FDIC settles with former Washington Mutual executives: sources

SEATTLE, Wash. ― Three former executives of Washington Mutual Inc. have agreed to a payment of about $75 million to settle a lawsuit brought by the Federal Deposit Insurance Corp. over their role in the biggest bank failure in U.S. history, two sources familiar with the talks said on Tuesday.

The three — former CEO Kerry Killinger, former COO Stephen Rotella and the company’s former home lending chief, David Schneider — were sued by the government’s deposit insurer last March.

The payment will be largely funded by Washington Mutual’s remaining liability insurance for directors and officers, the sources said. The FDIC originally sought $900 million.

One source said the personal contribution from the three, who collected $95 million in compensation between 2005 and 2008, would be “a meaningless amount.”

The settlement was first reported by the Wall Street Journal.

The FDIC declined to comment but is expected to make an announcement later on Tuesday.

Attorneys for Killinger, Rotella and Schneider did not immediately return calls seeking comment. The three have denied wrongdoing.

Washington Mutual’s banking business was seized by regulators in September 2008, at the height of the global financial crisis. The bank was immediately sold to JPMorgan Chase & Co for $1.88 billion, with no cost to the FDIC for covering deposits.

The holding company filed for bankruptcy the day after the bank seizure.

On Monday, the holding company reached an agreement with shareholders that could clear the way for it to end its three-year stay in Chapter 11 and begin distributing $7 billion to creditors.

An investigation by the U.S. Senate found that Washington Mutual contributed to the U.S. housing and financial crisis by adopting a compensation policy that encouraged its employees to ignore safety controls and crank out shoddy home loans.

Those loans were packaged into bonds and sold as top-notch securities. When U.S. housing market collapsed, those bonds plummeted in value and spread financial losses around the globe.

The FDIC brought its case in federal court in Washington state, accusing the three former executives of gross negligence and reckless disregard for the long-term safety of the bank.The lawsuit was unusual in that it also named the spouses of Killinger and Rotella as defendants and accused them of helping their husbands hide assets, such as homes, from creditors. The claims against the spouses will be dropped and they will not contribute to the settlement, one source said.

Hedge funds appeal ‘gross injustice’ of Washington Mutual ruling

WILMINGTON, Del. ― Four hedge funds appealed on Tuesday a ruling in the Washington Mutual Inc. bankruptcy that found viable claims they had engaged in insider trading, an opinion one fund called a “gross injustice.”

The hedge funds sought an expedited appeal of a ruling earlier this month by Delaware Bankruptcy Judge Mary Walrath, in which she rejected Washington Mutual’s plan to distribute $7 billion to creditors for a second time.

“The opinion rewrote the rules for these cases retroactively — invoking a series of new legal standards that would radically remake federal securities and bankruptcy law,” said Aurelius Capital Management LP, one of the four hedge funds, in court papers.

In addition to rejecting the plan, Walrath also ruled that shareholders, who were expected to get nothing in the reorganization, presented a viable claim that the hedge funds engaged in insider trading.

Shareholders have accused the hedge funds of using information they gleaned from their role in helping draft Washington Mutual’s reorganization plan to make big profits trading the company’s securities.

Walrath granted shareholders standing to pursue claims against the hedge funds, with the goal of preventing them from collecting the roughly $2 billion they are owed by Washington Mutual.

The four hedge funds — Owl Creek Asset Management LP, Appaloosa Management LP, Centerbridge Partners LP and Aurelius — have denied the allegations.

The funds specialize in buying large blocks of securities issued by bankrupt companies for pennies on the dollar. The funds then hire top-notch lawyers to try to influence or even control the reorganization process in a bid to beef up their payout.

The funds often band together in ad hoc committees with large cumulative positions in a company’s debt. Walrath found such committees have a fiduciary duty to other creditors, a finding legal experts said could make it harder for large bankrupt companies to reorganize.

In their papers, the funds also said the ruling could make bankruptcy courts a favored venue for bringing types of securities litigation that has been criticized as frivolous and which Congress has been trying to discourage.

Washington Mutual has lingered in bankruptcy since September 2008, when regulators seized its savings and loan operation in the biggest bank failure in U.S. history.

The banking business was immediately sold to JPMorgan Chase & Co. for $1.88 billion and the holding company filed for bankruptcy the next day.