WaMu Bankruptcy Judge Agrees to Drop Insider-Trading Ruling

The judge overseeing Washington Mutual Inc. (WM)’s bankruptcy agreed to drop a ruling that hedge funds may have engaged in insider trading.

U.S. Bankruptcy Judge Mary Walrath in Wilmington, Delaware, found in September that there was enough evidence of insider trading to allow a lawsuit to be filed against four hedge funds that hold billions of dollars of WaMu’s debt.

Walrath agreed today to certify to a higher court that she probably will vacate that order, which is on appeal. The certification would allow Walrath to drop the ruling if she approves WaMu’s $7 billion reorganization plan at a hearing scheduled for next month.

Striking part of the insider-trading order will “pave the way for the debtors to finally exit bankruptcy after three years of extensive litigation and negotiation with a multitude of interested parties,” WaMu said in court papers.

WaMu is preparing to try for the third time to win approval of its plan after settling the objections of critics including shareholders. The Seattle-based company filed for bankruptcy on Sept. 26, 2008, the day after its banking unit was taken over by regulators and sold to JPMorgan (JPM) Chase & Co. for $1.9 billion.

Creditors Rejected

Walrath today rejected the arguments of a group of creditors that oppose WaMu’s reorganization plan. The group claimed that Walrath would set a bad precedent by vacating her ruling and that the four hedge funds were trying to restore their reputations after being accused of insider trading.

The hedge funds “are pursuing this so they can go out as part of their business model and say, ‘Look, the judge supported our position,’” Howard J. Kaplan, a lawyer for creditors, told Walrath at the hearing.

Shareholders had accused Aurelius Capital Management LP, Centerbridge Partners LP, Appaloosa Management LP and Owl Creek Asset Management LP of receiving inside information and using it to trade on WaMu securities. The four funds denied the allegations and supported vacating the order.

A committee of shareholders previously dropped their plan to sue the hedge funds in return for receiving a stake in the only part of WaMu that will exit bankruptcy under the proposed reorganization plan.

WaMu’s 4.625 percent bonds that mature in 2014 fell 2.2 percent after the ruling to 110 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

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

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

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

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