UPDATE 3-WaMu shareholders to probe hedge funds' trades

Tue Feb 8, 2011 6:25pm EST

* Amends bankruptcy plan after court rejection

* Drops rights offering

* Says to seek votes for amended plan (Rewrites throughout with investigation of insider trading among hedge funds)

By Tom Hals

WILMINGTON, Del., Feb 8 (Reuters) - Washington Mutual Inc shareholders were given permission by a judge on Tuesday to investigate allegations of insider trading against hedge funds that helped craft the company's reorganization plan.

Owl Creek Asset Management LP, Appaloosa Management LP, Centerbridge Partners LP and Aurelius Capital Management LP were accused in December by investor Nate Thoma of using their positions to profit on trades in the company's securities.

While Delaware bankruptcy judge Mary Walrath treated the allegations as hearsay, she cited the claims in her January opinion rejecting the company's reorganization plan.

The four hedge funds have large holdings of various Washington Mutual securities and were part of a settlement of legal disputes at the heart of the rejected reorganization plan.

An attorney representing the funds did not immediately return a call for comment. In court documents, the funds called the allegations "baseless" and "last-gasp point of leverage."

Washington Mutual filed a new plan on Tuesday aimed at resolving Walrath's criticisms. Notably, the hedge funds were no longer part of the settlement and it scrapped a rights offering that would have put them in control of the company's post-bankruptcy business, which will have valuable tax credits.

Washington Mutual said in a statement the hedge funds were no longer part of the settlement because they did not want to extend its termination date. The prior settlement expired on Jan. 31 and the new settlement expires April 30.

Washington Mutual needs approval of its amended bankruptcy plan to begin distributing more than $7 billion to its creditors, which range from hedge funds holding bonds to suppliers such as software suppliers.

The new plan also rolls back the number of parties protected from being sued. The company said in court documents that no party that voted to approve the previous plan is adversely affected in the amended version.

Washington Mutual filed for bankruptcy in September 2008 after regulators seized its savings and loan, which was the biggest bank failure in U.S. history.

It spent the first 18 months in bankruptcy fighting with the Federal Deposit Insurance Corp, which sold the seized bank, and JPMorgan Chase & Co (JPM.N), which bought it for $1.88 billion, over the ownership of assets and blame for the bankfailure.

The company reached a settlement last year that divided $10 billion of assets and ended the legal disputes.

Rather than a rights offering, the company plans to distribute the reorganized company's stock to creditors. The company said it could still decide to liquidate or sell its remaining business, which centers around a mortgage reinsurer.

The judge also denied a request by shareholders to appeal to the Circuit Court her finding that the company's settlement was fair. They will have to appeal to a lower District Court instead.

The case is In re Washington Mutual, U.S. Bankruptcy Court, District of Delaware, No. 08-12229. (Reporting by Tom Hals; editing by Andre Grenon)

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