The U.S. Securities and Exchange Commission charged Silver Point Capital, L.P. with breaches of nonpublic information federal laws with regards to Puerto Rico bonds.
The SEC filed its case in the U.S. District Court for the District of Connecticut.
Silver Point Capital is a Connecticut-based hedge fund with $33 billion in investible assets, according to its web site.
The SEC says Silver Point failed to establish, implement, and enforce written policies reasonably designed to prevent the misuse of material nonpublic information. The charges focus on the behavior of Chaim Fortgang, who Silver Point had hired as an outside consulting attorney.
Fortgang, who has since died, represented Silver Point in negotiations over Puerto Rico's debt restructuring in 2019 and 2020. He was part of the private side of Silver Point that would negotiate deals concerning Silver Point's distressed and restructuring debt holdings, the SEC said. As such, he had material non-public information that could conceivably have offered an advantage in trading those bonds. Silver Point also had a public side of traders who traded a variety of securities, including those for which Fortgang had access to non-public information.
Silver Point had a policy that members of the private side couldn't communicate with the public side unless they first contacted the firm's compliance department and got its OK or its terms for the communication, according to the SEC.
According to the SEC, Fortgang made over 500 calls to members of the public team September 2019 to February 2020 without first getting a compliance OK.
During this period of negotiations on the Puerto Rico bonds, the firm was actively trading the bonds. Fortgang also met in person with members of the public team without compliance approval dozens of times in the period, the SEC found.
Silver Point netted a profit of $29 million from the Puerto Rico bonds it bought in late 2019 and early 2020, the SEC said.
For its part, Silver Point said in a statement, "We have refused to settle a matter in which there was neither any wrongdoing nor any deficiency in our information barrier policies or our compliance program." It noted that it has waived attorney-client privilege in the SEC's four-year investigation of the firm.
Since Fortgang was an experienced and respected attorney and since he only gave legal advice to members of the firm, neither he nor the firm did anything wrong, Silver Point said.
The SEC complaint doesn't allege Fortgang talked to members of the public team that traded Puerto Rico bonds and doesn't explicitly allege that he shared information from the Puerto Rico bond negotiations with anyone on the public team.
There were two times in the period when the Silver Point compliance department monitored Fortgang's communications with the public trading staff, which the SEC acknowledges.
"There was absolutely no reason for the personnel at Silver Point to believe that a lawyer of Mr. Fortgang's intelligence and experience would make a mistake in connection with his representation of Silver Point and even less that he would need someone to supervise his activities and give him advice on legal matter," said retired federal bankruptcy Judge Allan Gropper, whom Silver Point has hired as an expert witness.
Silver Point said, "All of the evidence — including emails, legal confirmation letters from Mr. Fortgang to PricewaterhouseCoopers and statements by 22 witnesses — indicates that Mr. Fortgang acted for Silver Point solely as an attorney and therefore should have been treated no differently than any other outside counsel (where chaperoning, by all accounts, is not required)."
Silver Point has hired Andrew Ceresney, co-chair of Debovoise & Plimpton's Litigation Department. He served for nearly four years as director of enforcement at the SEC.
The SEC says other fund participants in the Puerto Rico bond negotiations didn't trade the bonds during the negotiations.
