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Supreme Court justices offered hope to both prosecutors and traders yesterday during arguments in the first insider trading case to come before the nation’s high court in two decades, the New York Times reported today. A ruling by the court could clarify one of the most hotly debated issues on Wall Street: what prosecutors must prove to secure insider trading convictions based on confidential tips. In their questioning, the justices grappled with where to draw the line. Even as they appeared sympathetic to the government’s interpretation of the high court’s past insider trading decisions, the justices were wary of radically expanding the government’s power and affording prosecutors too much of a free hand in these cases. The case now before the court, Salman v. United States, No. 15-628, comes from California and centers on the insider trading conviction of Bassam Salman in 2013. According to prosecutors, Salman placed profitable stock trades based on confidential information leaked by his future brother-in-law, Maher Kara, who had advance knowledge of corporate mergers because of his job in Citigroup’s health care investment banking group.

The Financial Industry Regulatory Authority (FINRA) expanded its oversight of alternative trading systems (ATS) yesterday, publishing block-size trade data occurring on nonpublic exchanges, like "dark pools,” The Hill reported today. The initiative to publish block-size trading statistics is the next chapter in FINRA’s initiative to shed light on ATS activity. FINRA started publishing volume and trade count data on equity securities executed in dark pools in June 2014, before making all over-the-counter volume transparent last April. Dark pools were initially created to house large trades without the level of information leakage associated with public exchanges. With the introduction of high-frequency trading, dark pools began to accommodate smaller trades. The new measure, published on a monthly basis, will allow the public to discern between firms that are still engaged in the traditional, large-scale trading and those hosting more small, high-frequency executions.

Connecticut’s attorney general reached a record settlement $120 million settlement with RBS Securities Inc. over its underwriting of faulty residential mortgage-backed securities in the lead-up to the 2008 financial crisis, MorningConsult.com reported yesterday. “RBS was one of the key players in the RMBS business in the lead up to the financial crisis, underwriting $250 billion in securities that have to date suffered more than $40 billion in losses,” Attorney General George Jepsen said yesterday. The Department of Banking will receive $250,000 of those funds, and the remaining $119.75 million will be sent to Connecticut’s general funds.

U.S. syndicated loan financing of $1.326 trillion in the first nine months of 2016 was 11 percent lower than the same period last year and the lowest since 2012 as M&A activity dropped and opportunistic refinancings prevailed while interest rates stayed low with the U.S. elections pending, Reuters reported on Friday. The $372 billion of loans issued in the third quarter was 31 percent below the same time last year and down 38 percent from second quarter volume, according to Thomson Reuters LPC data. Leveraged lending is down 11 percent in the year to date at around $555 billion, while investment grade lending is off 7 percent at about $580 billion. A gradual increase is seen for M&A financing, which totals about $320 billion so far this year and is down 20 percent from the same nine months of last year. Third quarter financing to back mergers and acquisitions fell 40 percent from the prior quarter.

Deutsche Bank AG’s talks with the U.S. Justice Department to settle a high-profile set of mortgage-securities cases are continuing, with no deal yet presented to senior decision makers for approval on either side, the Wall Street Journal reported today. The talks are moving forward, but they have not progressed to a degree that a proposed deal has reached senior-level review at the Justice Department or with Deutsche Bank’s supervisory board. Justice Department lawyers have floated the possibility of also reaching accords with other European banks who have yet to resolve similar investigations and announce them at once, but no such move is certain.

As Peabody Energy Inc. stumbled toward bankruptcy last year, its Wall Street adviser raised a red flag for management: Two powerful and litigious distressed-debt hedge funds held Peabody bonds, Bloomberg News reported today. “Both are bomb throwers and we should be very suspicious,” wrote Tyler Cowan, a restructuring expert at Lazard Ltd. Six months later, in April, the world’s largest private-sector coal company was in bankruptcy. The two New York hedge funds — Paul Singer’s Elliott Management Corp. and Mark Brodsky’s Aurelius Capital Management — soon became embroiled in a bitter $1 billion dispute as they sought to extract a bigger share of Peabody’s assets. In court filings, including emails and handwritten notes by Peabody executives, Elliott and Aurelius are shown to have privately lobbied management to make the accounting change that would shift $1 billion in collateral to benefit themselves and other holders of around $4 billion in unsecured bonds. The lenders led by Citigroup Inc., an agent to $2.8 billion in secured debt, contend that those assets rightly belong to them. Peabody caved to the demands of the hedge funds in their effort to “drive up their own recovery at the expense” of the secured creditors, Citibank says in court filings. Franklin Resources Inc., with 21 percent of one tranche of the debt, is among the biggest secured lenders.

Lenders to struggling shoe chain Nine West have watched the company’s debt soar to more than 20 times earnings, and there’s little they can do about it. Unfortunately for them, that’s exactly what they signed up for, Bloomberg News reported today. Nine West’s debt is “covenant-lite,” meaning it carries minimal protections for lenders should the company falter and little obligation to explain if something goes wrong. There are no limits on how much debt the company can hold relative to its earnings, and the only required disclosures are annual and quarterly reports, according to S&P Global Ratings analysts. The absence of specific metrics to meet or tests to pass leaves creditors with virtually no power to force answers from their borrower or changes in its behavior. It’s an example — a warning, some analysts would say — of what creditors can expect as they trade away traditional debt protections for extra yield. With past covenant-lite deals like Nine West and Weight Watchers International Inc. now causing headaches for their lenders, credit analysts and investors say that they’re seeing similarly loose terms more frequently on new loans and bonds. Just 35 percent of new leveraged loans issued in 2016’s first half had traditional covenants that require regular financial check-ups, compared with 100 percent in 2010, according to Xtract Research, which analyzes debt packages. Read more. 

Don’t miss tomorrow’s ABI Workshop “Turnaround Lending 2016” for a market update for turnaround and restructuring lending. The program will also feature two panels, addressing a wide range of topics, including regulated and compliance issues impacting lenders. Register to attend in person or for a live web stream!

Investors pulled an estimated $25.2 billion from hedge funds last month, the biggest monthly redemption since February 2009, according to an eVestment report, Bloomberg News reported yesterday. The monthly withdrawals were the second straight for the beleaguered industry, which saw $23.5 billion pulled in June. They bring total outflows this year to $55.9 billion, driven by “mediocre” performance after a number of funds lost money last year, according to Wednesday’s report. “Unless these pressures recede, 2016 will be the third year on record with net annual outflows, and the first since the outflows in 2008 and 2009 — a result of the global financial crisis,” eVestment said.

Wells Fargo, Advanced Micro Devices and Fifth Third Bank have in recent years agreed to settlement deals that seek to muzzle former employees in ways that some lawyers said could violate U.S. whistleblower protection laws, according to a Reuters analysis today. Five lawyers, including three who represent whistleblowers, said that the settlements appear aimed at blocking workers from airing their concerns and contain similarities to those used by other companies that ran afoul of government rules. The deals by Wells Fargo, AMD, and Fifth Third Bank were among a dozen such corporate settlements reached between 2012 and 2015 that were reviewed by Reuters. The companies each struck deals with departing workers that limit the employees' ability to receive money arising from any government investigations into their former employers. Some language in the settlements could run afoul of rules adopted by the U.S. Securities and Exchange Commission (SEC) in 2011 that generally bar corporate attempts to muzzle whistleblowers, the lawyers. Since 2015, the SEC has brought four cases targeting specific types of so-called whistleblower gag orders, such as confidentiality agreements that bar employees from discussing internal wrongdoing.

The Securities and Exchange Commission yesterday announced enforcement actions against more than 70 municipal bond issuers for bond disclosure violations, part of an initiative that offers favorable settlement terms to issuers, underwriters and obligated persons who self-report breaches of federal securities laws, MorningConsult.com reported yesterday. The 71 issuers and obligated persons sold muni bonds from 2011 to 2014 with offering documents that contained false statements or omissions about continuing disclosure compliance, the SEC said. The issuers included the Carilion Clinic in Virginia, as well as Montgomery College in Maryland, according to today’s announcement. The parties settled the enforcement actions and did not admit to or deny the SEC’s findings. They also agreed to comply with current continuing disclosure requirements, establish procedures for continuing disclosure compliance, disclose the settlement in future offering documents and cooperate with subsequent SEC investigations, the agency said.