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Courts Will Define Boundaries of Friendship in Insider Trading

Insider trading law is heating up again, with a trial involving the high-profile gambler Billy Walters scheduled to start next week.

Just days ago, the United States Court of Appeals for the Second Circuit ordered another round of arguments about the conviction of Mathew Martoma, the former analyst at SAC Capital Advisors involved in the largest trading case ever, while a Federal District Court on Friday rejected another effort by the former hedge fund manager Raj Rajaratnam to overturn some of his convictions.

The issue in the cases revolves around how to interpret the Supreme Court’s decision in December in Salman v. United States, which found that the government did not have to prove that any tangible benefit was given when one brother tipped another about impending deals.

As often happens, the opinion did not settle how far it should be applied, and now the lower courts will need to figure out what it means.

The source of the controversy was the decision in 2014 by the Second Circuit in Manhattan in United States v. Newman, which added a wrinkle to the analysis of when tipping involved a gift that was sufficient to show the tipper received a benefit, a prerequisite to violating the law.

The appeals court held that the government must prove “a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” In overturning the convictions of two hedge fund managers, the Newman decision found that the original tippers and tippees were little more than casual acquaintances, so there was insufficient evidence to prove the information was given as a gift.

The two brothers in the Salman case had a much closer relationship, speaking almost daily, with one giving out information to help the other. The question was whether their personal relationship was sufficient without further proof that something tangible passed between them beyond the warm feeling one gets for being beneficent.

The Supreme Court’s unanimous answer was succinct: “A tipper breaches a fiduciary duty by making a gift of confidential information to ‘a trading relative,’ and that rule is sufficient to resolve the case at hand.”

Justice Samuel A. Alito Jr.’s opinion rejected the benefit analysis in Newman, stating that the Second Circuit’s holding “that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family and friends” was inconsistent with the Supreme Court’s interpretation of insider trading law.

What was left unaddressed was how close a friendship needs to be to show a gift of inside information. Although the Second Circuit said there had to be a “meaningfully close personal relationship,” that language was not used by the Supreme Court.

Insider trading defendants want to preserve Newman’s description of the requisite personal relationship by limiting the Salman opinion as much as possible to cases involving close family members. The Justice Department, on the other hand, wants the Supreme Court’s decision construed as a clear rejection of the “meaningfully close” requirement so that most friendships — even a fairly casual one — can suffice to show a gift.

Did the Supreme Court reject only Newman’s tangible benefit requirement, or did it also mean to negate the reference to a meaningful relationship?

The Second Circuit will consider that question when it hears arguments in May about whether to uphold the conviction of Mr. Martoma. The case was first argued in October 2015, but the decision was held until after the Salman decision.

Mr. Martoma argues that the government did not introduce enough evidence that he had a sufficiently close relationship with Dr. Sidney Gilman, who leaked confidential information about a clinical trial of an Alzheimer’s drug that led SAC Capital to sell out its position in two pharmaceutical companies, resulting in gains and losses avoided of over $250 million.

The Justice Department’s position is that the two men developed a lucrative relationship through an expert networking firm for which SAC Capital paid Dr. Gilman thousands of dollars to speak with Mr. Martoma. The government also argues that the Salman decision made it “clear that a gift of confidential information to a trading friend or relative is enough to satisfy the personal benefit requirement” — with no mention of the “meaningfully close” language of Newman.

The Salman case was easy because the two brothers readily admitted to their close relationship, so the Supreme Court did not need to address what other types of relationships might be sufficient. The Second Circuit will have to decide how much of Newman’s analysis survives when it moves into a murkier area that mixed together business dealings and some measure of personal friendship.

It will be difficult for courts to fashion a clear test for when a friendship is close enough to show that a gift of confidential information is the benefit needed to violate the insider trading laws. Mr. Martoma’s case will be an opportunity for the Second Circuit to flesh out the meaning of the Salman gift analysis, perhaps preserving a portion of the Newman decision that the Supreme Court seemed to have unceremoniously rejected.

The trial of Mr. Walters, scheduled to begin next Monday, has already generated headlines because of the involvement of the professional golfer Phil Mickelson and questions about whether leaks by an F.B.I. agent improperly influenced the investigation.

Last week, Judge P. Kevin Castel of Federal District Court in Manhattan rejected a defense request to dismiss the charges because of the agent’s disclosures to The New York Times and The Wall Street Journal in 2014. He found that there was no prejudice to Mr. Walters, and that dismissal of the charges was not an appropriate way to punish the government for the misconduct of an investigator.

An issue in the trial will be whether the relationship between Mr. Walters and his source, Thomas C. Davis, a former chairman of the board of Dean Foods and a consultant in an activist campaign involving Darden Restaurants, was sufficiently close to find that tips about the two companies were a gift in violation of the insider trading laws.

The indictment says the two men “maintained a personal relationship and friendship founded on a shared interest in sports, golf, gambling and business.” In addition, Mr. Walters was involved in loans to Mr. Davis that were not repaid.

The defense wants the jury to be instructed that the government must prove a “meaningfully close personal relationship” between the two, arguing that there must be a line drawn “between a friend (where a gift of confidential information can satisfy the benefit requirement) and a casual acquaintance (where it may not).”

Prosecutors did not include that language in their proposed jury instructions, and will likely point to the intertwined personal and business relationship as sufficient to show there was either a payoff for the information or a gift from Mr. Davis, much like in Mr. Martoma’s case.

Whether the government can show the friendship was close enough so that the tips constituted a gift could be a crucial issue. Much of the evidence about the relationship will come from Mr. Davis, who has cut a deal and admitted that he had initially lied to investigators about passing confidential information, which could undermine his credibility. Judge Castel’s decision whether to instruct the jury that the relationship must be “meaningfully close” might tip the scales.

In Mr. Rajaratnam’s effort to overturn his conviction, Judge Loretta A. Preska of Federal District Court in Manhattan rejected the argument that he was not guilty because the government had not shown at his trial in 2011 that any benefit was passed to the tippers. Applying the Salman decision, she stated that “because all the information was transferred between trading relatives or friends, the mere transfer of information is sufficient to constitute a benefit.”

This approach is much closer to how prosecutors approached the benefit issue before Newman, when showing almost any connection between a tipper and tippee that could arguably be called a friendship sufficed to show a gift as the benefit for inside information. There was no reference to the closeness of the relationship in Judge Preska’s opinion, perhaps indicating that any type of friendship is sufficient.

There is always a measure of uncertainty after a Supreme Court opinion as lower courts have to apply it to new cases. Much like Solomon, judges can be expected to fall somewhere in the middle, requiring more than a passing acquaintance but less than “B.F.F.” to establish the relationship when there is a gift of inside information. How they explain that requirement will be the real test as insider trading law moves forward.

Epic tale of telecoms consolidation will not end well for groups that fail to compete

Xavier Niel employs a classic approach to the telecoms markets: discount aggressively and swipe market share. Over the past five years his low-tariff mobile operator Iliad has built a permanent outpost in France. EU Competition Commissioner Margrethe Vestager likely approves — having four operators in France has worked. That might be bad news for rivals in Italy, the next country to play host both to Iliad and the four-operator model.

Tuesday’s second-half results revealed how far Iliad has advanced. Although earnings before interest, tax, depreciation and amortisation only just beat expectations, the top line has held up well. Ebitda margin at 35.5 hit a new high, up over one percentage point from 2015. More customers have migrated to higher priced mobile contracts at the same time as average revenues from broadband customers have increased. Though the company claims it has free cash flow for the first time since 2013, Iliad’s calculation omits the downpayment for new radio spectrum. Still, net debt is less than its ebitda, so leverage is no concern.

Iliad fights for market share in France with incumbent Orange, Bouygues Telecom and SFR. Unusually for Europe, three of the four are run by individuals, so any combinations would depend on these tricky personalities getting on. Analysts have long predicted that pricing pressure would force consolidation in the French market, but recent results from Bouygues and Orange do not suggest they are struggling. Iliad’s results imply that SFR, which has results later this week, might be the one losing out.

Mr Niel will soon take his quest to Italy. Ms Vestager only allowed last year’s combination of Hutchison’s 3 and Wind there if a fourth operator could enter. In stepped Mr Niel with his Parisian swagger. His Italian unit will be named Free. It will not be quite that cheap, but clearly the epic tale of consolidation in European telecoms will not end well for mobile operators that cannot compete on price.

London City airport could fly to Lagos and Mumbai, says chief

New jets and £350m investment extend airport’s horizons

London City airport will be able to offer flights to as far away as Lagos and Mumbai after a £350m investment, its chief executive has said.

Declan Collier said the investment, coupled with new aircraft, such as Bombardier’s C Series, Embraer’s E2 and the Mitsubishi Regional Jet, would open up routes beyond the single long-haul flight to New York, business class-only, that City currently provides.

Some of the jets will be able to handle the relatively short runway and steep descent at City while dramatically increasing the range of 1,000 or so nautical miles that is currently feasible.

“This new C Series will allow us to treble that distance,” Mr Collier said. “It opens up the possibility of direct flights into Istanbul, into Israel, into the Gulf, into Moscow, into Kazakhstan, that kind of distance.”

Aircraft with less dense business class-only seating plans can fly even farther because they are less heavy.

“In an all business-class configuration, they afford the opportunity to offer all business-class flights to Lagos and as far east as Mumbai and Delhi,” Mr Collier said.

The change in the nature of City’s business follows the airport’s sale a year ago for £2bn by a consortium led by Global Infrastructure Partners to three Canadian pension funds and the infrastructure arm of the Kuwait Investment Authority.

Between now and 2030, what we need to look at is the development of London City airport as being the only significant opportunity to add capacity into the London airport system

The funds pledged £350m in new investment in July when the airport won planning permission for an extended taxiway and new stands. The spending is intended to take the airport — the smallest of the five airports ringing London — from last year’s 80,000 air traffic movements annually to a new regulatory ceiling of 111,000. The number of annual passengers will grow from 4.5m last year to 6.5m by 2025.

Mr Collier said that the relatively short timetable for the airport’s expansion, which is due for completion by 2021, meant that City airport would be offering new flight capacity well before the planned third runway at Heathrow airport came into operation. Mr Collier said it was unlikely Heathrow expansion could be completed before 2030.

“Between now and 2030, what we need to look at is the development of London City airport as being the only significant opportunity to add capacity into the London airport system,” Mr Collier said.

City airport, which opened in 1987 in the former Royal Docks in east London, has grown quickly thanks to its proximity to key London destinations, particularly the financial district of Canary Wharf.

Such improved connectivity would remain critical as the UK endured the uncertainty of leaving the EU, Mr Collier went on.

“London isn’t going to disappear just because it steps out of Europe,” Mr Collier said. “We are an island and trading nation that, post-Brexit, is going to have to rely on its ability to be a better trader than anybody else to survive.”

Mr Collier stressed that he expected the UK to continue to have a close trading relationship with EU members after it left the bloc and that City airport would help to facilitate that.

The airport is due to announce on Tuesday that Terry Morgan, chairman of the Crossrail cross-London rail scheme, will also become chairman of City airport.

The airport is seeking to add a City airport station to the Canary Wharf to Abbey Wood stretch of Crossrail, which passes immediately underneath the airport. Such a station would open up the possibility of far better connections between City airport and Heathrow, one of the western termini for the project.

Islamists accused of plotting attack on Saudi king in Malaysia

Yemenis detained for alleged vehicle bomb conspiracy aimed at King Salman

Malaysian authorities announced on Tuesday they had foiled a plot against Saudi Arabia’s monarch on a tour of Asia last week and had arrested seven men, including four Yemeni nationals.

Malaysia’s police chief Khalid Abu Bakar said the men arrested in February, who were suspected of links to militant groups including Isis, had plotted to attack King Salman bin Abdul Aziz al-Saud while he was visiting Kuala Lumpur last week. 

“They were planning to attack Arab royalties during their visit to Kuala Lumpur. We got them in the nick of time,” Mr Khalid told reporters.

Saudi Arabia is leading a military coalition against Yemen’s Houthi rebellion in a controversial armed intervention aimed at restoring the government in exile.

Malaysian police said in an earlier statement that two of the detained men, a Malaysian and an Indonesian, were plotting a large-scale car or truck bomb attack before travelling to join Isis in Syria. 

Recent Islamist terrorist attacks in Southeast Asia have been less deadly than in Europe and high-profile strikes against urban targets have become rare, but there have been sporadic clashes between militants and security forces in the southern Philippines and the jungles of Sulawesi island in Indonesia. 

Last year Malaysian police arrested three suspected militants who were allegedly planning to attack a Hindu temple complex north of Kuala Lumpur. 

This followed a grenade attack at a Malaysian nightclub in June that authorities linked to Isis, making it the group’s first alleged attack in the country. Isis was also linked to a shootout and explosions in Jakarta at the start of last year, which killed seven people, including the five militants.

King Salman’s four-day visit to Malaysia was the start of a month-long Asian tour aimed at deepening political and business ties in key export markets for Saudi oil. 

On the second day of the king’s visit, Saudi Arabia’s state-owned oil company announced plans to invest $7bn in a Malaysian refining project. 

The deal is one of Saudi Aramco’s biggest investments in refining and petrochemicals, and fits with a strategy of expanding refining capabilities in key markets to secure demand for its crude oil exports. 

The Saudi ruler left Malaysia for Indonesia last week, and is expected to go on to China, Japan and the Maldives. 

The king arrived in Kuala Lumpur with a 600-strong delegation, including members of the royal household and ministers, according to Malaysia’s state news agency. 

He touched down in Indonesia with a fleet of aircraft and 459 tonnes of luggage including two Mercedes-Benz S-Class limousines, freight handlers told local media.