* Parties present closing arguments over reorganization
* Judge to consider insider trading allegations
* Judge says "a long way toward an opinion"
By Tom Hals
WILMINGTON, Del., Aug 24 Shareholders of
Washington Mutual Inc made their final pitch against the
company's $7 billion reorganization plan on Wednesday,
repeating accusations the bankruptcy was tainted by insider
The company needs the plan approved so it can begin
repaying its creditors, although shareholders are unlikely to
get much of anything.
Shareholders have accused four hedge funds of gleaning
information from their role in negotiating the bankruptcy plan
to generate profits trading Washington Mutual's securities.
For details of the insider trading allegations, see
Delaware Bankruptcy Judge Mary Walrath began the hearing by
saying she was "a long way toward an opinion."
If the insider trading allegations stick, Walrath could
keep Washington Mutual bottled up in bankruptcy court by
finding the company's plan was not negotiated in good faith.
Lawyers for the company and other creditors dismissed the
insider trading allegations as a "house of cards" and part of a
"carney show" of attacks.
Both sides already spent two weeks in July presenting
evidence tied to the insider trading allegations. Walrath will
consider that evidence in forming her opinion.
The bankruptcy stems from the September 2008 failure of the
company's WaMu savings and loan business, the biggest bank
failure in U.S. history. The Federal Deposit Insurance Corp
sold the lender immediately to JPMorgan Chase & Co (JPM.N) for
If the plan of reorganization is approved, Washington
Mutual's only remaining operation, a small mortgage reinsurance
business, will emerge from bankruptcy.
The WaMu seizure and bankruptcy set off a series of legal
battles that ended with a settlement last year between the
FDIC, Washington Mutual and JPMorgan. The three agreed to divide
$10 billion in disputed assets.
In January Walrath said she found that settlement fair and
reasonable, while at the same time rejecting the company's
previous plan of reorganization.
She rejected the plan in part because an individual
investor from New Jersey, Nate Thoma, accused the four hedge
funds of insider trading. The official committee of equity
holders seized upon those accusations to try to prove the plan
was not drafted in good faith.
In addition to asking her to reject the company's plan, the
shareholders committee also asked Walrath to allow them to
pursue claims against the hedge funds that would essentially
prevent the funds from receiving the more than $1 billion they
Walrath interrupted the closing arguments of Kenneth
Eckstein, an attorney for Aurelius Capital Management LP, to
ask what remedies she might impose if she determines the hedge
fund traded on inside information.
Eckstein said the equity committee had essentially accused
the hedge funds of "misjudgment" and that to disallow repayment,
the court would have to make a finding of fraud. He said the court
would also have to find the funds had a fiduciary duty to other
creditors and investors.
Walrath was generally silent during most of the arguments,
which were dedicated to emphasizing key points that parties had
already made in their briefs filed with the court.
The case is In re Washington Mutual Inc, U.S. Bankruptcy
Court for the District of Delaware, No. 08-12229.
(Reporting by Tom Hals; Editing by Phil Berlowitz)
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