SEC Files Credit Default Swap Insider-Trading Case

For the first time, the U.S. Securities and Exchange Commission ("SEC") filed an insider-trading case involving the purchase of a credit default swap ("CDS") based on confidential, nonpublic material information. A CDS is a financial product similar to an insurance policy that pays the purchaser of the CDS a negotiated amount upon the occurrence of certain triggers, typically events of default under a debt security. The trading price of a CDS fluctuates with changes in the perceived likelihood that the original issuer of the debt security will default on such debt security, thereby triggering payment under the CDS. As an issuer's perceived risk of defaulting rises, the value of the underlying CDS increases.