Bloomberg News

Aurelius Got Early Updates on WaMu Talks, Lawyer Claims

July 19, 2011

(Updates with meetings with Aurelius in seventh paragraph.)

July 19 (Bloomberg) -- Aurelius Capital Management LP used its law firm to get non-public information about progress in Washington Mutual Inc.’s bankruptcy, a lawyer for WaMu shareholders said in court.

Aurelius, a hedge fund that invests in bankrupt companies, learned through its law firm that secret settlement talks to end WaMu’s bankruptcy were going as Aurelius hoped, the shareholder lawyer, Parker C. Folse, said while questioning an Aurelius official in court. The allegation was denied by the hedge fund official, Aurelius Managing Director Dan Gropper.

“This doesn’t work on a wink and a nod,” Gropper said in U.S. Bankruptcy Court in Wilmington, Delaware. “What you are suggesting would not be appropriate.”

Shareholders claim that Aurelius and three other hedge funds used inside information gleaned from two rounds of settlement talks to buy and sell the most-profitable WaMu securities.

In early 2010, Aurelius law firm Fried, Frank, Harris, Shriver & Jacobson LLP was helping negotiate the details of a multibillion dollar settlement among WaMu, JPMorgan Chase & Co. and the Federal Deposit Insurance Corp., Folse said.

Shareholders want U.S. Bankruptcy Judge Mary Walrath to reject for the second time WaMu’s reorganization plan. Shareholders would get nothing under the plan.

Aurelius met with WaMu officials to talk about how to implement a settlement, should a deal be struck, Gropper said. During those meetings, Aurelius never received any non-public information, Gropper said.

Public Information

He said the fact that there were settlement talks under way in January 2010 was public. Details of the proposed settlement weren’t, he said. That settlement was announced a few months later and formed the basis of the current reorganization plan.

Aurelius and the other hedge funds, 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.

The former owner of the biggest U.S. bank to fail, WaMu is seeking Walrath’s approval for the reorganization plan that would pay creditors more than $7 billion.

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.

The case is In re Washington Mutual Inc., 08-12229, 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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