Four hedge funds based in New York and New Jersey are being questioned in response to an accusation that they used insider information to trade Washington Mutual Inc. securities after the bank failed.
At least one official from one of the funds, Aurelias Capital Management, was deposed this week in New York City in relation to the accusation, according to court documents and people familiar with the situation.
Similar depositions are scheduled later this month for the other funds — Appaloosa Management, Centerbridge Partners and Owl Creek Asset Management.
The accusations arose in January during a hearing in U.S. Bankruptcy Court in Delaware on the proposed global settlement with creditors that would distribute the remaining WaMu Inc. assets of approximately $7 billion.
Nate Thoma, an independent investor, said in court that the funds used confidential knowledge they gained by helping draft WaMu Inc.’s reorganization plan to trade securities. It isn’t clear what specific securities might have been traded.
Judge Mary Walrath considered Thoma’s claim and granted “equity security holders” — a term that appears to cover security holders in several categories — the right to investigate Thoma’s allegations. According to court documents, in February she authorized depositions and subpeonas aimed at looking into the accusations.
A deposition of at least one Aurelias executive was taken in the New York City offices of Kramer Levin Naftalis & Frankel, the counsel for Aurelias, this week.
The hedge funds have firmly denied wrongdoing and called the accusations “defamatory,” according to court documents. The court docket shows that depositions for each of the four funds have been pushed back at least once.
If impropriety is found, the hedge funds could lose their share of WaMu’s assets being distributed as part of the bankruptcy process. That money, potentially a large slice of WaMu Inc.’s $7 billion in assets, could then be placed in the hands of WaMu equity holders, according to a person familiar with the case. If the windfall is big enough, it may even trickle down to common shareholders, though preferred shareholders’ claims are first in line.
I made a call Wednesday to Kramer Levin Naftalis & Frankel, the counsel for Aurelias, who said there was no deposition of an Aurelias executive on the firm’s schedule. However, court documents indicate at 10 a.m. on Wednesday, there was an Aurelias deposition scheduled in the company’s office.
Others familiar with the case confirmed the deposition had occurred. Topics of the deposition included the fund’s trading of “WMI or WMI Investment debt or equity securities” and “confidential information” that Aurelias received during negotiations on WaMu Inc’s proposed settlement to distribute some $7 billion in assets to its creditors, according to documents filed in court.
The next related deposition is of Appaloosa Management on May 12. The other two funds are currently scheduled to be deposed the week after that.
Since these allegations surfaced, all four funds dropped out of their roles in organizing the settlement plan, which has already been rejected once in the Delaware bankruptcy court because of what Walrath called “inappropriate releases.” I reported last week the case has already cost more than $400 million.
Washington Mutual Inc. was once the holding company of Washington Mutual, a bank based in Seattle that was closed by regulators on Sept. 25, 2008 and sold to JPMorgan Chase & Co., of New York.
Walrath is scheduled to make her decision on whether to approve the current settlement plan in early June.
