Bloomberg News

WaMu Judge Allows Creditors to Join Insider Trading Probe

June 29, 2011

(Updates with comment from main creditor committee in 10th paragraph.)

June 29 (Bloomberg) -- A group of Washington Mutual Inc. shareholders, including Black Horse Capital, can join a probe of four hedge funds accused of using confidential data to trade debt of the bankrupt former bank holding company, a judge ruled.

U.S. Bankruptcy Judge Mary Walrath today gave the holders of WaMu trust preferred securities access to information already collected by an official shareholders committee. Walrath declined to give either group any more information, except for a single compliance report from one of the four hedge funds, Aurelius Capital Management LP.

Allowing the two groups to share the confidential information would allow them to coordinate their effort to defeat WaMu’s proposed reorganization plan when it comes before Walrath next month, committee attorney Edgar Sargent said in U.S. Bankruptcy Court in Wilmington, Delaware.

“Their rights as a party means they are entitled to the information,” Walrath said.

During a three-day hearing set to start July 13, WaMu will try to persuade Walrath to approve a reorganization plan that would distribute more than $7 billion to creditors. The trust preferred shareholders and the shareholder committee say they will oppose the plan, using evidence they claim shows the hedge funds may have violated insider trading laws.

Aurelius, Centerbridge

The shareholder committee says Aurelius, Centerbridge Partners LP, Appaloosa Management LP and Owl Creek Asset Management LP may have used confidential information they obtained while negotiating with WaMu to buy the company’s debt. The hedge funds have repeatedly denied the allegations and claim the committee is just trying to force senior creditors to pay something to shareholders.

Walrath refused to grant the shareholders more access to information they said they needed to prepare for next month’s hearing. She only required Aurelius to provide a copy of a report on how well the hedge fund complies with its own ethical rules.

An agreement to end the investigation fell apart this month, prompting the shareholder committee to renew its plans to question the hedge funds at the July hearing. WaMu’s reorganization plan would pay senior noteholders, including the four hedge funds, in full and give shareholders nothing.

2008 Bankruptcy

WaMu, based in Seattle, filed for bankruptcy on Sept. 26, 2008, the day after its banking unit was taken over by regulators and sold to JPMorgan Chase & Co. for $1.9 billion. WaMu’s Washington Mutual Bank was the biggest bank to fail in U.S. history, with more than 2,200 branches and $188 billion in deposits.

Giving the trust preferred holders access to the hedge fund documents will delay WaMu’s exit from bankruptcy by having two groups trying to prove insider trading occurred, David Stratton, an attorney for the official committee of unsecured creditors told Walrath today.

“The creditors’ committee does not believe there is any evidence that any of the noteholders engaged in insider trading or other inequitable conduct,” the committee said in court papers filed yesterday. “Instead, it appears that by trying to exploit this issue the equity committee is, for at least the fourth time in this case, trying to delay these proceedings in an inappropriate effort to extract value from the debtors’ legitimate creditors.”

The case is In re Washington Mutual Inc., 08-12229 in U.S. Bankruptcy Court, District of Delaware (Wilmington).

--Editors: Stephen Farr, Glenn Holdcraft.

To contact the reporter on this story: Steven Church in Wilmington, Delaware, at schurch3@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.


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