Hedge Funds May See 1,000% Return For Backing Bank Litigation

Oct 10 2013 | 8:34am ET

Four hedge funds are set to enjoy a handsome profit after bankruptcy court judge ruled that a failed bank is entitled to a huge tax refund.

The hedge funds stepped in when the receiver for Downey Financial Corp., which filed for bankruptcy in 2008, ran out of money, agreeing to continue to finance its legal battle. The hedge funds put up $12 million—and are now poised to split as much as one-third of the $373.8 million refund, Reuters reports.

U.S. Bankruptcy Judge Christopher Sontchi on Tuesday ruled in favor of Downey Financial and against the Federal Deposit Insurance Corp., which seized the firm's Downey Savings & Loan in 2008. Downey Financial had claimed Downey S&L's huge losses against their taxes for the preceding five years, but the FDIC argued that the refund belonged to it, as the receiver for the S&L.

Sontchi ruled that the FDIC would have to make a claim for the refund as part of bankruptcy proceedings, during which time it would have to battle other creditors. The FDIC, which noted in court papers that the hedge funds are poised to reap at 1,000% return, estimated its own losses on the Downey failure at $1.6 billion.

Those hedge funds, which also own some $200 million in Downey Financial bonds, are Alden Global Capital, Davidson Kempner Capital Management, Farallon Capital Management and Halcyon Asset Management.

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    One of the most unique charity benefits in the hedge fund industry, A Leg To Stand On's (ALTSO's) Hedge Fund Rocktoberfest - NYC, raised nearly $500,000 last Thursday thanks to the generous support of major sponsors and nearly 1,400 attendees from the Tri-State finance, business and hedge fund communities. Read more…