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A prominent Connecticut hedge fund has been accused by US market regulators of failing to consistently supervise a well-known lawyer who advised it on distressed debt legal fights.
The showdown between the US Securities and Exchange Commission and Silver Point Capital, which manages roughly $30bn, centres on the role of lawyers retained by investment firms.
The SEC in a complaint on Friday charged that Silver Point failed to “prevent the misuse of material non-public information relating to its participation on creditors committees”.
The civil lawsuit focuses on the work of Chaim Fortgang, a pioneering distressed debt lawyer, who after a lengthy career at white-shoe firm Wachtell, Lipton Rosen & Katz joined Silver Point in 2004 as an outside consultant.
Silver Point, which was founded in the early 2000s by two former Goldman Sachs executives, is one of the most prominent credit investors in the country. The firm maintains a strict barrier between its “public” side, which traded securities, and a “private” side that took longer-term positions in troubled companies and joined creditors committees to bargain over restructuring efforts.
The SEC said Fortgang, while representing Silver Point in mediation sessions over Puerto Rico’s sovereign debt restructuring five years ago, had repeatedly called Silver Point traders, breaking down divisions between the company’s two sides.
Silver Point denied any wrongdoing, noting it was not accused of illicitly profiting from any trades.
It said: “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.”
Compliance officials approve and monitor communications between distinct sides of Silver Point, it added.
Fortgang, who died in 2021 at age 74, had been among the handful of prominent lawyers who dominated corporate bankruptcy cases after the Chapter 11 process was created in 1978 to promote corporate reorganisations.
Fortgang “had a reputation for being aggressive and uncompromising while advocating on behalf of his clients”, the SEC wrote in its complaint. A 2002 Wall Street Journal profile described a negotiation in the 1990s Marvel Entertainment case when Fortgang threw a bagel at an adversary.
Interactions between Silver Point’s two sides were closely monitored by its compliance department. But the SEC said Fortgang, who was paid $181,333 per month in an addition to an annual bonus, operated in a vacuum.
“By not designating Fortgang as a public or private employee, Silver Point allowed Fortgang to operate in a loophole, effectively exempting him from the public/private divide,” the SEC wrote.
The agency said Fortgang was the sole Silver Point representative in multi-party discussions over Puerto Rico’s sovereign debt restructuring in late 2019 and early 2020. The firm had purchased $260mn of the US territory’s bonds during that period.
During the talks, Fortgang “had more than 500 calls with public side employees without the involvement of compliance”, the SEC alleged in its complaint. The firm ultimately made $29mn in profits on its bond position.
In a letter sent earlier this month to Silver Point investors reviewed by the Financial Times, the firm denied wrongdoing and said the SEC’s allegation that Fortgang required monitoring was based on a “very narrow” interpretation of securities law.
It said it had surveyed 12 outside law firms which had worked opposite Fortgang when he was affiliated with Silver Point. They all stated he operated merely as “legal counsel”.
“The SEC has not identified a single witness that contends that Mr Fortgang functioned in any role other than as legal counsel,” Silver Point wrote in the letter.
The regulator is seeking a jury trial in a Connecticut federal court and a civil monetary fine.
The action against Silver Point comes just three months after the SEC settled charges with Marathon Asset Management over its treatment of confidential information in debt restructuring negotiations.
