Friday, September 16, 2011

Washington Mutual Bankruptcy Delayed as Pro Se Petitioner May Strip Hedge Funds of $3.3 Billion (Appaloosa, Aurelius Capital, Centerbridge Partners et al)

Although the story immediately below says the hedge funds stand to get $1Billion less than they were counting on their actual recovery could be up to $3.3 billion lower.
From Reuters via The Business Times:
WaMu reorganisation plan rejected again
Washington Mutual's plan to pay more than US$7 billion to creditors and exit bankruptcy was rejected for a second time by a judge who ordered the warring parties into mediation, according to a Tuesday ruling.

The ruling is likely to be held up as a victory for shareholders, who would likely have gotten very little in terms of a payout if the plan was approved.

In January, Delaware Bankruptcy Judge Mary Walrath rejected the company's first reorganisation plan, which details how it will repay the hedge funds and other investors who hold its securities.

Judge Walrath said in her 139-page ruling that shareholders made a viable claim that the plan was tainted by insider trading by four hedge funds.

Shareholders spent nearly two weeks in July presenting evidence to Walrath that the funds gleaned information from their role in negotiating Washington Mutual's bankruptcy plan to make big profits trading the company's securities.

However, Judge Walrath stopped short of allowing shareholders to pursue their claim against the hedge funds. If successful on that claim, they could prevent the funds from collecting the more than US$1 billion they are owed and also greatly increase the payout to shareholders.

Instead, she ordered mediation.

'The Court is concerned that the case will devolve into a litigation morass,' Walrath wrote. 'In addition, the Court notes that as the case continues, the potential recoveries for all parties in the case dwindles.'...MORE
From DealBook:
Judge Says Hedge Funds May Have Used Inside Information
There have long been whispers on Wall Street that hedge funds have hijacked the bankruptcy process, using their influence as debt holders to obtain and trade on insider information about when and how a company will restructure.

A federal court ruling highlighted such concerns late Tuesday when a judge raised the possibility that four large hedge funds might have used confidential information to trade in the debt of Washington Mutual.
The issue was raised amid the derailment of Washington Mutual’s emergence from bankruptcy protection, the final chapter in the largest bank failure in the nation’s history.

Judge Mary F. Walrath, in dismissing a proposed settlement in the federal bankruptcy court in Delaware, wrote that four hedge funds that had played a role in Washington Mutual’s restructuring might have received confidential information that could have been used to trade improperly in the bank’s debt.
The four hedge funds are Appaloosa Management, Aurelius Capital Management, Centerbridge Partners and Owl Creek Asset Management. All have denied any wrongdoing.

The Washington Mutual bankruptcy, and Judge Walrath’s ruling, have slightly thrown back the covers on the sharp-elbowed tactics used by investors in trading the stocks and bonds of companies in Chapter 11 bankruptcy protection. That market has exploded in recent years, driven by hedge funds buying up the loans of companies in bankruptcy at a steep discount in the hopes of obtaining big profits when the companies emerge from Chapter 11.

Judge Walrath’s ruling is a victory for the Washington Mutual shareholders who claimed that hedge funds had been using insider knowledge to influence proceedings and seek profits. And the ruling is a potential blow to the funds — who have long argued they acted properly — and the large law firm Fried, Frank, Harris, Shriver & Jacobson, which was representing some of the funds and is accused of passing them confidential information.

Part of Judge Walrath’s ruling focused on a dispute involving $4 billion held by JPMorgan Chase when Washington Mutual was put into bankruptcy. Early in the bankruptcy proceedings, Washington Mutual claimed ownership of those funds, and in confidential settlement talks, JPMorgan agreed to hand them over.
If the public had been aware of that agreement, the value of Washington Mutual’s bonds would probably rise, since the $4 billion could be used to pay bondholders, including hedge funds that had bought the debt.

The deal, however, was kept secret....MORE
Here's some backround the WSJ did in June:
Hipster Battles Funds 
Nate Thoma stood up in a Delaware bankruptcy court last December in a sharkskin suit and delivered a 24-minute argument that changed the course of one of the largest bankruptcies in U.S. history.

The 33-year-old Washington Mutual investor, with no legal experience, delivered what people in the courtroom called an unusually eloquent speech, helping persuade the judge to investigate trading by some of the nation's biggest hedge funds and to reject a plan for the bank's exit from bankruptcy.
The net result was a settlement between small investors and the hedge funds, which included Appaloosa Management and Centerbridge Partners. That deal has paved the way for the bank to exit from bankruptcy and gives the little guys a chance of recovering some of their losses.

Mr. Thoma's court appearance added new drama to an already contentious case, which began when the U.S. government seized the bank in September 2008. The court-ordered probe riled hedge-fund managers, who said they did nothing wrong, and made Mr. Thoma a folk hero among Washington Mutual's legions of small investors.
Mr. Thoma, who had traveled from Queens, N.Y., to lodge his objections in person, came across as "intense and smart," though "somewhat lacking in experience in the legal arena," says Edgar Sargent, a lawyer representing Washington Mutual's shareholder committee.
Sitting in a Greek tavern in Astoria, N.Y., on a recent afternoon, sporting a hipster-perfect scruffy beard and dressed in a plaid shirt and jeans, Mr. Thoma recalls thinking Judge Mary Walrath would cut him off after a few minutes.
"But halfway through, I noticed she was paying attention," he says. "I realized she was going to let me go on, and I went for broke."
Mr. Thoma, who gave up computer programming to become a trader in 2005, estimates he probably made 10 times his money in Washington Mutual, in part because he bought up cheap securities that will get a payout.
Mr. Thoma spent as many as 10 hours a day analyzing various pieces of the Washington Mutual case before appearing in court, and presented 33 pages of documents. In her written opinion, Judge Walrath cited Mr. Thoma's arguments six times, though she pointed out that much of his evidence was inadmissible.
"Some things were wide of the mark," concedes Mr. Thoma. "But it's my first bankruptcy."
No wrongdoing by the hedge funds was proved by the investigation ordered by Judge Walrath. Appaloosa and Centerbridge, as well as Aurelius Capital Management and Owl Creek Management, were ordered to divulge trading records and answer questions from lawyers for common shareholders.
The funds declined to comment, as did Washington Mutual's attorney.

While Mr. Thoma's impact on the case could inspire other small investors, they probably won't get as loud a voice. Judge Walrath was particularly attentive to smaller shareholders during the Washington Mutual case, in part because of the number of individuals hurt when the bank was seized, according to people involved in the case.

Soft-spoken and with about $500,000 in investments, Mr. Thoma is an unlikely agent for change in the halls of American finance and an even more unwelcome adversary for the hedge funds involved. His actions infuriated the likes of David Tepper, head of Appaloosa. They also served as a call to arms for small investors in the case, many of whom lavished him with accolades on Yahoo message boards.

When Appaloosa responded to Mr. Thoma's claims with demands for research, correspondence and trading records, shareholders, many of them from Europe, rallied to Mr. Thoma's defense, flooding the Delaware court with more than 150 objections. "Apparently, I'm big in Switzerland," he says.

Mr. Thoma, who didn't finish college, says he taught himself to trade, much like he taught himself computer programming. He is also following in the footsteps of his grandfather, who actively traded and retired early on his stock-market investments....MORE
Here's the judge:
“Based on the evidence presented thus far it appears that the (settlement) negotiations may have shifted towards the material end of the spectrum and that the settlement noteholders traded on that information which was not known to the public. Consequently, the court finds that the equity committee has stated a colorable claim that the (hedge funds) received material nonpublic information.”