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Aurelius Capital Denies Using Inside Information to Profit on WaMu Debt

Aurelius Capital Management LP denied using confidential information to profit on the debt of bankrupt Washington Mutual Inc. (WAMUQ), saying it installed a soundproof office to prevent traders from hearing sensitive negotiations.

The hedge fund’s managing director, Dan Gropper, testified today in U.S. Bankruptcy Court in Wilmington, Delaware, that he took phone calls in an office 30 feet away from the trading desk while negotiating with WaMu and later spent $150,000 to soundproof his office.

“We are absolutely compulsive about this compliance,” Gropper said, referring to restrictions on insider trading in general.

Shareholders want U.S. Bankruptcy Judge Mary Walrath to reject for the second time WaMu’s reorganization plan, which Aurelius helped negotiate with three other hedge funds. Shareholders would get nothing under the plan. They claim Aurelius and the other hedge funds used confidential information obtained while they negotiated with WaMu to pick the most profitable WaMu securities to buy and sell.

The former owner of the biggest U.S. bank to fail, WaMu is seeking Walrath’s approval for the reorganization plan that would pay creditors more than $7 billion.

WaMu, based in Seattle, filed for bankruptcy on Sept. 26, 2008, the day after its banking unit was taken over by regulators and sold to JPMorgan Chase & Co. (JPM) for $1.9 billion. WaMu’s Washington Mutual Bank was the biggest bank to fail in U.S. history, with more than 2,200 branches and $188 billion in deposits.

The case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporter on this story: Steven Church in Wilmington, Delaware, at schurch3@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.

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