Hedge funds that invest in bankrupt companies are demanding protection from insider-trading lawsuits before agreeing to take part in restructuring talks — a reaction by the industry’s top performers to an obscure court decision involving the 2008 collapse of Washington Mutual Inc., Bloomberg News reported today. The ruling by Bankruptcy Judge Mary Walrath let shareholders pursue allegations that four hedge funds involved in the bankruptcy traded on inside information about talks between WaMu, JPMorgan Chase & Co. and the Federal Deposit Insurance Corp. While the 2011 decision was ultimately rescinded, some funds and other investors in bankrupt companies have begun to demand “comfort orders” to protect themselves from such liability if they simultaneously trade in an ailing company’s securities and take part in its confidential bankruptcy talks, according to Bankruptcy Judge James Peck. “Funds are suffering from what I call the WaMu effect,” said Peck. Speaking at a ABI/St. John’s University School of Law symposium this month, he said that the ruling “spawned a new normal: Funds first want protection from risks.”
