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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 While the 2011 decision was ultimately rescinded, some funds and other investors in bankrupt companies have begun to demand “comfort orders” to protect themselves from such liability if they simultaneously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.”

The hedge fund SAC Capital Advisors is moving closer to a plea deal with prosecutors that would force it to wind down its business of managing money for outside investors, punctuating its decline from the envy of Wall Street to a firm caught in the government’s cross hairs, the New York Times DealBook blog reported yesterday. An agreement to stop operating as an investment adviser is one feature of a larger agreement SAC is negotiating as it seeks to resolve insider trading charges. The plea deal would also require SAC to plead guilty to criminal misconduct and pay more than $1 billion in penalties, a record for an insider trading prosecution.

Lawyers for former MF Global Inc. Chief Executive Jon Corzine and his top lieutenants are opposing a bankruptcy trustee's bid to characterize his final 100 percent payment to the failed firm's commodity customers as an "advance," Dow Jones Daily Bankruptcy Review reported today. Corzine's lawyers, along with attorneys representing former No. 2 Bradley I. Abelow, ex-finance chief Henri J. Steenkamp and other top brass aren't objecting to trustee James W. Giddens' request to return property to the customers. But they are upset about his attempt to characterize his final $305 million payout to customers as an "advance" to be recouped over time from future distributions due from MF Global 's U.K unit.

A federal judge has signed off on the $100 million settlement of a class-action lawsuit over Residential Capital LLC's soured mortgage-backed securities, some $37.66 billion worth of investments that went bad in the collapse of the housing market, Dow Jones Daily Bankruptcy Review reported today. The settlement is a key element of the series of deals that make up ResCap's Chapter 11 plan, which is slated for confirmation review in mid-November before Bankruptcy Judge Martin Glenn.

Capitol Bancorp, which has been in bankruptcy since August 2012, will sell its stake in the remaining banks it owns in Michigan, Indiana, Nevada and New Mexico, the Lansing (Michigan) State Journal reported today. The bank development company, which sold its interest in Lansing-based Capitol National Bank earlier this year, said on Monday that it is selling its common stock in the banks to Troy, Michigan-based Talmer Bancorp Inc. The deal involves the Bank of Las Vegas, Indiana Community Bank, Michigan Commerce Bank and Sunrise Bank of Albuquerque, Lansing-based Capitol Bancorp said.

A former executive of Bank of America Corp.’s Countrywide unit testified she wasn’t part of a scheme to defraud Fannie Mae and Freddie Mac by selling them thousands of defective loans, Bloomberg News reported yesterday. The U.S. sued Bank of America in October, joining a whistle-blower action filed by another former Countrywide executive, Edward O’Donnell. The U.S. claims Bank of America and Countrywide, which the Charlotte, N.C.-based bank acquired in 2008, sold thousands of defective loans from 2007 to 2009 to the home-mortgage finance companies. The case is the first brought by the U.S. against a bank over defective mortgages to go to trial. Mairone, the only individual named as a defendant in the case, testified in response to questioning by her lawyer, Marc Mukasey. Mairone said she now works for JPMorgan Chase & Co. Countrywide engaged in the fraud to boost profits, making at least $165 million, Assistant U.S. Attorney Pierre Armand told jurors in his opening statements Sept. 24.

Five former employees of Bernard L. Madoff on trial over allegations they aided in his $17 billion fraud probably scrapped plea talks involving harsh prison terms to gamble for total exoneration from a jury, Bloomberg News reported yesterday. The U.S. had little reason to offer the group leniency in exchange for testimony against others, since Madoff and his top aides had already pleaded guilty, said Philip Hilder, a former federal prosecutor in Houston who represents defendants accused of white-collar crimes. The former employees, all of whom have pleaded not guilty, are Annette Bongiorno, Madoff’s personal secretary, who worked with him for 40 years and helped recruit investors; Joann Crupi, a manager of large accounts at Madoff’s investment firm; Daniel Bonventre, operations chief; and computer programmers Jerome O’Hara and George Perez.

A month after JPMorgan acknowledged that “severe breakdowns” had allowed a group of traders in London to run up $6 billion in losses, the bank has preliminarily reached a rare agreement to admit that the trading blowup itself represented reckless behavior, the New York Times DealBook blog reported today. The bank could settle with the Commodity Futures Trading Commission as soon as this week. Aside from admitting some wrongdoing, the bank is expected to pay about $100 million to resolve the case, a trading debacle last year that has come to be known as the London Whale episode. Unlike a settlement last month with the Securities and Exchange Commission, which largely took aim at porous controls and governance practices at the bank, the pact with the Commodity Futures Trading Commission zeros in on the bank’s actual trading practices. The agency, using new authority under the Dodd-Frank Act of 2010, argues that the bank’s trading was so large and voluminous that it violated a law preventing banks from recklessly using a “manipulative device” in the market for credit derivatives, financial contracts that let the bank bet on the health of companies like American Airlines. JPMorgan’s concession, part of a broader policy shift in Washington, D.C., that emerged in fits and starts over the last year, is the most aggressive step in reversing a decades-long practice of allowing banks to “neither admit nor deny” wrongdoing. The deal also could set a precedent that potentially exposes a bank to scrutiny — from the government and from shareholder lawsuits — whenever it builds a huge trading position that alters the market.

Wilbur Ross, whose Talmer Bancorp has agreed to invest $97 million to take over Capitol Bancorp’s stakes in its four remaining banks, said Tuesday that such deals without government assistance are fast becoming the model for rescuing troubled banks, the Wall Street Journal reported yesterday. “I’m seeing fewer FDIC-assisted transactions than there used to be,” said Mr. Ross, whose private equity arm W.L. Ross & Co. has invested more than $2 billion in recent years to buy up struggling regional banks in the U.S. “While the banks have varying degrees of problems, the real problem is at the holding company. We’re finding that [the bank level] is a more fruitful place to play to make acquisitions.” Ross’s Talmer, a Michigan-based holding company that he has used in recent years to buy a number of struggling banks in the Midwest, has agreed to be the stalking horse, or lead bidder for Capitol’s banks, which are slated to be sold next month at a bankruptcy auction.

McGraw Hill Financial Inc.’s Standard & Poor’s unit seeks information from the board of governors of the Federal Reserve to bolster its defense against U.S. claims it misled investors in mortgage-backed securities, Bloomberg News reported today. The credit rating company said that it served subpoenas on the Federal Reserve board as well as the Federal Open Market Committee and the Federal Reserve Bank of New York, according to a court filing yesterday. S&P is “seeking, among other things, information and analyses supporting or relating to specifically identified statements from high ranking government officials such as Ben Bernanke and Timothy Geithner about the housing market in 2006 and 2007,” it said in the filing, referring to the then-Fed chairman and the former head of the New York Fed. “S&P seeks to identify the data upon which the assessments, similar to those made by S&P, were made.” S&P, based in New York, and the Justice Department are exchanging pre-trial evidence in the U.S. lawsuit that accuses the company of knowingly downplaying the credit risks of residential mortgage-backed securities, as well as that of collateralized-debt obligations that contained those securities, in order to win more business from investment banks.