‘Mutually Beneficial’
“It’s a mutually beneficial relationship, a symbiosis,” Steven Wilamowsky, a bankruptcy partner at Bingham McCutchen LLP, said at the conference. “The estate needs them at the table no less than they need a seat.”
Funds have traditionally tried to avoid insider-trading questions by agreeing not to trade during certain periods, or putting up an “ethical wall” that separates their trading arm from the arm involved in the bankruptcy.
Securities laws that apply to stocks and bonds don’t cover bank debt, which also can be traded during a bankruptcy, said Gregory Milmoe, a partner at Skadden, Arps, Slate, Meagher & Flom LLP who advises on restructurings.
“There has always been this kind of curious tension in the bankruptcy practice as to whether securities law precepts actually apply,” Milmoe said in an interview.
‘Tremendous Discretion’
Determining whether funds are trading on inside information isn’t only a task for regulators, said Alistaire Bambach, chief bankruptcy counsel to the U.S. Securities and Exchange Commission.
“Courts have tremendous discretion to decide on the conduct in front of them,” she said at the conference.
In the WaMu case, U.S. Bankruptcy Judge Mary Walrath in Wilmington, Delaware, said on Sept. 13, 2011, that shareholders had established grounds to pursue claims against Aurelius Capital Management LP, Centerbridge Partners LP, Appaloosa Management LP and Owl Creek Asset Management LP. All four funds denied engaging in any insider trading, saying the information they got as participants in WaMu’s bankruptcy was either public or not material.
The funds, which together owned $2.54 billion in WaMu debt, used inside information from two rounds of settlement talks to buy and sell the bank’s securities, lawyers for shareholders said. Aurelius was accused of finding out through its law firm that the secret talks were going as the fund had hoped.