Hedge Funds May Have Used Insider Information

According to an article in the New York Times, U.S. Bankruptcy Judge Mary F. Walrath wrote that hedge funds may have received confidential information that was improperly used.  Judge Walrath dismissed a proposed settlement in Federal Bankruptcy Court regarding the restructuring of Washington Mutual.  Four hedge funds had played a role in Washington Mutual’s restructuring.  The opinion noted that the funds may have received confidential information that could have been used to trade in the bank’s debt.  Washington Mutual sought bankruptcy protection and its failure represented the largest bank failure in American history.  Shareholders had claimed that hedge funds had used insider knowledge to give them an edge in buying up loans of companies in bankruptcy at a steep discount.

The opinion discussed multiple funds, including Appaloosa Management, Aurelius Capital Management, Centerbridge Partners, and Owl Creek Asset Management.  Judge Walrath did not rule that the hedge funds had engaged in actual wrongdoing but that the allegations created a “colorable claim” that the funds had “received material nonpublic information.”