WaMu Bankruptcy, Hedge Fund Insider-Trading Allegations Head To Mediation

Oct 7 2011 | 11:08am ET

A judge has ordered extensive mediation in the Washington Mutual bankruptcy before she'll consider another plan from the former bank.

U.S. Bankruptcy Judge Mary Walrath has twice rejected WaMu's bankruptcy plan, in part over allegations of insider-trading against four hedge funds involved in the crafting of that plan by WaMu shareholders. Walrath gave the sides until Nov. 7, and suggested the naming of a New Jersey federal bankruptcy court judge as mediator.

"I'm not going to have another contested confirmation without trying," Walrath said.

Walrath blocked the plan last month. She did not reject its main points, but ruled that the collapsed bank's shareholders had established a "colorable" case that the four hedge funds, known as the "settlement noteholders," had violated insider-trading laws during their involvement in WaMu's Chapter 11 plan negotiations. But, while ruling that the shareholders produced enough evidence that "the settlement noteholders knowingly traded with knowledge that the debtors were engaged in global settlement negotiations… of which the trading public was unaware" to sue the hedge funds, she blocked any immediate litigation, pending mediation.

All four hedge funds have denied any wrongdoing, and, despite Walrath's barring of it, a lawyer for Appaloosa said that the shareholders "should just bring their claims if they have them and we'll fight them." A lawyer for Aurelius told The Wall Street Journal that the firm is willing to mediate the insider-trading allegations—Walrath said that "all the issues have to be on the table"—but would only accept "very, very minimal damages."

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