By Peg Brickley Of DOW JONES DAILY BANKRUPTCY REVIEW
The official creditors committee in Washington Mutual Inc.'s (WAMUQ) Chapter 11 case has joined the ranks of those pushing to appeal a ruling that put some of the country's most powerful distressed-debt investing firms in danger of going to trial for insider trading.
Issued in mid-September, the decision said Washington Mutual shareholders had sketched out the basics of a case that Aurelius Capital Management, Appaloosa Management LP, Centerbridge Partners LP and Owl Creek Asset Management LP traded in the company's securities with inside information on the state of Chapter 11 plan negotiations.
The four funds insist they did nothing wrong while joining in the hard bargaining that produced Washington Mutual's Chapter 11 plan. In asking a federal district court to review Judge Mary Walrath's decision on insider trading, they warned it could have far-reaching consequences for distressed-debt investors.
If the ruling stands, Washington Mutual shareholders will be able to "use the creditors' money to gamble on a litigation" that has little chance of paying off, the official committee of Washington Mutual's unsecured creditors said in a court filing Tuesday.
"Merely having an informational advantage is not actionable," lawyers for the creditors' committee wrote, criticizing Walrath for refusing to shield some of Washington Mutual's biggest creditors from the ire of shareholders, who will be left with nothing under the company's Chapter 11 plan.
The creditors committee threw its weight behind the four accused funds, which have already appealed. Normandy Hill Capital, an investor in some of the lowest-ranked Washington Mutual debt, has also appealed the decision. An additional appeal was filed by bondholders whose debt is linked to Washington Mutual Bank, or WaMu, the thrift that was seized by regulators more than three years ago.
In the meantime, Washington Mutual is pushing to exit bankruptcy soon, no matter what happens to the insider-trading allegations.
The appeals are a challenge to Walrath, who in September rejected Washington Mutual's Chapter 11 plan for the second time and held that shareholders have standing to sue the hedge funds for insider trading. The judge listed a number of defects in the plan and found shareholders had sketched out the basics of an insider-trading case.
Creditors said Tuesday that the decision to give a green light to a shareholder lawsuit against the big investors "created an entirely new, untested legal standard to govern trading activity in bankruptcy cases."
The ruling was also a blow to Washington Mutual, which filed for Chapter 11 protection in September 2008 after regulators seized Washington Mutual Bank. A deal with WaMu's new owner, J.P. Morgan Chase & Co. (JPM) and with regulators that forms the heart of the Chapter 11 plan promises to silence many of the questions surrounding the biggest bank failure in U.S. history.
The J.P. Morgan settlement has withstood challenge twice, but remains in limbo as long as there is no confirmed Chapter 11 plan for Washington Mutual. Meanwhile, the insider-trading suspicions that surfaced during the bankruptcy case have blocked confirmation.
Thursday, Walrath will meet with Washington Mutual and its assorted creditors and shareholders to decide what happens next to the Chapter 11 proceeding, where some $7 billion is stored up waiting to be handed out.
Washington Mutual says it has fixed the flaws Walrath found in its plan, and there is no need for another vote. With delay eating $30 million a month out of the recovery going to the lowest-ranking creditors, company attorneys said, there is no reason to delay a third and final confirmation hearing.
Mediation should be limited to the question of whether shareholders can pursue the insider-trading allegations, the company insists.
(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
