FACTBOX-Insider-trading allegations in WaMu bankruptcy
July 18 | Mon Jul 18, 2011 3:36pm EDT
July 18 (Reuters) - Washington Mutual Inc is seeking court approval to exit bankruptcy and distribute $7 billion to creditors.
Shareholders argue the company is wrongly denying them any recovery in the bankruptcy, and they are attacking four hedge funds that helped craft the company's bankruptcy plan, by accusing them of engaging in insider trading. Under the proposed plan, shareholders are unlikely to get any money.
If the charges stick, Delaware Bankruptcy Judge Mary Walrath could reject the company's reorganization plan. This could keep the company bottled up in bankruptcy.
The company has been in bankruptcy since September 2008 after regulators seized its savings and loan in the biggest bank failure in U.S. history. WHAT ARE THE ALLEGATIONS?
The official shareholders committee accused Washington Mutual of allowing four hedge funds to dominate talks to develop a reorganization plan. They accuse the company of feeding the funds nonpublic, material information and turning a blind eye to their trading company securities at the same time. WHO ARE THE HEDGE FUNDS?
The four funds at the center of the accusations are Owl Creek Asset Management LP, Appaloosa Management LP, Centerbridge Partners LP and Aurelius Capital Management LP.
The funds hold about $2 billion of Washington Mutual's debt. They specialize in investing in securities of bankrupt companies and then playing an active role in bringing the company out of Chapter 11. SOURCE OF THE ALLEGATIONS
The allegations first gained attention in December, on the final day of Washington Mutual's last round of confirmation hearings. An individual investor from New Jersey, Nate Thoma, said the hedge funds were manipulating the reorganization negotiations for their own benefit.
Walrath cited Thoma's allegations in her opinion denying the company's first reorganization plan. POTENTIAL PROFITS
Court-ordered disclosures show some instances of huge potential profits. Appaloosa and Owl Creek, for example, paid pennies on the dollar for certain bonds that now could be paid a full recovery, with interest on top.
But they aren't alone: disclosures show plenty of other investors who are not being accused of insider trading and who could potentially reap enormous profits from similar trades.
Even Thoma, who gave life to the allegations, told the Wall Street Journal he made 10 times his investment by trading Washington Mutual securities.
The huge gains are partly due to the Worker Homeownership and Business Assistance Act, an economic stimulus law that provided Washington Mutual with billions of windfall tax refunds. TIES TO OTHER INSIDER TRADING CASES?
The allegations are unrelated to other insider trading scandals involving hedge funds. There are no secret wiretaps by the U.S. government, no former business allies of the hedge funds who have turned witnesses against them. The evidence will largely focus on what qualifies as material information requiring disclosure, who was obligated to disclose it. WHAT DO THE FUNDS SAY?
In general, the funds dismiss the allegations as an "absurd" attempt to derail the company's plan for repaying creditors.
The funds say they have turned over hundreds of thousands of documents and provided people for depositions. They say the shareholders' case is built on innuendo.
The hedge funds deny they played a central role in Washington Mutual's bankruptcy negotiations. Washington Mutual, they say, was required to determine what constituted material information and was required to make it public before trading restrictions on the funds were lifted. WHAT ARE THE POSSIBLE PENALTIES?
In a worst-case scenario for the funds and other creditors, the judge could determine that Washington Mutual's bankruptcy plan was not negotiated in good faith and reject the plan.
Shareholders also want to be allowed to pursue litigation against the funds to disallow their $2 billion in claims, which if successful would make it much more likely the shareholders will recover money in the bankruptcy.
However, more likely would be a finding that the funds engaged in "inequitable conduct" and the judge could cut the amount of interest they could collect on their Washington Mutual securities. Such a finding could cost the funds hundreds of millions of dollars, but it might not be enough to produce any recovery for common stockholders.
The case is In re Washington Mutual, U.S. Bankruptcy Court, District of Delaware, No. 08-12229. (Reporting by Tom Hals; Editing by Gary Hill)
www.reuters.com/article/2011/07/18/...amp;feedName=marketsNews
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