Revisiting Insider Trading In The Debt Markets: Lessons For Debt Investors And Members Of Committees In Bankruptcy Cases

For some participants in the debt and credit markets, insider trading risks seem like a problem for someone else. There is some statistical basis for that assumption; the law of insider trading has been developed largely through cases involving the equity markets. There is no basis, however, for a sense of immunity. The Securities and Exchange Commission's recent settlement involving Barclays Bank PLC and Steven J. Landzberg, a former proprietary trader for Barclays' U.S. Distressed Debt Desk, sends a signal that the SEC is prepared to bring even novel insider trading cases in the debt markets. See SEC v. Barclays Bank PLC, Litig. Release No. 20,132 (May 30, 2007) (the "Settlement"). While the Settlement involves important lessons for holders of debt securities, such investors should particularly take these lessons into account when considering joining a creditors' committee.

The SEC's complaint that resulted in the Settlement is not focused on an isolated incident. Instead, the Commission contends that, through Barclays' participation on a half dozen official and unofficial creditors' committees, the firm received material, nonpublic information about the debt issuers involved.1 While serving on these committees, Barclays allegedly received material information concerning the financial condition and prospects of the issuers, their most recent business plans, detailed management projections, contemplated financing alternatives, proprietary advisor analyses, and the timing and terms of proposed plans of reorganization. The SEC alleges that between March 2002 and September 2003, Barclays "purchased and sold millions of dollars of securities while aware of material nonpublic information . . . ."

None of the legal issues implicated in the Settlement will be tested in the courts. Barclays and Landzberg settled the proceedings for payments, respectively, of $10.9 million and $750,000. Landzberg also consented to a bar from service on any creditors' committee in a federal bankruptcy case involving an issuer of securities.

The Settlement coincides with significant change in the debt and credit markets. Once dominated by banks and multi-service securities firms, these markets have seen an influx of new participants, including hedge funds and other "buy side" investors.2 For this marketplace, the Settlement signals four important lessons.

First, through the Settlement, the SEC sounds a blunt warning for debt investors in general, and particularly for those serving as members of committees in bankruptcy cases. The warning regarding the ability to trade while aware of material, nonpublic information involving debt securities is not new; the SEC has prosecuted insider trading cases in the debt markets since 1943.3 What is distinctive about the Commission's action is the breadth of the trading activity covered. The complaint alleges that 143 separate transactions in the debt securities of six issuers were effected while Barclays had material, nonpublic information regarding the relevant issuer; the complaint fails to address the specific details of any one trade. By contrast, in another settled insider trading case announced just days before the Settlement involving the equity markets, the SEC's pleadings addressed the specific nature of the nonpublic information involved (a corporate takeover), the materiality of the information (the target company's stock price increased 34 percent after the transaction was announced) and the allegedly improper profits garnered ($3,785 by one defendant; $2,897 by the other).4

Members of committees in bankruptcy cases should take particular note of the Commission's allegation that Barclays' trading breached fiduciary and other duties of trust or...