SEC Probes

Comfort orders aren’t bulletproof, according to Peck and Fisher. They don’t protect from SEC probes, and other creditors can still sue over claims that the funds violated rules barring acts that give some creditors an advantage over others in the same class, Fisher said.

Specific circumstances will determine what constitutes an insider and what information is material, Fisher said. For example, a hedge fund that says it doesn’t want material nonpublic information still might ask a lawyer involved in settlement talks whether closing arguments in the underlying lawsuit are going forward at a certain date.

“If I tell them, ‘No, closing arguments are going to be put off,’ the party could know that a settlement is close,” Fisher said. “There’s lots of room for mischief.”

Insider-trading concerns also can be addressed through what some lawyers refer to as “big boy” letters, which state that parties won’t sue each other over a transaction that may involve material nonpublic information, Milmoe said.

‘Peer-Group Pressure’

“Powerful peer-group pressure” prevents the parties from suing, Milmoe said. A hedge fund that signed a big boy letter and then accused another fund of insider trading probably would be excluded from future deals, he said.

Peck confronted the issue of comfort orders in the ResCap bankruptcy when some bondholders refused to receive nonpublic information without one. Members of the group, which held more than $900 million of ResCap notes due this year, said they couldn’t take part in mediation over how much interest they would collect on the notes because of “uncertainty as to whether such participation would expose them to liability.”

The group, which included Appaloosa, Loomis Sayles & Co. and David Kempner Capital Management LLC, asked Peck to enter an order like the one issued in Vitro’s case on behalf of Aurelius, billionaire Paul Singer’s Elliott Management Corp. and other holders of more than $720 million of the company’s senior notes.

“I was generally unsympathetic to the request,” he said. After an impasse of several months, however, Peck entered an order July 29 that he described as the new “gold standard for comfort orders of this type.”