By Peg Brickley
of DOW JONES DAILY BANKRUPTCY REVIEW
WILMINGTON, Del. (Dow Jones)--Washington Mutual Inc. (WAMUQ) has reached a
deal to quiet shareholder protests over its $7 billion Chapter 11 exit plan,
Brian Rosen, attorney for the company, said Tuesday.
The settlement was brokered by four hedge funds stung by suspicions they
engaged in insider trading in the big bankruptcy case, Rosen said. The case
began in September 2008 when Washington Mutual lost its prized thrift,
Washington Mutual Bank, or WaMu, to regulatory seizure at the height of the
financial crisis.
Speaking at a hearing in the U.S. Bankruptcy Court in Wilmington, Del.,
Rosen, who's with Weil, Gotshal & Manges, said the tentative deal reached
Monday evening "makes sense" as a way to get money to creditors quickly from a
bankruptcy that has dragged on more than two years.
Rosen said the company wants to be out of Chapter 11 by mid-August, having
cemented in place the last in a series of settlements that grew out of WaMu's
collapse. The tentative pact gives shareholders the benefit of a $30 million
litigation trust and equity in the reorganized Washington Mutual, a company
that may be positioned to take advantage of $5 billion worth of tax breaks.
Appaloosa Management LP, Centerbridge Partners LP, Owl Creek Asset Management
LP and Aurelius Capital Management LP, hedge funds that invested in Washington
Mutual's debt, took the initiative in reviving talks with shareholders that
stalled in the spring, Rosen said.
Aurelius attorney Kenneth Eckstein, who's with Kramer Levin Naftalis &
Frankel LLP, said Tuesday that Aurelius has not yet signed on to the deal but
"will endeavor to try to achieve a successful resolution" of remaining
reservations about terms of the shareholder settlement.
According to Rosen, the four hedge funds will offer $100 million worth of
financing to the reorganized Washington Mutual. The company will run a fading
insurance operation but could buy other businesses to take advantage of the tax
breaks. The breaks grow out of the massive losses rung up by WaMu, a thrift
that gorged on subprime home loans before the housing market collapsed.
Creditors who were promised value in the reorganized Washington Mutual will
still get it, Rosen said, in the form of another type of security.
The key deal at the heart of Washington Mutual's plan was reached last year,
and survived attack at confirmation. It's a settlement with WaMu's new owner,
J.P. Morgan Chase & Co. (JPM) and federal regulators, and provides the bulk of
the cash to be distributed under the plan.
Judge Mary Walrath refused to confirm Washington Mutual's plan, however,
handing shareholders an opening to launch an investigation of suspected
wrongdoing by big creditors involved in the case. The insider-trading
investigation threatened to trouble Washington Mutual's renewed effort to get
out of bankruptcy.
The probe grew out of suspicions the hedge funds bought and sold securities
taking advantage of material inside information gained at the bargaining table
where Washington Mutual negotiated its Chapter 11 plan. The big investors have
denied wrongdoing and complained that the hearsay-based allegations were
burning up $30 million worth of value each month Washington Mutual's Chapter 11
exit was delayed.
Fred Hodara of Akin Gump Strauss Hauer & Feld said Tuesday the case delay
cost could be closer to $40 million per month. He represents the official
committee of unsecured creditors, which joined in the settlement talks as they
neared success.
"Getting to confirmation is of paramount importance," Rosen said. "This has
lingered...cost a lot of people a lot of money and a lot of value."
Attorneys for shareholders will set out their statement on their findings on
the insider trading claims as part of the pact, Rosen said.
"It is our understanding, the debtors', that the equity committees
investigation has not established" any wrongdoing by the hedge funds, Rosen
said.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and
those under bankruptcy protection.)
-By Peg Brickley, Dow Jones Daily Bankruptcy Review; 302-521-2266;
peg.brickley@dowjones.com
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