(Updates with insider trading claim in first paragraph.)
July 13 (Bloomberg) -- Washington Mutual Inc., former owner of the biggest U.S. bank to fail, began a court hearing today to end its bankruptcy facing a shareholder claim that it enabled hedge funds to profit from insider trading.
During a three-day hearing, shareholders will try to show that WaMu’s reorganization plan is tainted by the hedge funds’ alleged use of confidential information to trade in the bank holding company’s debt.
WaMu “fed four of these hedge funds, known as the ‘settlement note holders,’ confidential inside information about the debtors and about settlement negotiations and then turned a blind eye to trading that the settlement note holders were conducting based on this information,” a committee of shareholders said in court documents unsealed yesterday.
Shareholders would get nothing under a reorganization plan that was negotiated with JPMorgan Chase & Co., the four hedge funds and the Federal Deposit Insurance Corp. U.S. Bankruptcy Judge Mary Walrath has already approved the main settlement that plan is based on and is now being asked to approve the plan itself, which would distribute more than $7 billion to WaMu’s creditors.
The hedge funds, Aurelius Capital Management LP, Centerbridge Partners LP, Appaloosa Management LP and Owl Creek Asset Management LP, all deny that they engaged in insider trading. They have argued in court papers and in hearings that the information they used to buy and sell WaMu’s debt was either publicly available or wasn’t “material,” and therefore its use was legal.
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 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.
The hearing this morning focused on whether the reinsurance company that would be the only piece of WaMu to survive bankruptcy could use past losses to avoid taxes on future profits. The dispute over the insider-trading allegations will be the final issue in the hearing, WaMu bankruptcy attorney Brian Rosen told Walrath.
The case is In re Washington Mutual Inc., 08-12229 in U.S. Bankruptcy Court, District of Delaware (Wilmington).
--Editors: Charles Carter, Stephen Farr.
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