WaMu Trustees Seek Goldman Probe
Trustees for creditors left unpaid after the biggest banking failure in U.S. history say they suspect Goldman Sachs Group Inc. (GS) of targeting Washington Mutual Inc., in a naked short-selling scheme.
If those suspicions prove out, the alleged wrongs could translate into a damage award for those still looking for money from Washington Mutual's Chapter 11 case, according to papers filed Friday in the U.S. Bankruptcy Court in Wilmington, Del.
Goldman Sachs spokesman Michael DuVally declined comment on Monday. Creditors are asking for a court order entitling them to investigate Goldman Sachs' trading activities for evidence of naked short selling.
Naked short selling involves trading in shares that an investor doesn't own, doesn't borrow and doesn't deliver. The phantom stock trades flood the market with what appear to be shares available for sale, and they drive down the stock price.
Creditor attorneys say there's "unmistakable" evidence Washington Mutual was victimized by naked short sales in the months leading up to its September 2008 bankruptcy filing. They want to know if long-time investment banker Goldman Sachs was involved in "abnormally high levels' of short selling of Washington Mutual's stock.
Washington Mutual was the holding company that owned Washington Mutual Bank, or WaMu, a thrift swept under in 2008 after indulging in the subprime lending boom. Its final affairs are in the hands of a bankruptcy trust.
Goldman Sachs was called on by Washington Mutual, charged with shoring up market confidence and locating a buyer, court papers say.
"Instead of providing this promised support to [Washington Mutual], it appears that Goldman Sachs may have decided it could make more money by betraying its client," court papers allege.
If they get proof, creditors believe they can hit Goldman Sachs with a suit for damages over breach of its contract as investment banker for Washington Mutual.
A court-appointed examiner weighed the chances of suing Goldman Sachs for holding a short position in the stock of its client, Washington Mutual, but dismissed it, noting the investment banking contract authorized Goldman Sachs to "hold long and short positions" in the stock.
Creditors attorneys say that only applies to "legal" shorting of the stock, not "unlawful naked shorts or...participation in a scheme to artificially depress [Washington Mutual's] stock price."
They cited settlements Goldman Sachs signed in 2007 and 2010 ending Securities and Exchange Commission claims it participated in illegal short-sale trading.
A wide-ranging Chapter 11 plan settlement meant full recovery for many top-ranking creditors, but left shareholders and creditors who ranked at the bottom of Washington Mutual's pile of unpaid debts still looking for funds to make good their losses.
The request to probe Goldman Sachs is part of the cash chase, which is being led by the same lawyers who championed Washington Mutual's shareholders in bankruptcy court, from the firm of Susman Godfrey LP.
The bankruptcy settlement ended much of the litigation stemming from WaMu's demise, but creditors say Goldman Sachs is still fair game.
The most recent figures indicate there was nearly $368 million in cash still sitting in the Chapter 11 coffers at the end of September as efforts continue to scrape up value for unpaid creditors.
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