Matt Levine has an ongoing bit that “Everything is securities fraud” and has followed onto this bit with “Everything might be insider trading.” There’s something to this: a lot that goes on in debt markets where there are in-groups and out-groups and “surprise transactions” by loan and bond holders who may or may not also own equity, and may have different levels of information often does feel like insider trading.

But what happens when a party has potentially insider information on a company, and ultimately makes a profit on betting on or against that company but — and this is key — there are no actual securities involved?

Recently, 9fin reported that Apollo’s structured financing arm — Atlas SP — gained access to information on part of First Brands’ off-balance sheet funding which may have given Apollo insight into certain credit risk the company faced. Apollo ended up betting against the company — possibly through credit default swaps or possibly through a DQ list workaround where Apollo has a counterparty who could sell loans on its behalf, without ever having to settle the trades, which is where being DQ-ed would have complicated things. Using information other parties do not have to profit in the loan market — if that is indeed what occurred — seems like something that would run afoul of some law.

Insider trading

At first glance, one might think insider trading. The SEC generally defines insider trading as “buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.”

The Supreme Court’s denial of review of the Second Circuit’s ruling in Kirschner affirmed the principle that syndicated loans are not in fact securities and accordingly are not subject to state and federal securities laws and and regulations. Although insider trading does not apply to loans themselves, insider trading can be implicated when parties gain access to material non-public information in the context of loans if that party then uses that information to purchase other securities — ie bonds or equity — in that capital structure.

In First Brands, however, as mentioned above there are no securities in the capital structure so this specific angle would not arise.

Asymmetric information in loans

Although 9fin does not have all the specifics of how Apollo went from gaining access to the company’s financials, to ultimately holding a short position on its loans, there is a typical process for these things with corresponding rules. Generally, before a party gains access to a borrower’s confidential financial information, the parties execute a non-disclosure agreement. The NDA typically provides that any confidential information shared during the due diligence process will not be used outside of evaluating the specific investment being considered.

Now there are some ways around one party having confidential information and still transacting with parties who do not, one example is a "big boy” letter where “the buyer (who does not have the confidential information) acknowledges that it has made its own independent assessment of the risks involved, including that the seller or other counterparty may possess material, nonpublic information regarding the issuer which has not been disclosed to the buyer.” Still, these types of arrangements typically apply when the party has already entered into the loan and then decides to try and sell it. It is 9fin’s understanding that Apollo did not own the First Brands loans and on the contrary may have been on First Brand’s DQ list.

9fin reported that according to some market participants, Apollo utilized credit default swaps to implement its short. As explained in a Chicago Booth Review article, “the financial institutions that issue CDSs are often lenders to the underlying companies and, as such, have significant insight into the results of operations, balance-sheet quality, and the covenants attached to any outstanding debt.” Additionally, or perhaps, consequently, what may be seen as insider trading in equities, has been generally acceptable in CDS markets.

Although asymmetrical information may not always be an issue in the CDS market, a NDA would likely still prevent the party who signed it from buying or selling CDS on that company’s debt.

So what likely happened here?

There are a few possibilities: one is Apollo did not have to sign an NDA prior to reviewing First Brands financials — this seems unlikely. Second, Apollo breached its NDA — also seems unlikely. Third, the wording of the NDA may have been somewhat limited and Apollo found a loophole or some clever legal strategy to circumvent the restrictions imposed… it has certainly happened before.

Or, fourth and perhaps mostly likely, the unit within Apollo that placed the short was separate from the unit that had access to the non-public information and independently decided to short the loans, or even if it was the same unit there was completely independent rationale to short the loans regardless. Taking a few steps out and looking at First Brands, there were signs there that the company could slide further into distress.

First Brands was founded by Patrick James, who is the CEO and sole equity owner. Back in 2008, after several of his companies experienced financial hardships, James was sued by a Pennsylvania bank looking to recoup millions because the loans the bank extended were based on “ false and inflated accounts receivable and inventory figures for the companies… which misrepresented the companies' financial strengths.” The case ultimately settled.

While past results do not guarantee future performance, after First Brands filed for bankruptcy, the first day declaration disclosed that there is an ongoing investigation which “includes matters relating to the debtors’ prepetition factoring and other off-balance sheet financing processes.”

Additionally, First Brands acquired 15 companies in the past 15 years with no additional equity infusion or sponsor. At the point where First Brands was seeking refinancing in June, the company was facing mounting funded debt and lease obligations between May and August 2025, which snowballed into a liquidity crisis. That profile coupled with uncertainty around the quality of the company’s earnings, lead to a failed refinancing and ultimately the company filing for bankruptcy.

Ultimately, while it’s hard to say exactly how this short occurred and whether it could have run afoul of any law, the answer seems to be at worst it was a breach of contract — and that is only if an NDA existed and the short was placed after the company signed it and saw the confidential information. The bigger question is perhaps why even after it was reported that the company’s refi was placed on hold due to uncertainty about the quality of its earnings report, its loans were still trading in the 90s, and an even bigger question is why loans, which seem to walk like securities and quack like securities, are still not securities.

Apollo declined to comment.