* Shareholders accuse WaMu of allowing insider trading
* Funds accused of gaining millions in illegal profits
* Court may hear insider-trading allegations on Thursday
By Tom Hals
WILMINGTON, Del., July 13 (Reuters) - Washington Mutual Inc (WAMUQ.PK) allowed four hedge funds to hijack its bankruptcy and tacitly approved of their trading on inside information, according to the bank's shareholders.
The accusation of insider trading hung over Washington Mutual on Wednesday as it began its attempts in court to end its bankruptcy and distribute $7 billion to creditors.
The official committee of shareholders asked the Delaware Bankruptcy Court for permission to pursue litigation against the hedge funds -- Owl Creek Asset Management LP, Appaloosa Management LP, Centerbridge Partners LP and Aurelius Capital Management LP -- with the goal of knocking them out of the line for repayment.
In the most inflammatory of scores of objections, shareholders accused WaMu of assisting in the hedge funds' "gross abuse" of the bankruptcy to profit from trading the company's securities.
"The debtors fostered these hedge funds' ability to generate tens or even hundreds of millions of dollars in ill-gotten gains through illegal trading," the shareholders said in a filing on Tuesday.
A Washington Mutual spokesman declined to comment.
The hedge funds have said in court documents that they are owed about $2 billion for their holdings in company securities. They denied the insider-trading allegations in court-filed responses to the allegations.
WaMu has said common shareholders will get nothing from the bankruptcy. The shareholders could change that by getting the judge to strike down the hedge funds' claims.
The judge, Mary Walrath, put off ruling on what evidence the shareholders could present on the insider-trading question until she hears the allegations in court. That will probably not happen until Thursday or Friday.
Washington Mutual has been in bankruptcy since September 2008, when regulators seized its savings and loan and sold it to JPMorgan Chase & Co (JPM.N) for $1.88 billion in the biggest bank failure in U.S. history.
The bankruptcy plan is based on a "global settlement agreement" struck last year between warring parties. The deal divided $10 billion in disputed assets, providing $7 billion to the company, while other recipients agreed to support its bankruptcy plan.
Shareholders accused the funds of directing the settlement talks while trading the securities that stood to benefit from the deal.
Much of Wednesday's hearing before an overflow crowd consisted of expert views on the value of the tax breaks that the reorganized company will own.
Washington Mutual plans to emerge from bankruptcy as a small mortgage reinsurance business that it says is worth around $160 million. Shareholders have argued the business may be worth billions more because of the potentially valuable tax breaks.
The case is In re Washington Mutual, U.S. Bankruptcy Court, District of Delaware, No. 08-12229. (Reporting by Tom Hals; Editing by Lisa Von Ahn)
Link:
www.reuters.com/article/2011/07/13/...e=companyNews&rpc=43
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