August 24, 2011 / 9:57 PM / in 6 years

WaMu judge weighs closing arguments

4 Min Read

* 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 (Reuters) - 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 trading.

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 [ID:nN1E76D1M6]

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 $1.9 billion.

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 are owed.

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) (; 1-646-200-2558; Reuters Messaging

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