‘Ethical Wall’
Creditors “who want to participate in settlement discussions in which they receive material nonpublic information about the debtor must either restrict their trading or establish an ethical wall between traders and participants in the bankruptcy case,” Walrath said in the ruling.
She later agreed to rescind her order, which had been on appeal. In doing so, she was criticized by shareholders’ lawyers who claimed the hedge funds’ were seeking to restore their reputations. Seattle-based WaMu had sought to resolve the dispute so it could end the litigation and negotiations that had kept it in bankruptcy for three years.
Walrath’s initial decision “shines a light on something that is not easy to grapple with,” said Eric Fisher, a partner at Dickstein Shapiro LLP and a former assistant U.S. attorney in New York. The primary objective of hedge funds -- to make money -- often conflicts with the chief goal of bankruptcy: to be fair to all creditors, he said at the St. John’s conference.
‘Seems Reasonable’
While hedge funds can help finance a company through tough times and reorganize, “it seems reasonable to require they restrict trading or establish an effective wall, as a precondition to obtaining access to material nonpublic information,” Fisher said in an interview after the conference.
Many funds, however, don’t want to limit trading or erect a wall between their trading operation and participants in bankruptcy talks, Peck said. Such walls are seen as costly and burdensome, and trading restrictions may be unacceptable to hedge funds in volatile markets, he said.
“You want to know what the rule is so you can comply with the rule,” Dan Kamensky, a senior vice president at Paulson & Co., the New York-based hedge fund, said at the conference.
Paulson recently agreed to trading curbs while taking part in talks to resolve a lawsuit between general creditors in the General Motors Corp. bankruptcy and holders of notes in the automaker’s Nova Scotia unit.
Peck, who oversaw that mediation, declined to discuss specifics of the GM case. A settlement of that dispute goes before a bankruptcy judge for review on Monday.