the CDS's notional amount.

23. The spread of a bond, on the other hand, is the portion of the bond's yield, or amount of expected return, above the risk-free rate of return, which is typically estimated by reference to the London Interbank Offered Rate ("LIBOR"). (Tr. 1558:15-1559:10.) A bond's price, usually expressed as a dollar value or percentage of the par value of the bond, has an inverse relationship to the bond's spread or yield. For example, as a bond's price decreases, the bond's spread or yield increases. (Tr. 1560:6-22.)

24. The triggering credit events are specified in CDS contracts and often include the referenced company's bankruptcy, its failure to pay an obligation, or its restructuring. (Tr. 1553:4-14; DEX 1 at ¶ 42.)

25. Upon the occurrence of a credit event, the CDS-buyer must deliver to the CDS-seller a deliverable obligation under the contract in order to receive the notional amount at settlement from the CDS-seller. The obligation actually referenced in a particular CDS contract provides the baseline seniority level for deliverable obligations under that contract. CDS-buyers may return the referenced obligation, or a loan or bond of the same or greater level of seniority. (Tr. 1557:7-12.)

26. Although the parties agree upon the types of qualifying deliverable obligations at the commencement of the CDS contract, the exact deliverable obligations are not determined until a credit event occurs. At such a time, the obligations that will qualify as "deliverable" are determined. (Tr. 1600:15-1601:22.)

27. The International Swaps and Derivatives Association ("ISDA") facilitates the over-the-counter derivatives market by publishing various protocols, procedures, and base documents that many parties agree to follow in creating CDS contracts, but the use of such protocols is not required. (Tr. 1555:7-14.)

28. CDSs are negotiated between the buyer and seller. In the typical situation, an investment-fund CDS-buyer establishes a prime brokerage relationship with a CDS-seller bank and enters into an ISDA Master Agreement that facilitates over-the-counter trading in a number of derivatives. Subsequently, the parties enter into a Master Confirmation Agreement that provides general terms that govern CDS contracts between the parties. (Tr. 1555:15-1556:14.)

29. After the Master Confirmation Agreement is in place, the parties can execute individual CDS contracts by negotiating the specific terms of each transaction. The terms are usually memorialized in Trade Confirmations. (Tr. 1556:15-1558:14.)

30. The method of settlement is specified in the Master Confirmation Agreement. The settlement terms determine what the CDS-buyer must do, upon a credit event, to receive the notional payment. (Tr. 1553:23-1554:7.)

C. The Flow of Information in High Yield Bond Offerings

31. Many high yield bond offerings are marketed pursuant to SEC Rule 144A under the Securities Act of 1933, 17 C.F.R. § 230.144A, and thus can only be sold to sophisticated institutional customers with more than $100 million in investable assets, also known as Qualified Institutional Buyers ("QIBs"). (Stipulated Facts ¶ 19.)

32. As Mr. Barnum-a portfolio manager for Blue Mountain- explained, the high yield bond market is "a smaller market, it's a more professional market, it's a more concentrated market, it's a riskier market" than other markets. (Tr. 760:21-23.)

33. Marketing a high yield bond offering involves a flow of information among customers, salespeople, the underwriter, and the issuer. As Mr. Barnum testified, "there is a lot more discussion about things between issuers and investors and salespeople and capital markets professionals than there is in other markets." (Tr. 809:1-9, 1241:19-1242:8; see also, DEX 2 at ¶ 29 ("Thus, effective salespeople are constantly providing customers with customized investment ideas and market information and receiving feedback on what kind of investment products would better meet the customers' needs. Salespeople then pass on these continuously flowing bits of information to traders and capital markets professionals, who use them to price their various products. This free flow of information is regarded as custom and practice in the high yield bond market.").)

34. Unlike equity deals, bond deals in the high yield market are not presented on a "take-it-or-leave-it" basis. If investors do not like a deal, they will negotiate with the salespeople to change the price or the structure. (Tr. 376:7-15, 1182:2-15, 1484:4-1485:14; DEX 2 at ¶ 21.)

35. One of a high-yield-bond salesperson's responsibilities is to collect feedback from investors. In the context of a new bond offering, salespeople bring the feedback they receive from investors to capital markets professionals. (Tr. 1242:9-21, 1485:15-1486:5; DEX 2 at ¶¶ 27, 29.)

36. As the SEC's expert, David Barcus, acknowledged that "there is a dialogue that takes place" between the investors and the underwriter in a high yield bond offering, because "[t]he underwriter is seeking information from the buy side of the market to understand what they are thinking about the transaction." (Tr. 618:3-12.)

37. Mr. Barcus also agreed that, based on the feedback received from investors, capital markets sometimes would recommend to the sponsor or the issuer that a deal should be restructured. (Tr. 622:18-22, 623:12-624:21.)

38. When potential investors suggest that an issuer make changes to the proposed terms of a primary high yield bond offering, the suggestion is called a "reverse inquiry." Reverse inquiries can include suggested modifications to covenants, pricing, maturity, or structural features of a proposed securities offering. (Stipulated Facts ¶ 36.)

39. Reverse inquiries may be submitted by investors to salespeople, who then pass the reverse inquiries on to the capital markets professionals. Occasionally, investors address these reverse inquiries directly to the capital markets professionals. The capital markets professionals may relay the suggestion to the other investment bankers responsible for managing the relationship with the issuers, and those bankers, in turn, may discuss the reverse inquiry with the issuer. (Stipulated Facts ¶ 37.)

40. It is common in the high yield bond market, when there is a reverse inquiry from a customer, for salespeople to share that idea with other customers in order to determine whether there would be sufficient demand for the proposal suggested in the reverse inquiry. (Tr. 538:18-25, 637:10-638:24, 1223:25-1224:21; DEX 2 at ¶ 22.)

41. It also is common for salespeople or capital markets professionals to keep customers apprised of the status of a reverse inquiry and to provide customers with feedback as to the underwriter's possible support for a particular requested change. (Tr. 539:1-10, 630:13-632:8; DEX 2 at ¶ 23 ("As the Capital Markets professionals are receiving reverse inquiries from the salespeople, it was my experience to receive updates on the progress of the reverse inquiries which may include information about the discussions with sponsors. This information was also provided to customers by both Capital Markets professionals and other salespeople.").)

42. The sponsors or the issuers must approve all requests for changes to the proposed terms of the bond offering. A potential restructuring is not definite until the sponsor approves it. Indeed, sponsors reject many reverse inquiries for a variety of reasons. (DEX 2 at ¶ 25; Tr. 377:19-378:5, 539:11-22, 810:1-7.)

II. The VNU Bond Offering

A. The Original Bond Issuance

43. VNU was a public, Dutch media and information company. Its operating subsidiaries included Nielsen, a marketing and media information company best known in the United States for providing viewing and ratings statistics for television shows. (Stipulated Facts ¶ 12.)

44. On March 8, 2006, VNU announced that it had agreed to be purchased and taken private for €7.5 billion by a consortium of private equity firms consisting of AlpInvest Partners N.V., Blackstone Group L.P., Carlyle Group, Hellman & Friedman LLC, Kohlberg Kravis Roberts & Co. L.P., and Thomas H. Lee Partners, L.P. (the "sponsors"). (Stipulated Facts ¶ 10.)

45. Deutsche Bank served as a financial advisor to the sponsors in connection with their acquisition of VNU. (Stipulated Facts ¶ 11.)

46. On July 10, 2006, VNU announced that it would change its capital structure to include $1.67 billion of new bonds issued by VNU's subsidiaries in an offering under SEC Rule 144A, and €4.89 billion of new bank loans and credit facilities. (Stipulated Facts ¶ 13.)

47. The $1.67 billion of bonds was proposed to be issued in two tranches-senior notes issued by Nielsen Finance LLC and senior subordinated discount notes issued by Nielsen Finance Co. (Stipulated Facts ¶ 14.)

48. Deutsche Bank was the lead underwriter for the VNU bond offering. The other underwriters were Citigroup Global Markets Inc., JP Morgan Securities Inc., ABN AMRO Bank N.V., and ING Bank N.V. (Stipulated Facts ¶ 15.)

49. Deutsche Bank salespeople, especially those in the high yield sales group in New York, had the primary responsibility for soliciting orders for the proposed VNU bond offering. (Tr. 1496:14-1497:4.)

50. The VNU bond offering could only be marketed to Qualified Institutional Buyers. (Stipulated Facts ¶ 19.)

51. The financial sponsors, VNU management, and Deutsche Bank investment bankers organized a three-week international roadshow to market the bond offering. The European roadshow commenced on July 11, 2006, in London, and the United States roadshow took place from July 17 to July 28, 2006. (Stipulated Facts ¶ 21.)

52. A roadshow consists of meetings that are typically organized and attended by representatives from the underwriter and the issuer to educate prospective investors on the issuing company and the proposed bond offering. During the roadshow, investors often ask questions, raise concerns, and discuss potential changes to the proposed terms of the bond offering directly with investment bankers and the issuer. (DEX 2 at ¶ 20; Tr. 618:13-619:13.)

B. Deliverability Questions Arose

53. At the time of the VNU bond offering, VNU CDSs had previously been written and were traded in the market. The existing VNU CDSs referenced bonds of VNU N.V., the holding company at the top of the corporate pyramid that included the various VNU operating subsidiaries. (Stipulated Facts ¶ 27.)

54. As part of its proposed new financing, VNU indicated that it would tender for and retire most of its previously issued, outstanding bonds. (Stipulated Facts ¶ 29.)

55. It was understood that existing VNU N.V. 5 5/8% bonds denominated in Great Britain Pounds (the "Sterling Bonds") would remain outstanding. However, the Sterling Bonds were set to mature in May 2010, and the small outstanding amount of the Sterling Bonds led market participants, including those who had bought VNU CDSs, to conclude that this shortage of outstanding value of deliverable obligations would negatively affect the price of VNU CDSs. (Tournier Dep. 56:21-58:12; Causer Dep. 23:6-24:20, 26:16-27:11; Pl.'s Ex. ("PX") 142-A; PX 142 at DBL 2116-17; Tr. 771:16-772:15; Defs.' Ex. ("DX") 86.)

56. As soon as the marketing for the VNU bond offering began, the issue whether the new operating company bonds would be deliverable into VNU CDSs was debated widely among investors and other market participants. (DX 57; Tr. 815:12-25.)

57. Some market participants held the view that, in order for the new operating company bonds to be deliverable into VNU CDSs, they would have to be unconditionally and irrevocably guaranteed by the holding company, VNU. Because the language in the bond offering's preliminary memorandum indicated that the bonds were guaranteed by VNU, but that the guarantee might fall away in certain circumstances, some market participants believed that the new operating company bonds would not be deliverable into the VNU CDSs. (DX 57; DX 110.) Others held the view that the bonds would be deliverable. (PX 213.)

58. At one of the first investor presentations, which took place in London on the morning of July 12, 2006, and was attended by financial sponsors, by VNU management, by Deutsche Bank investment bankers, and by market participants, a number of investors raised the question whether the operating company bonds would be deliverable into existing VNU CDSs. (Stipulated Facts ¶ 31.)

59. Market participants suggested two options for changing the structure of the VNU bond offering in an effort to solve the deliverability question: The financial sponsors could (1) change the guarantee language in the offering memorandum for the new bonds so that the bonds would be irrevocably and unconditionally guaranteed by VNU; or (2) issue a tranche of bonds from the holding company or some other legal entity that would be deliverable into VNU CDSs. (Stipulated Facts ¶ 41.)

C. Investors Expressed Interest in Deliverable Bonds

60. From the outset of the marketing period for the VNU bond offering, Deutsche Bank and the financial sponsors heard from a number of public sources about the market's demand for deliverable bonds. (Tr. 304:4-15, 1504:21-1505:2.)

61. The possibility of structural changes to the VNU bond offering, including changing the guarantee language and the potential for issuing a tranche of bonds directly from VNU, was discussed in the marketplace, and was the subject of speculation from July 11 through July 21, 2006. (DX 79; DX 97; DX 109; DX 112; DX 166; DX 199; Tr. 469:2-470:7; PX 108A.)

62. During the first week of the marketing period, Mr. Fedorcik learned through feedback directly from market participants as well as from Mr. Rorech and through reports on questions raised at the roadshow that there was a technical demand in the market for deliverable bonds. (Tr. 295:4-13.)

63. Similarly, Mr. Martindale, Mr. Rorech's direct supervisor, became aware of the deliverability issue through "chatter in the marketplace," research reports, and because "clients were talking about it." (Tr. 1504:25-1505:2.)

64. In light of the deteriorating conditions in the high yield market in the summer of 2006, and due to the large amount of debt that VNU was planning to assume, Deutsche Bank considered the VNU bond offering to be difficult to market. (Tr. 334:3-17.)

65. Deutsche Bank's investment bankers understood that the senior subordinated discount note tranche of the new operating company bonds would be especially difficult to sell. (DX 271; Tr. 387:17-388:20.)

66. While market prices for VNU CDSs increased following the July 10, 2006, announcement of the bond offering, many market participants held the view that VNU CDSs remained underpriced, in light of the substantial debt burden that the company had announced it was planning to incur, and in light of the fact that the existing VNU CDSs referenced the most junior, and, thus, most risky, part of the company's capital structure. This increased risk drove up the chances that a credit event would occur and that a CDS-buyer would be owed the notional amount. (PX 30; DX 98.)

67. Because of the relatively low market price for VNU CDSs, upon the announcement of the bond deal, market participants such as Geoffrey Sherry, a portfolio manager at Caxton, a New York-based hedge fund, immediately perceived an opportunity for the financial sponsors to resolve the deliverability problem by issuing deliverable bonds at the holding company level. (DX 361.) These bonds could be issued at a lower coupon, and therefore at a lower cost for VNU, than those contemplated for the operating company bonds. (DX 361.)

68. Similarly, on July 12, 2006, Eve Tournier, a trader for Deutsche Bank in London, discussed the possibility of an issuance of deliverable bonds to satisfy CDS-investor demand with David Ross, the senior Deutsche Bank capital markets professional responsible for marketing the VNU bond offering in London. (PX 142A.)

69. Likewise, Mr. Martindale believed that Deutsche Bank should address the deliverability issue because, "CDS was trading way too cheap, just on a fundamental basis, and that if we could actually issue debt to people that were willing to buy it based on not the creditworthiness of the company but based on some synthetic arbitrage, that we should take full advantage of that because that would be a gift to the issuing client." (Tr. 1505:3-10.)

D. The Basis Trade Idea Was Developed

70. At the same time, a number of market participants also realized that the low VNU CDS prices meant that investors could potentially profit by executing a basis trade-by buying VNU CDSs and also buying deliverable bonds. The basis-trade-buyer would capture the difference between the relatively high bond spread and the lower premium amount that had to be paid on the CDS contract, while at the same time enjoying the CDS's protection from the bond's risk. (Tr. 769:23-771:11.)

71. Indeed, early in the morning of July 11, 2006, Mr. Sherry explained the deliverability issue to Mr. Rorech, Mr. Sherry's salesperson at Deutsche Bank, and told Mr. Rorech about the basis trade opportunity that would result if deliverable bonds were issued. (DX 359.) Mr. Rorech then called Grigore Ciorchina, a trader for Deutsche Bank in London, to discuss VNU. Mr. Ciorchina also expressed his opinion that the basis trade idea made sense. (DX 528.)

72. Shortly thereafter on July 11, Mr. Ciorchina sent an email suggesting the basis trade opportunity to a number of Deutsche Bank salesman, including Mr. Rorech. (DX 40.)

73. Because a basis trade involves buying both bonds and CDSs, Mr. Rorech believed that the basis trade idea could help generate interest in the bond deal. (Tr. 1187:3-13, 1192:1-21, 1283:1-9, 1297:2-10, 1357:10-24.)

74. Mr. Rorech immediately forwarded Mr. Ciorchina's email about the basis trade idea to his customers, including to Renato Negrin and Randy Masel at Millennium, and to Geoffrey Sherry and others at Caxton. (DX 67; DX 68.)

75. Mr. Rorech consulted his supervisor, Wight Martindale, and discussed the basis trade idea. Mr. Rorech asked Mr. Martindale whether he wanted to discuss it with Mark Fedorcik, the senior capital markets professional in New York responsible for the VNU bond offering. Mr. Rorech then called Mr. Fedorcik and told him about the deliverability issue and about the opportunity for the sponsors to issue deliverable bonds that would be attractive to CDS holders and prospective CDS purchasers. (Tr. 1293:9-16, 1503:22-1504:20; DX 368; Stipulated Facts ¶ 65.)

76. Other Deutsche Bank salespeople, including Christopher Wagner, Mark Colm, and John Bertrand, also pitched the basis trade strategy to their customers. (Tr. 1444:25-1445:20, 1447:7-10, 1449:7-1450:13, 1451:24-1452:1; DX 84; DX 347; DX 347T; DX 463; DX 463T.)

E. Deutsche Bank Worked to Resolve the Deliverability Issue

77. The senior investment banking employees working on the VNU transaction at Deutsche Bank included Mark Fedorcik, Vikrant Sawhney, and John Eydenberg. They were the primary points of contact for the financial sponsors throughout the VNU transaction and were the investment bankers at Deutsche Bank who were actively in communications with the sponsors about the potential structural changes. (Tr. 407:1-4, 472:17-21.)

78. The role of capital markets professionals during a new bond offering is to work with salespeople and with investors to provide the issuer with accurate information about market demand and with advice about whether to change the pricing, covenants, and the other structural components of the bond offering so as to achieve the best execution of the deal in light of market conditions. (Stipulated Facts ¶ 40.)

79. During the first week of the VNU bond offering, Mr. Fedorcik and others at Deutsche Bank first explored whether changing the offering memorandum's guarantee language would allow the operating company bonds to be deliverable into VNU CDSs. (DX 85; DX 105.)

80. In exploring the issue internally, Mr. Fedorcik spoke to Eve Tournier in London. During a telephone call on July 13, 2006, Ms. Tournier assured Mr. Fedorcik that providing for an unconditional and irrevocable guarantee would make both the senior and the senior subordinated operating company bonds deliverable under ISDA rules. (PX 48A.)

81. As of July 13, 2006, Mr. Fedorcik was still trying to understand the guarantee language issue. ...


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