The Delaware bankruptcy court hearings this week in Washington Mutual Inc's endless Chapter 11 have been quite a mudfest. As OTC's crackerjack colleague Tom Hals reported yesterday for Reuters, Susman Godfrey, which represents the out-of-the-money WMI shareholders, is trying to blow up WMI's latest reorganization plan. Their ammo: accusations that four hedge funds holding about $2 billion in WMI bonds dominated the negotiations that led to WMI's plan. At the same time, the shareholders claim, the hedge funds engaged in insider trading in WMI debt, based on what they knew of settlement talks.
On Tuesday, with Aurelius managing director Dan Gropper on the stand, Parker Folse III of Susman tried to throw some of that mud at Fried, Frank, Harris, Shriver & Jacobson. Fried Frank represented four WaMu hedge fund bondholders until February 2011, when Aurelius terminated the engagement. (The termination came not long after Delaware bankruptcy judge Mary Walrath authorized the WMI shareholders to investigate their claims that the hedge funds profited from inside information about reorganization talks.)
Folse asked Gropper of Aurelius whether Fried Frank had leaked inside information about the talks to the hedge fund. Folse asserted that the law firm told Aurelius that negotiations were proceeding the way the hedge fund wanted.
Gropper, however, proved as adept at deflecting the Fried Frank mudball as he has been at dodging dirt throughout the hearing, according to Hals. The Aurelius managing director testified that he received no improper information about settlement talks from the law firm. He said Aurelius knew talks were underway in 2010-negotiations were publicly known-but the hedge fund learned nothing about the details of settlement proposals from their lawyers at Fried Frank.
"What you are suggesting would not be appropriate," Gropper reportedly told shareholders' counsel Folse of Susman Godfrey.
OTC tried hard to find out what the folks at Fried Frank thought of Folse's questions. I called and e-mail firm chairwoman Valerie Jacob and two of the partners who represented Aurelius, Shannon Nagle and Brad Scheler. Alas, none of them responded.
(Reporting by Alison Frankel)