WaMu Will Face Trial in November Over $4 Billion of Low-Ranking Securities
Washington Mutual Inc., the ex-owner of the biggest U.S. bank to fail, will face a November trial in an investor lawsuit over ownership of $4 billion in low-ranking debt known as trust-preferred securities, a judge said.
U.S. Bankruptcy Judge Mary F. Walrath in Wilmington, Delaware, scheduled a trial for Nov. 1, the first day of a confirmation hearing on WaMu’s reorganization plan. Lawyers for WaMu and investors, including Black Horse Capital LP and Lonestar Partners LP, agree the issue must be resolved before the company can end its bankruptcy and distribute more than $6 billion to creditors.
As the confirmation hearing continues in November, other critics of WaMu’s plan may want to use any facts or arguments presented by the investors to attack the reorganization proposal, Walrath said. Shareholders claim that the holding company’s bank should never have been seized by regulators and sold to JPMorgan Chase & Co. in 2008.
“Others may want to ride your coattails,” Walrath told an attorney for Black Horse at a court hearing yesterday. “The first day of confirmation will be yours.”
In July, a group of investors sued WaMu and JPMorgan over the way the trust-preferred securities were converted from debt- like investments into equity. The investors, who bought $1 billion of the trust-preferred securities, got preferred equity in WaMu when the exchange happened just before WaMu collapsed.
‘Rampant Fraud’
When affiliates of WaMu raised $4 billion by selling the securities, the bank was “engaged and/or involved in rampant fraud, misrepresentation and/or reckless business practices,” investors said in a complaint filed July 6 in Delaware. JPMorgan knew about the fraudulent business practices, the investors claim.
JPMorgan and WaMu denied any wrongdoing and said in court that they plan to fight the allegations when they come before Walrath on Nov. 1.
The securities were backed by $13.5 billion in home equity and home mortgage loans. The securities, and the assets backing them, were acquired by JPMorgan when it bought WaMu’s bank for $1.9 billion, according to court records.
The investors claim that the securities should have been retained by WaMu. They want Walrath to void the conditional exchange and give the securities to them.
Securities’ Rank
The investors will have a hard time winning because the securities were designed to rank below almost all of WaMu’s other debts, Kevin Starke, senior analyst with CRT Capital Group Inc., said in an e-mail. That means the investors shouldn’t be able to collect money before other, more senior creditors, Starke said.
“A judge is likely to look at this from a common sense perspective and uphold the deep subordination,” Starke said.
WaMu’s 5 percent bonds due in 2012 rose more than 3 percent today to 107.8 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Those bonds rank above the trust-preferred securities, which means their holders would be repaid before the investors who are suing WaMu and JPMorgan.
The securities are part of a settlement among WaMu, JPMorgan and federal regulators. WaMu agreed not to sue JPMorgan and the Federal Deposit Insurance Corp. over the seizure of its bank as part of a settlement that splits almost $10 billion in cash and tax refunds.
Last month, Walrath appointed an examiner to investigate that settlement as well as the strength of a potential lawsuit against JPMorgan and the FDIC for their roles in the collapse of WaMu’s bank.
The bankruptcy case is In Re Washington Mutual Inc., 08- 12229, U.S. Bankruptcy Court, District of Delaware (Wilmington). The securities lawsuit is Black Horse Capital LP v. JPMorgan Chase Bank NA, 10-51387, U.S. Bankruptcy Court, District of Delaware (Wilmington).
To contact the reporter on this story: Steven Church in U.S. Bankruptcy Court in Wilmington, Delaware, at schurch@bloomberg.net.
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