By The Star Staff
The Securities and Exchange Commission (SEC) has filed a complaint against investment adviser Silver Point Capital L.P. for failing to implement and enforce policies and procedures to prevent the misuse of material nonpublic information (MNPI) related to Puerto Rico bonds.
Silver Point Capital, in a separate statement, has denied any wrongdoing.
The allegations focus on Silver Point’s involvement in the restructuring of Puerto Rico’s defaulted municipal bonds and the firm’s purchase of over $260 million of these bonds while a consultant with access to MNPI had extensive communications with Silver Point’s trading desk, according to an SEC statement issued last week.
Silver Point’s core strategy involves investing in distressed companies, with a consultant participating in creditors’ committees on the firm’s behalf. The SEC alleges that Silver Point failed to address the specific risks associated with the consultant’s receipt of MNPI through his participation in the committees.
Specifically, from September 2019 to February 2020, the consultant sat on an ad hoc creditors’ committee for Puerto Rico’s bond restructuring and received MNPI from a confidential mediation. During this period, the consultant had more than 500 communications with Silver Point’s public trading desk without involving the firm’s compliance department.
According to the SEC, that created a substantial risk that Silver Point may have misused information from the mediation in its trading of Puerto Rico bonds.
Sanjay Wadhwa, acting director of the SEC’s Division of Enforcement, emphasized the importance of preventing the misuse of MNPI, stating that “the resulting risks to market integrity and investors are compounded when investment advisers fail to enforce their compliance policies and procedures.”
Silver Point said the SEC solely claims “that we should have required Chaim Fortgang, a preeminent bankruptcy lawyer who was a legal consultant to Silver Point until his death three years ago, to be chaperoned by the Firm’s Compliance Department in his discussions with the Public Side of the Firm.”
“Importantly, after a four-year investigation, a review of approximately 350,000 documents and interviews of 10 current and former employees and Silver Point’s outside counsel, 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,” the firm said. “It has also not alleged any potential impact or harm to investors.”
“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,” the firm continued. “Silver Point has, at all times, behaved legally and ethically. Silver Point takes great pride in our Firm’s compliance program and seeks to always operate with the highest ethical standards. 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. In addition, Silver Point has, since inception, consulted with numerous legal and compliance consulting firms on the design and operation of its information barrier and related governing policies and procedures.”
“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 said. “In contrast, the SEC has not identified a single witness who contends that Mr. Fortgang functioned in any role other than as legal counsel.”