Washington Mutual Inc. has set May 2 for its second attempt to get court approval on a Chapter 11 exit plan that would pay more than $7 billion to creditors, including four hedge funds facing an investigation into possible insider trading.

Judge Mary Walrath Tuesday authorized a shareholder investigation into the trading activities of the hedge funds that sat at the Chapter 11 bargaining table when Washington Mutual's Chapter 11 plan was hammered out: Appaloosa Management LP, Aurelius Capital Management LP, Centerbridge Partners LP and Owl Creek Asset Management LP.

The former parent of Washington Mutual Bank, or WaMu, filed for bankruptcy protection in September 2008, after WaMu was seized and sold by regulators who feared it would collapse. It hoped to be out of bankruptcy early this year, with most of its creditors paid in full, but its first Chapter 11 plan was rejected.

At a hearing Tuesday in the U.S. Bankruptcy Court in Wilmington, Del., Walrath gave Washington Mutual's shareholders the green light to look into trading activity by the funds, in spite of protests from hedge fund attorneys that there was no basis for the suspicions.

Walrath cited concerns about insider trading when she refused to confirm Washington Mutual's first Chapter 11 plan in January. The judge said she had only hearsay evidence, but the possibility that powerful hedge funds profited from information gained in confidential bankruptcy negotiations was worth taking seriously.

The suspicions of insider trading were first raised by a lone investor, Nate Thoma, during hearings last year where Washington Mutual unsuccessfully attempted to win confirmation of its Chapter 11 plan. Hedge fund attorneys said Tuesday that Thoma failed to name a single tainted trade.

Walrath, however, opened the door to an investigation of all trading by the four hedge funds from the start of Washington Mutual's Chapter 11 case.

"He raised an issue that the court has a concern about. And I think it should be explored," Walrath said.

If the suspicions prove out, they could have a big dollar impact on Washington Mutual's distribution scheme. Proof of insider trading could be grounds for the judge to chop the interest rate Washington Mutual is paying some creditors. The interest rate change could translate into a $700 million difference, said Jeremy Coffey of Brown Rudnick LLP, attorney for a group of preferred shareholders.

Walrath said the insider trading suspicions, if proven, could sway her view of the value of the reorganized Washington Mutual. Under the plan, the four hedge stand to gain control of the post-bankruptcy Washington Mutual, which they say will be a limited operation that manages leftover insurance business.

Critics of the plan say the reorganized Washington Mutual can profit from some $5 billion worth of tax breaks, and is more valuable than it appears. Therefore, the hedge funds that will run it could be in line to collect more than what they are owed under the plan, while shareholders are left with nothing, plan opponent say.

WaMu's former parent saw its first Chapter 11 plan shot down due to overly generous lawsuit releases. A revised Chapter 11 plan designed to cure the defects that caused the first plan to fail was filed Tuesday, Washington Mutual attorney Brian Rosen said.

Rosen, who's with the law firm Weil Gotshal & Manges, set out the new timetable for the end of the Washington Mutual's Chapter 11 case. Earlier, WaMu's former parent indicated it hoped to push a revamped plan through the courts by the end of March.

The timetable is a matter of some interest to investors who bought Washington Mutual's debt in the wake of the loss of WaMu.

Delay in getting confirmation for the Chapter 11 plan eats away at the recovery to the lowest-ranking creditors, because interest on the higher-ranking debt accumulate at the rate of $30 million per month.

In addition, the bankruptcy professional fee meters continue to run at the rate of an estimated $10 million per month.

Rosen said Tuesday Washington Mutual's revised Chapter 11 distribution scheme is scheduled to receive a preliminary level of court review March 21.

The preliminary review will focus on whether Washington Mutual has given creditors adequate information to decide whether to support the plan.

The confirmation hearing tests the legal sufficiency of Washington Mutual's Chapter 11 plan, which embodies a settlement of wide-ranging legal disputes over the loss of WaMu.

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