S.E.C. v. Rorech

• Decision Date: 10 December 2009
• Docket Number: No. 09 Civ. 4329(JGK).,09 Civ. 4329(JGK).
• Citation: 673 F.Supp.2d 217
• Parties: SECURITIES and EXCHANGE COMMISSION, Plaintiff, v. RORECH, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

673 F.Supp.2d 217

SECURITIES and EXCHANGE COMMISSION, Plaintiff, v. RORECH, et al., Defendants.

No. 09 Civ. 4329(JGK).

United States District Court, S.D. New York.

December 10, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Bruce Karpati, Assistant Regional Director, Richard G. Primoff, Nancy A. Brown, Panayiota Kilaras Bougiamas, U.S. Securities and Exchange Commission, New York, NY, for Plaintiff.

Richard Mark Strassberg, Maryana Zubok, Goodwin Procter, LLP, Lawrence Iason, Linda Fang, Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., New York, NY, Roberto M. Braceras, Goodwin Procter, LLP, Boston, MA, for Defendants.

OPINION AND ORDER

JOHN G. KOELTL, District Judge:

The Securities and Exchange Commission ("SEC") brought this case against defendants Jon-Paul Rorech and Renato Negrin for alleged insider trading in credit default swaps ("CDSs") in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 48 Stat. 891, codified as amended at 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. The defendants both move for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) and ask that the Court dismiss the SEC's Complaint. Both defendants argue that § 10(b) does not provide the SEC with the authority to regulate the CDSs at issue in this case because they are not "securities-based swap agreement[s]." See 15 U.S.C. § 78j(b). The defendants therefore argue that the Court lacks subject matter jurisdiction over this case and that the Complaint fails to state a claim upon which relief can be granted. Mr. Rorech also argues that even if the CDSs are based on the securities at issue here, bonds issued by VNU N.V. ("VNU"), the SEC has no jurisdiction over the CDSs because they are based on foreign bonds. Finally, Mr. Rorech argues that, in any case, he did not violate § 10(b) and Rule 10b-5's proscription of insider trading because he had no duty to keep information about the VNU bonds confidential.

I

The standards to be applied to a motion for judgment on the pleadings pursuant to Rule 12(c) are the same as those applied to a motion to dismiss pursuant to Rule 12(b). See Cleveland v. Caplaw Enters., 448 F.3d 518, 521 (2d Cir.2006); Katz v. Image Innovations Holdings, Inc., 542 F.Supp.2d 269, 271-72 (S.D.N.Y.2008); United States ex rel. Phipps v. Comprehensive Cmty. Dev. Corp., 152 F.Supp.2d 443, 448-49 (S.D.N.Y.2001); Peters v. Timespan Commc'ns, Inc., No. 97 Civ. 8750, 1999 WL 135231, at *3 (S.D.N.Y.1999). When presented with motions under both Federal Rule of Civil Procedure 12(b)(1) to dismiss for lack of subject matter jurisdiction and Rule 12(b)(6) to dismiss for failure to state a claim upon which relief can be granted, the Court must first analyze the Rule 12(b)(1) motion to determine whether the Court has the subject matter jurisdiction necessary to consider the merits of the action. See Rhulen Agency, Inc. v. Alabama Ins. Guar. Ass'n, 896 F.2d 674, 678 (2d Cir.1990); Abrahams v. App. Div. of the Sup.Ct., 473 F.Supp.2d 550 (S.D.N.Y.2007).

In defending a motion to dismiss for lack of subject matter jurisdiction, the plaintiff bears the burden of proving the Court's jurisdiction by a preponderance of the evidence. Makarova v. United States, 201 F.3d 110, 113 (2d Cir.2000). In considering such a motion, the Court generally must accept the material factual allegations in the complaint as true. See J.S. ex rel. N.S. v. Attica Cent. Sch., 386 F.3d 107, 110 (2d Cir.2004). The Court does not, however, draw all reasonable inferences in the plaintiff's favor. Id.; Graubart v. Jazz Images, Inc., No. 02 Civ. 4645, 2006 WL 1140724, at *2 (S.D.N.Y. Apr. 27, 2006). Indeed, where jurisdictional facts are disputed, the court has the power and the obligation to consider matters outside the pleadings, such as affidavits, documents, and testimony, to determine whether jurisdiction exists. See APWU v. Potter, 343 F.3d 619, 627 (2d Cir.2003); Filetech S.A. v. France Telecom S.A., 157 F.3d 922, 932 (2d Cir.1998); Kamen v. Am. Tel. & Tel. Co., 791 F.2d 1006, 1011 (2d Cir.1986). In so doing, the Court is guided by that body of decisional law that has developed under Federal Rule of Civil Procedure 56. Kamen, 791 F.2d at 1011; see also Melnitzky v. HSBC Bank USA, 2007 WL 1159639, at *5 (S.D.N.Y. Apr. 18, 2007).

In deciding a motion to dismiss pursuant to Rule 12(b)(6), the allegations are accepted as true, and all reasonable inferences must be drawn in the plaintiff's favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir.2007); Arista Records LLC v. Lime Group LLC, 532 F.Supp.2d 556, 565-68 (S.D.N.Y.2007). The Court's function on a motion to dismiss is "not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.1985). The Court should not dismiss the complaint if the plaintiff has stated "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). While the Court should construe the factual allegations in the light most favorable to the plaintiff, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions." Id. at 1949; see also Donelli v. County of Sullivan, No. 07 Civ. 2157, 2009 WL 2365551, at *1 (S.D.N.Y. July 31, 2009).

When presented with a motion to dismiss pursuant to Rule 12(b) (6), the Court may consider documents that are referenced in the complaint, documents that the plaintiff relied on in bringing suit and that are either in the plaintiff's possession or that the plaintiff knew of when bringing suit, or matters of which judicial notice may be taken. See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002); see also Kavowras v. New York Times Co., 328 F.3d 50, 57 (2d Cir.2003); Taylor v. Vermont Dep't of Educ., 313 F.3d 768, 776 (2d Cir.2002); Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d. Cir. 1991); Kramer v. Time Warner, Inc., 937 F.2d 767, 773 (2d. Cir.1991).

II

The following facts are undisputed, unless otherwise noted.

A credit default swap is a type of credit derivative contract that provides protection against credit risk for investors. See Aon Fin. Prods., Inc. v. Société Générale, 476 F.3d 90, 92 n. 1 (2d Cir.2007). The seller of a CDS agrees to pay the buyer a specific sum of money, called the notional amount, if a credit event occurs to either the company or the financial instrument referenced by the CDS. Credit events can include the default of the underlying instrument or the referenced company's bankruptcy or restructuring. If a credit event occurs, the buyer must return to the seller the defaulted debt instrument referenced by the CDS, or a loan or bond of the same or greater level of seniority. In exchange for this default protection from the seller, the buyer agrees to make periodic premium payments to the CDS seller during the course of the contract. The premium is expressed in basis points, which indicate a percentage of the notional amount to be paid annually.

VNU is a Dutch media holding company that consists of various subsidiaries. Before July 2006, the only VNU CDSs available on the market referenced bonds issued by VNU itself. (Compl. ¶ 16.) On July 10, 2006, VNU announced that its subsidiaries, Nielsen Finance LLC and Nielsen Finance Co. ("Nielsen"), would issue bonds directly to help fund the takeover of VNU. (Compl. ¶ 15.) Deutsche Bank Securities Inc. ("DBSI") was one of the underwriters of this new bond offering. (Compl. ¶ 17.) The SEC alleges that because these Nielsen bonds would not be covered by the available VNU CDSs, and because VNU would soon have no remaining debt to serve as a reference entity for those CDSs, there was a market demand for bonds that could be covered by the available VNU CDSs. (Compl. ¶¶ 16-17.) From July 12, 2006 to July 24, 2006, DBSI allegedly led an effort to encourage the VNU holding company to issue additional bonds. (Compl. ¶ 20.) On July 24, 2006, VNU announced publicly a restructuring of the bond issuance that included bonds issued directly by VNU. (Compl. ¶ 20.)

The SEC alleges that the issuance of these new bonds materially affected the price of CDSs that referenced VNU bonds. (Compl. ¶ 22.) The SEC alleges that a trader who purchased VNU CDSs before the July 24, 2006 public announcement would have seen the price and value of the CDSs increase with the increase in VNU bonds that would be covered by the CDSs. (Compl. ¶ 22.) In fact, the price of VNU CDSs did increase after the public announcement. (Compl. ¶ 22.)

In July 2006, Mr. Rorech was a bond and CDS salesperson at DBSI. (Compl. ¶ 1.) The SEC alleges that between July 14, 2006 and July 17, 2006, Mr. Rorech passed information on the new VNU bond issuance to Mr. Negrin, a portfolio manager for Millennium Partners, L.P. ("Millennium"), a hedge fund investment advisor. (Compl. ¶¶ 2, 10, 32.) On July 17 and July 18, 2006, allegedly based on Mr. Rorech's tip, Mr. Negrin purchased two VNU CDSs, each with notional amounts of 10 million. (Compl. ¶ 42.) One was purchased from DBSI and one was purchased from another dealer. (Compl. ¶ 42.) Sometime after the July 24, 2006 public announcement of the bond issuance, Mr. Negrin sold the CDSs for a profit of almost 950,000, approximately $1.2 million at the then-existing exchange rates. (Compl. ¶ 44.)

The CDSs purchased were governed by a set of standard contract terms set out in a Master...