Barclays made gains from bankruptcy panel info: SEC

WASHINGTON: Barclays, Europe’s biggest underwriter of corporate bonds, used confidential information from serving on creditors’ committees to trade securities of bankrupt companies, two people with knowledge of a government investigation said.

The US Securities and Exchange Commission has evidence that Barclays profited from advance knowledge of market-moving developments its analysts and traders received from the bankruptcy panels, said the people, who declined to be identified because the three-year probe isn’t public. London-based Barclays is in talks to settle SEC allegations that it broke insider- trading rules, they said.

The investigation highlights the potential for conflicts of interest as banks lend money to foundering clients while also trading their securities. Barclays, the UK’s third-largest bank, more than doubled trading revenue from credit products, including bonds and loans, in the past two years.

“As we come to the end of the business cycle and are likely to see more troubled companies in workout situations, this is a timely marker for the SEC to put down against a practice that really can’t be tolerated,” said Mark Radke, a former SEC official now at LeBoeuf, Lamb, Greene & MacRae LLP in Washington.

“Commercial banks have increasingly built up their proprietary trading operations, so the issue is more and more acute.” Barclays spokesman Peter Truell and SEC spokesman John Nester declined to comment.

Some of the trading under investigation by the SEC dates back to 2002, and those involved are no longer at the bank, the people familiar with the probe said. Since then, default rates on high-risk bonds have declined to the lowest in a decade, according to data compiled by Moody’s Investors Service.

Securities firms, hedge funds, private-equity managers and law practices are hiring traders, bankers, investors and attorneys specializing in bankruptcies and so-called distressed debt, anticipating an increase in defaults as the economy slows.

Bear Stearns Cos, the fifth-largest US securities firm, said last month that distressed debt helped fuel record first-quarter revenue in its credit-products department.