Aurelius, Owl Creek Deny Insider-Trading Allegations

Jul 21 2011 | 1:43pm ET

Representatives of two of the four hedge funds accused of insider-trading in the Washington Mutual bankruptcy case have denied any wrongdoing on the stand.

Aurelius Capital Management's Daniel Gropper and Owl Creek Asset Management's Daniel Krueger testified that neither they nor fellow hedge funds Appaloosa Management or Centerbridge Partners trader WaMu securites based on confidential information learned during the crafting of the former bank's restructuring plan. The two men took the stand in Wilmington, Del., federal bankruptcy court as part of a hearing to determine whether WaMu's latest bankruptcy exit plan will be approved.

WaMu's shareholders want that plan rejected—again—and have sought to show that the four hedge funds used confidential information learned during the planning process. The four hedge funds refused last year to renew their support for the plan after it expired.

Owl Creek's Krueger admitted that his firm and the others were part of a meeting in March 2009 that hopes to come up with a plan to end the lawsuits involving WaMu, which was seized by federal regulators and sold to JPMorgan Chase in 2008, but denied that their participation in the talks was material, non-public information.

Earlier, Aurelius' Gropper discussed the great lengths his firm went to to prevent insider-trading after it became part of the bankruptcy plan. He testified that the hedge fund spend $150,000 to soundproof an office and hired a separate legal team to prevent its traders from eavesdropping or otherwise learning about the WaMu talks.

The shareholders group wasn't moved, with their lawyer, Parker Folse, hammering away at Gropper's claims that the scope of the settlement talks was material and non-public. Folse also accused Aurelius of using its law firm, Fried Frank Harris Shriver & Jacobson, which was working on the WaMu settlement, to learn confidential details about that process.

"This doesn't work on a wink and a nod," Gropper testified. "What you are suggesting would not be appropriate."

"You're either involved in the negotiations and restricted, or you're not," Gropper said. But he admitted that Aurelius had traded WaMu securities upon the expiration of its confidentiality agreement. Gropper claimed those trades were not made on confidential information.

"We knew, and the market knew in general… that there were ongoing negotiations," Gropper said. "We did not participate in those negotiations, and we did not know the substance of those negotiations."


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