Distressed and Dishonest

How convenient would it be to have one of your distressed-debt traders also head up the creditors' committee at the very same companies whose debt he was trading?

Very convenient, of course.

But it's also very illegal, as Barclays Bank has been reminded.

Barclays and one of its former traders settled civil charges of insider trading by agreeing to cough up millions of dollars in ill-gotten gains, penalties and interest. Neither the bank nor the trader, Steven J. Landzberg, admitted or denied the Securities and Exchange Commission's allegations, however.

In its complaint, filed in U.S. District Court in Manhattan, the S.E.C. alleges that senior managers at Barclays authorized Landzberg to buy and sell the bonds of companies that were trying to reorganize their debts while Landzberg was also sitting on the creditors committees of those companies.

In three cases, the companies were under the protection of federal bankruptcy courts. In two cases, Barclays employees were chairmen of the creditors' committees. In all cases, committee members had access to sensitive nonpublic information including business plans, management projections, financing alternatives, adviser analyses, and the timing and terms of proposed plans of reorganization.

The S.E.C. said the bank never informed its fellow creditors that it was using this private information to make a profit from or to avoid losses on the distressed companies' securities. The trading was all for Barclays' own account, and occurred between March 2002 and September 2003, the S.E.C. said.

While Landzberg did not share his secret with other creditors, he did hint at it with some of the people he was trading with. The S.E.C. said that "in a few instances," he passed around what the commission described as "big boy letters"--essentially warnings that Barclays may have had access to material nonpublic information.

(The phrase comes from the idea that such letters essentially say that "we're all big boys and know the risks of trading dud loans and bonds, so don't sue me later if you find out I had some information that you didn't have.")

The S.E.C. added that there was no evidence that he or the bank ever actually shared the ill-gotten information with others.

To settle the charges, Barclays agreed to pay more than $10.9 million. This includes a $6 million penalty, nearly $4 million in surrendered profits from the trades, and more than $900,000 in interest on those profits.

Landzberg personally agreed to pay a fine of $750,000 and to be forever banned from creditors committee in federal bankruptcy actions involving companies that have issued any kind of securities.

by Mark Stein