Washington Mutual Inc. shareholders won a judge's permission to question hedge funds about allegations they used confidential information to trade in the bankrupt company's securities.
Washington Mutual Inc. shareholders won a judge’s permission to question hedge funds about allegations they used confidential information to trade in the bankrupt company’s securities.
U.S. Bankruptcy Judge Mary F. Walrath approved the investigation Tuesday at a hearing in Wilmington, Del. Authorizing depositions and document subpoenas may be the only way to determine whether the hedge funds violated bankruptcy rules on insider trading, she said.
“The allegation that troubles the court is that you used that information to trade in the debtors’ securities,” Walrath told a lawyer for one of the four hedge funds. “I don’t know of anybody who feels that is proper.”
After Seattle-based WaMu filed for bankruptcy in 2008, hedge funds bought debt securities, some for pennies on the dollar, issued by the bank holding company and its former banking unit, Washington Mutual Bank.
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The hedge funds then battled each other, shareholders, creditors, regulators and JPMorgan Chase about how to divide the company’s assets.
WaMu ended most of the battles last year by agreeing to split billions of dollars in cash and tax refunds among its creditors, including the hedge funds, JPMorgan and the Federal Deposit Insurance Corp. The settlement is the central feature of the company’s plan to end its bankruptcy by paying more than $7 billion to creditors.
A committee of shareholders will investigate allegations of insider trading made against Appaloosa Management, Owl Creek Asset Management, Centerbridge Partners and Aurelius Capital Management.
The hedge funds denied the allegations Tuesday and in previously filed court papers. At their request, Walrath agreed to limit the inquiry.
“We feel highly confident there will be no issue, but it will be extremely expensive to litigate,” Thomas Moers Mayer, an attorney for Aurelius, told Walrath during the hearing.
The hedge funds don’t need to turn over any business plans they may have for WaMu once the bankruptcy case ends and an insurance unit is reorganized, Walrath said.
WaMu filed for bankruptcy Sept. 26, 2008, the day after its banking unit was taken over by regulators and sold to New York-based JPMorgan for $1.9 billion. 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 hedge funds own WaMu notes and are set to receive a payout as part of the company’s proposed bankruptcy plan. The funds are allied with JPMorgan and the Federal Deposit Insurance Corp., which are trying to persuade Walrath to approve the $7 billion bankruptcy plan.
WaMu on Tuesday filed a new version of the plan and a new settlement agreement to win Walrath’s approval. The judge last month rejected plan and gave WaMu a list of things to change.
The company said the new plan and the new settlement have been altered to comply with Walrath’s ruling. WaMu dropped its plan to sell stock in the only piece of the company that will exit bankruptcy, a reinsurance company that would be co-owned by the hedge-fund creditors.
Walrath objected to a requirement that prevented small debt holders from participating in the sale.
The shareholders and some lower-ranking creditors opposed the original settlement and the payment proposal because it would give them nothing.
The insider-trading investigation must be concluded before the May hearing, where shareholders will use any information collected to attack the proposed plan and the settlement. Walrath ordered the hedge funds to turn over the information within two weeks.
The hedge funds will be required to reveal details of their purchases and sales in WaMu debt since the company filed bankruptcy and any protections they put in place to avoid misusing confidential information.