Larry Ribstein tackles what he calls The SEC's quixotic pursuit of insider trading in CDS's:
The SEC claims that a Deutsche Bank salesman gave inside information to a trader who used it to make a $1.2 million profit on CDS’s tied to DB debt. There are a few problems with this case, like the fact that CDS’s themselves aren’t securities, and they relate to European securities that aren’t regulated by the SEC. According to the WSJ, “[t]he SEC said it has jurisdiction because the swaps are "security-based," and the two traders are based in the U.S.”
Sounds pretty weak to me.
So the SEC, having dropped the ball on Madoff’s multi-billion dollar fraud, has been trying to restore its reputation by cracking down on the legitimate information-revealing mechanisms of short-selling and hedge funds. Now it’s flown off to Europe to find a miniscule profit that probably hurt nobody.
Having said that, if the alternative is letting state insurance commissioners regulate CDSs, I'd much rather see the SEC regulating them.