Hedge Funds, WaMu Shareholders Settle Insider-Trading Allegations

May 26 2011 | 10:51am ET

Four hedge funds have settled insider-trading allegations against them in the Washington Mutual bankruptcy, moving the former bank a step closer to getting out of bankruptcy protection.

WaMu's shareholders have settled their grievances with the hedge fund creditors, who have agreed to accept $160 million in debt and preferred equity in the reorganized company, instead of common stock. In addition, the "significant creditors" have also agreed to lend the firm, which sold its banking operations to JPMorgan Chase in 2008, as much as $100 million.

In exchange for dropping their insider-trading probe, WaMu's shareholders will get common stock in the reorganized company and a litigation trust that will sue to raise money.

WaMu did not identify the "significant creditors," but published reports indicate that they include four hedge funds—Appaloosa Management, Aurelius Capital Management, Centerbridge Capital Partners and Owl Creek Asset Management—which initially backed WaMu's Chapter 11 bankruptcy plan but refused to renew their support earlier this year. Some shareholders had alleged that the hedge funds used confidential information they learned during the creation of WaMu's reorganization plan.

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