DOVER, Del. – A Delaware bankruptcy judge on Tuesday refused for the second time to approve bank holding company Washington Mutual Inc.’s reorganization plan.
The judge said WaMu’s committee of equity security holders had made credible claims that hedge funds supporting the plan engaged in insider trading of WMI securities based on information they obtained during the bankruptcy.
The hedge funds, referred to in court documents as the settlement noteholders, denied the allegations of insider trading. But Judge Mary Walrath said their conduct raises questions about how they treated settlement discussions in which they were involved.
The judge also said she was concerned that the bankruptcy case, already three years old, could “devolve into a litigation morass,” and that as the case drags on, potential recoveries for all parties dwindle.
As a result, Walrath ordered that the parties engage in mediation. She scheduled a status hearing for Oct. 7.
Washington Mutual’s reorganization plan is based on the proposed settlement of lawsuits that pitted Washington Mutual, the Federal Deposit Insurance Corp. and JPMorgan Chase against one another after the FDIC seized WaMu’s Seattle-based flagship bank in 2008 and sold its assets to JPMorgan for $1.9 billion in the largest bank failure in U.S. history.
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