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The Securities and Exchange Commission (SEC) has initiated a complaint against investment adviser Silver Point Capital L.P. for its failure to adopt and enforce policies intended to prevent the misuse of material nonpublic information (MNPI) concerning Puerto Rico bonds.
In a separate statement, Silver Point Capital has refuted the allegations.
The claims revolve around Silver Point’s role in the restructuring of Puerto Rico’s defaulted municipal bonds, alongside the firm’s acquisition of over $260 million in these bonds during a period when a consultant with access to MNPI had significant communications with Silver Point’s trading desk, as per an SEC statement released last week.
Silver Point’s primary strategy focuses on investing in distressed firms, with a consultant actively partaking in creditors’ committees on behalf of the firm. The SEC contends that Silver Point neglected to manage the specific risks linked to the consultant’s access to MNPI via his committee involvement.
Specifically, from September 2019 until February 2020, the consultant was a member of an ad hoc creditors’ committee for the bond restructuring and received MNPI during a confidential mediation. Throughout this timeframe, the consultant engaged in over 500 communications with Silver Point’s public trading desk without involving the firm’s compliance team.
The SEC indicated that this set up a significant risk that Silver Point might have misappropriated information from the mediation in its trading activities involving Puerto Rico bonds.
Sanjay Wadhwa, the acting director of the SEC’s Division of Enforcement, underscored the critical nature of preventing MNPI misuse, stating that “the risks to market integrity and investors are exacerbated when investment advisers fail to implement their compliance protocols effectively.”
Silver Point asserted that the SEC claims “that we should have mandated Chaim Fortgang, a leading bankruptcy attorney who served as a legal consultant to Silver Point until his passing three years ago, to be accompanied by the Firm’s Compliance Department during his conversations with the Firm’s Public Side.”
“Notably, after a four-year investigation, with a review of approximately 350,000 documents and interviews with 10 current and former employees along with Silver Point’s outside counsel, the SEC has not claimed that Mr. Fortgang improperly transmitted any information to the Firm’s Public Side or that Silver Point engaged in any improper conduct or trading,” the firm stated. “Furthermore, it has not indicated any potential adverse effects or harm to investors.”
“We have declined to settle a case where there was no wrongdoing or any shortfall in our information barrier protocols or compliance program,” the firm added. “Silver Point has conducted itself legally and ethically at all times. We take great pride in our compliance program and strive to uphold the highest ethical standards. In this context, we have maintained a constructive, collaborative relationship with the SEC for the last 22 years, fully cooperating with the SEC’s investigation, even going as far as waiving attorney-client privilege for requested documents and information to eliminate any suggestion of improper conduct. Additionally, since our inception, Silver Point has sought guidance from various legal and compliance consulting firms regarding the setup and functioning of its information barriers and governing policies.”
“All evidence — including emails, legal confirmation letters from Mr. Fortgang to PricewaterhouseCoopers, and statements from 22 witnesses — illustrates that Mr. Fortgang acted solely in his capacity as an attorney for Silver Point and should therefore have been regarded no differently than any other outside counsel (where, by all indications, chaperoning is not obligatory),” Silver Point mentioned. “Conversely, the SEC has not provided a single witness who asserts that Mr. Fortgang acted in any capacity other than legal counsel.”
