The Securities and Exchange Commission on Dec. 20 charged global credit firm Silver Point Capital with compliance failures over the receipt of material nonpublic information around bonds issued by Puerto Rico. Silver Point said it has “refused to settle” with the regulator.
“Silver Point is alleged to have purchased over $260 million of Puerto Rico bonds during the same period that a Silver Point consultant, who possessed MNPI (material nonpublic information) about the same Puerto Rico bonds, had more than 500 calls with firm employees, including those who actively traded such debt, without involving the firm’s compliance department,” said Sanjay Wadhwa, acting director of the SEC’s division of enforcement, in a news release Dec. 20.
“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," said Silver Point, a Greenwich-Conn.-based hedge fund, in a statement provided to Pensions & Investments. "Silver Point has, at all times, behaved legally and ethically.”
The SEC alleges that from September 2019 to February 2020, the consultant — Chaim Fortgang, a bankruptcy attorney who has since died — sat on an ad hoc creditors’ committee that dealt with restructuring Puerto Rico’s defaulted municipal bonds. Fortgang would receive material nonpublic information in this role and would have “extensive communications” with Silver Point’s public trading desk without the firm’s compliance department involved, creating a “substantial risk” that Silver Point may have misused that information, according to the SEC.
The SEC alleges in its compliant that one of Silver Point’s core strategies is investing in bankrupt or distressed entities and that the firm was organized with a public side buying and selling the debt of distressed entities while its private side would participate as a creditor/investors in “confidential negotiations over how the distressed entity could repay its debt.”
The SEC alleges in its complaint that Silver Point’s policies and procedures “were not reasonably designed to address the risks” of its business model and “allowed for a largely unfettered, unmonitored flow of information from the consultant to Silver Point’s public trading side.” The SEC also alleges that Silver Point generated more than $29 million in profit when it sold the bonds it amassed from 2019 to 2020.
Silver Point said in its statement that after a four-year investigation and review of about 350,000 documents as well as interviews with current and former employees, “the SEC has not alleged that Mr. Fortgang improperly conveyed any information to the firm’s public side or that Silver Point otherwise engaged in any type of improper activity or trading. It has also not alleged any potential impact or harm to investors.”
“Silver Point takes great pride in our firm’s compliance program and seeks to always operate with the highest ethical standards," the firm added. "In that spirit, we have maintained a positive, productive and collaborative relationship with the SEC for the past 22 years, and we have fully cooperated with the SEC’s investigation in this matter, even taking the extraordinary step of waiving attorney-client privilege over requested documents and information to successfully dispel any possible suggestion that we acted improperly.”
Andrew J. Ceresney, co-chair of law firm Debevoise & Plimpton’s litigation department who previously served as the director of enforcement at the SEC under Chair Mary Jo White, is representing Silver Point in the matter.
“I am surprised and disappointed the SEC has brought these charges,” Ceresney said in the firm’s statement. “They are unprecedented, and there is absolutely no basis in the evidence or the law for the claims asserted.”
Silver Point was founded in 2002 by former Goldman Sachs partners Ed Mule and Bob O'Shea.
Silver Point counts institutional investors among its clients, including the $49.7 billion Texas County & District Retirement System, Austin, and the $3.7 billion Dallas Employees’ Retirement Fund, according to P&I data.
Silver Point has about $37 billion in investable assets under management, according to its statement.
