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.


In Depth

GSAM's Papagiannis: Liquid Alternatives For The Long Run

Apr 21 2017 | 8:44pm ET

Interest in liquid alternatives cooled a bit last year amid a broad shift in investor...

Lifestyle

Aston Martin Returns To Debt Market As DB11 Drives Turnaround

Mar 31 2017 | 5:21pm ET

James Bond’s preferred carmaker is returning to the public debt markets for the...

Guest Contributor

Debunking Conventional Investment Wisdom (Part II)

Apr 17 2017 | 5:56pm ET

The alternative investment industry is currently replete with buzzwords around data...

 

From the current issue of