The collapse of Washington Mutual in the fall of 2008 and its rapid-fire sale of banking assets to JPMorgan Chase have become iconic symbols of the crisis in the U.S. credit markets. More than three years later, the WaMu holding company debtors left behind in bankruptcy are now making important news of their own.
In a recent decision that sent shock waves through Bloomberg terminals across the country, Delaware District Judge Mary F. Walrath permitted the WaMu equity committee to pursue disallowance of certain bondholder claims on the basis that a group of hedge-fund bondholders involved in negotiations over WaMu’s reorganization plan allegedly engaged in insider trading.1 The court recognized that the rarely used remedy of “equitable disallowance” was available if it could be shown that the bondholders had traded in WaMu’s securities while privy to nonpublic information gleaned through settlement negotiations with the WaMu debtors that “may have shifted towards the material end of the spectrum.” This recent decision from the Delaware Bankruptcy Court serves as an important bellwether for distressed investors pursuing activist strategies in bankruptcies, even as the bondholders pursue their appeal from the decision.
Factual Background
