Restructuring and Bankruptcy Alert: Washington Mutual Decision Reinforces Applicability of Insider Trading Laws to Participation in Bankruptcy Negotiations

Sullivan & Cromwell LLP - September 27, 2011

In a September 13 opinion denying confirmation of debtor Washington Mutual, Inc.’s modified plan of reorganization, the Honorable Mary Walrath of the United States Bankruptcy Court for the District of Delaware issued a clear reminder that general insider trading principles apply to material non-public information learned in bankruptcy plan negotiations.  Judge Walrath found that the equity committee had stated a colorable claim against four hedge funds for violations of U.S. insider trading laws.  Although the Court did not conclude that the hedge funds had violated U.S. securities laws, the decision raises questions as to the precautions distressed investors should consider when participating in bankruptcy plan and settlement negotiations.