WaMu Trust Preferred Holders Seek to Join Hedge Fund Probe

A group of Washington Mutual Inc.’s creditors, including Black Horse Capital, is seeking to join a probe of four hedge funds accused of using confidential data to trade in the debt of the bankrupt former bank holding company.

Lonestar Capital Management LLC, Greywolf Capital Management LP and other holders of WaMu’s trust preferred securities asked the judge overseeing the company’s bankruptcy to force the four hedge funds to turn over trading-related documents. U.S. Bankruptcy Judge Mary Walrath has already agreed to let a committee representing common and preferred shareholders question the hedge funds under oath and request documents.

Common shareholders and the trust preferred holders are among the last opponents to WaMu’s $7 billion reorganization proposal, which was crafted with help from the four hedge funds, Centerbridge Partners LP, Appaloosa Management LP, Owl Creek Asset Management LP and Aurelius Capital Management.

Aurelius called the probe “a shakedown operation” in a June 17 court filing and vowed not to participate in any settlement talks between shareholders and the other hedge funds.

“Aurelius prizes its integrity and reputation,” the hedge fund said in court papers. “It will not allow its reputation to be so sullied, it will never settle to appease such abhorrent tactics, and it has never supported the settlement with the Equity Committee recently under discussion.”

An agreement to end the investigation fell apart last week and the shareholder committee renewed its plans to question the hedge funds. The committee has already questioned Aurelius Managing Director Dan Gropper, according to a court filing.

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. for $1.9 billion. WaMu owned Washington Mutual Bank, the biggest bank to fail in U.S. history, with more than 2,200 branches and $188 billion in deposits.

Walrath will hold a hearing on July 13 to decide whether to approve WaMu’s current reorganization plan, which pays senior noteholders, including the four hedge funds, in full and gives shareholders nothing.

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

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