On September 13, 2011, Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware granted standing for an equity committee in In re Washington Mutual, Inc. (“WaMu”) to seek “equitable disallowance” of claims held by noteholders that had traded claims after engaging in negotiations with WaMu over the terms of a global restructuring. The decision highlights the question of whether creditors may engage in restructuring negotiations with a debtor and continue to trade in claims without establishing an ethical wall restricting traders from access to information related to the negotiations.

In WaMu, the equity committee argued that “equitable disallowance” of the claims held by certain hedge funds that held Washington Mutual notes (the “Noteholders”) was warranted because the Noteholders had allegedly traded securities of the Debtors while in possession of material, non-public information concerning plan-related settlement negotiations. The Noteholders had signed confidentiality agreements with WaMu that required them either to establish an ethical wall or to refrain from trading during two specified limited duration confidentiality periods. In exchange for the Noteholders submitting to those restrictions, WaMu agreed to make cleansing disclosures of material, non-public information at the conclusion of the specified confidentiality periods, so as to permit the Noteholders to resume trading without an ethical wall. Following the confidentiality periods and cleansing disclosures by WaMu, certain of the Noteholders traded in WaMu debt. WaMu did not include in its cleansing disclosures the fact that negotiations were ongoing or the content of the various settlement term sheets that had been exchanged among the parties to the negotiations. Despite the fact that the discussions and term sheets had not resulted in any agreement in principle, the equity committee argued that the fact of the ongoing negotiations and the settlement terms under discussion constituted material, non-public information.

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