WaMu Deal Collapses, Hedge Funds Back On Hot Seat

Jun 17 2011 | 3:54am ET

Insider-trading allegations against four hedge funds stemming from the Washington Mutual bankruptcy are back on after a deal struck last month collapsed.

WaMu's common shareholders have backed out of the proposed deal, fearing that the proceeds would end up exclusively with preferred shareholders—among them, the four hedge funds, Appaloosa Management, Aurelius Capital Management, Centerbridge Capital Partners and Owl Creek Asset Management, currently among WaMu's largest creditors. What's more, the insider-trading allegations that the shareholders agreed to drop last month are back on; the group on Wednesday filed notice in Delaware bankruptcy court that they plan to move forward with depositions from the hedge funds that were shelved when the deal was reached last week.

That deal fell apart when the preferred shareholders, led by Black Horse Capital, Guggenheim Partners, Paige Opportunity Partners, Pandora Select Partners and Scoggin Capital Management, announced their opposition to giving common shareholders a stake in the only business set to survive the WaMu reorganization, a reinsurance company. Under the proposal, the creditor hedge funds would have accepted $160 million in debt and preferred stock in the reorganized company while lending it up to $100 million. WaMu shareholders were to get common stock in that company and a litigation trust.

WaMu, which collapsed in 2008, was sold to JPMorgan Chase. The creditor hedge funds initially backed the bank's Chapter 11 plan but refused to renew their support earlier this year. Some shareholders had alleged that the hedge funds used confidential information acquired during the crafting of WaMu's reorganization plan.

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