New Shareholder Group Joins WaMu Insider-Trading Probe

Jun 30 2011 | 12:44pm ET

A federal judge has given the green-light to a group of Washington Mutual's shareholders to join an insider-trading investigation conducted by the former bank's official shareholders committee. But U.S. Bankruptcy Judge Mary Walrath said those shareholders, including hedge funds Black Horse Capital, Greywolf Capital Management and Lonestar Capital Management, will have to make due with the information already collected.

WaMu's common shareholders have been looking into possible insider-trading on the part of four hedge funds that helped craft the bankrupt firm's reorganization plan, which WaMu hopes to push through next month. A deal to end that investigation collapsed earlier this month.

But while Walrath allowed the trust preferred securities holders access to the information already collected, she rejected both their request and the request of the shareholders committee for more information, save a single compliance report from one of the four hedge funds, Aurelius Capital Management. An attorney for the shareholders committee had complained that the hedge funds' disclosures include "literally a Siberia of redaction."

The rulings played out at another contentious hearing in federal bankruptcy court in Wilmington, Del., where the hedge funds—Appaloosa Management, Aurelius, Centerbridge Capital Partners and Owl Creek Asset Management—angrily complained about the probe and WaMu's creditors' committee accused the shareholders of running a shakedown.

"The creditors' committee does not believe there is any evidence that any of the noteholders engaged in insider trading or other inequitable conduct," it said in a filing yesterday. "Instead, it appears that by trying to exploit this issue the equity committee is, for at least the fourth time in this case, trying to delay these proceedings in an inappropriate effort to extract value from the debtors' legitimate creditors."

Aurelius' lawyer, Kenneth Eckstein, was less diplomatic.

"A public accusation of insider trading is the equivalent of a moral crime," he told Walrath. Sargent countered that the shareholders were "proceeding in good faith" and have "an ample basis for what we're doing."


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