Fred Prouser/ReutersThe battle over Washington Mutual’s bankruptcy has shined a spotlight on the hedge funds trading in the debt of distressed companies.
7:49 p.m. | Updated
Earlier this month, a federal bankruptcy judge authorized shareholders of Washington Mutual to pursue a lawsuit that accused four hedge funds of insider trading in the collapsed bank’s debt securities.
Those hedge funds have now appealed the ruling, criticizing the judge’s decision. The opinion, said one of the funds in its court filing, “radically distorts securities law and bankruptcy law and inflicts a gross injustice.”
Judge Mary F. Walrath, a United States bankruptcy judge in Wilmington, Del., rejected the reorganization plan of Washington Mutual, the largest bank failure in the country’s history. She also ruled that the Washington Mutual’s shareholders had stated a viable claim that the hedge funds traded on confidential information about the bank that they had learned during restructuring talks.
The pitched bankruptcy battle has shined a spotlight on the hedge funds trading in the debt of distressed companies. These funds buy companies’ bonds and loans at a discount in the hope of obtaining profits when the companies emerge from Chapter 11 bankruptcy. Critics of hedge funds’ tactics complain that the sharp-elbowed investors hijack the reorganization process for their own gain.
The four hedge funds — Appaloosa Management, Aurelius Capital Management, Centerbridge Partners and Owl Creek Asset Management — have denied the shareholders’ accusations of insider trading, and said that the court’s ruling has caused them “significant reputational harm.” The funds said that they followed well-established bankruptcy court rules that set forth when they can and cannot trade during a company’s restructuring.
Aurelius said Judge Walrath’s ruling “set off shock waves” in the bankruptcy world because it premised insider trading liability on procedures that it says are “relied on and used in virtually all large bankruptcy cases.”
Lawyers for three of the hedge funds also said that the court’s ruling would allow and encourage bankruptcy courts to become a forum for frivolous lawsuits.
“The decision below, unless promptly reversed, also would allow and encourage the types of ‘abusive practices committed in private securities litigation’ that Congress intended to avoid by enacting” securities litigation reform, the hedge funds said.
Washington Mutual filed for bankruptcy at the peak of the global financial crisis in September 2008. Federal bank regulators seized the savings and loan, which had excessive exposure to subprime loans, and sold it off to JPMorgan Chase.
Judge Walrath has asked Washington Mutual’s shareholders and the hedge funds to attend mediation to resolve the dispute.
Motion of Appeal by Appaloosa, Centerbridge and Owl Creek
Motion of Appeal by Aurelius Capital
Article source: http://feeds.nytimes.com/click.phdo?i=094b3e92d264544e014fa968f724bfd0
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