Washington Mutual Inc. Wednesday persuaded a bankruptcy judge to consider wiping the slate clean of allegations that major hedge funds engaged in insider trading during the $7 billion bankruptcy.
Judge Mary Walrath said she would make the final call in February on whether to vacate an opinion that found a "colorable" case of insider trading had been sketched out against Aurelius Capital Management LP, Appaloosa Management LP, Centerbridge Partners LP and Owl Creek Asset Management LP.
In February, Washington Mutual is scheduled to make its third attempt to win confirmation of its Chapter 11 plan.
"Bottom line, I would be inclined to consider it because I do not think that vacating my opinion is prohibited under the circumstances of this case," Walrath said. "I think an argument can be made that the circumstances of this case are exceptional."
Washington Mutual's Chapter 11 case grew out of the largest banking collapse in U.S. history, that of Washington Mutual Bank, or WaMu. The company's bankruptcy-exit plan promises $7 billion to creditors. Getting Walrath to erase a portion of a September 2011 ruling that said the hedge funds should stand trial on the insider-trading allegations is a crucial element of its bid to get out of bankruptcy, Washington Mutual contends.
The hedge funds deny wrongdoing but agreed to a settlement with shareholders who were pushing the insider-trading accusations. The settlement is expected to ease Washington Mutual's path out of bankruptcy after two failed attempts, and it calls on Walrath to vacate her insider trading ruling.
The ruling threw a scare into the distressed-debt industry, where participants maneuver to sway the course of big Chapter 11 proceedings in the interest of cashing in.
Walrath's finding that evidence the four hedge funds traded in Washington Mutual's debt while they participated in Chapter 11 plan negotiations was enough to justify a trial sparked a lively dialogue in the industry.
Appaloosa, Aurelius, Owl Creek and Centerbridge countered the accusations with explanations they had the standard safeguards against insider trading in place, but Walrath said those weren't sufficient.
Wednesday's preliminary argument over whether the judge should take a second look at the insider-trading ruling was necessary because the decision was appealed. That put the issue before a federal district court, removing it from Walrath's jurisdiction.
Creditors who battled Washington Mutual's drive to make Walrath take back her words said they feared it would silence public debate over what constitutes improper trading activity in corporate bankruptcy cases.
Read in some quarters as a warning that hedge funds need to exercise extreme caution when trading while they're participating in Chapter 11 plan negotiations, the ruling was too important to erase, they contended.
On Wednesday, Walrath said her ruling wasn't such a big deal, as it was just a preliminary decision, not a conclusion that the hedge funds had actually engaged in insider trading.
The deal the hedge funds cut with shareholders gives the shareholders a stake in the reorganized Washington Mutual, a company that will run a fading insurance operation and perhaps make deals that will allow it to cash in on tax breaks.
