Wall St Trade Groups See Big Harm From Hedge-Fund Disclosure

Date: Friday, March 16, 2007
Author: Joseph Rebello, Dow Jones Newswires

Two trade associations that count among its members Wall Street's biggest financial-services firms asked a judge Thursday to reconsider an order forcing hedge funds to disclose trading activity, saying it would do "serious" harm to corporate bankruptcy reorganizations.

In papers filed with the U.S. Bankruptcy Court in Manhattan, the Loan Syndications and Trading Association and the Securities Industry and Financial Markets Association asked Judge Allan Gropper to rescind the order. Gropper last week instructed more than a dozen hedge funds involved in the Northwest Airlines Corp. (NWACQ) Chapter 11 case to disclose how much company stock and debt they bought, and at what price.

The associations said the order, "by requiring the disclosure of proprietary and highly confidential information, will in all likelihood erect a substantial obstacle to the participation of many stakeholders - in particular those sophisticated stakeholders who are the most likely to have the means and the experience to make a positive contribution toward reorganization."

The request to Gropper was made a day after the hedge funds facing his disclosure order appealed the decision to a federal district judge. At a hearing Thursday, Gropper also considered a request from some of the funds to reconsider. The funds, which had been ordered to disclose their trading data by Wednesday, have argued that forced disclosure would have a "chilling effect" on hedge funds' willingness to participate in bankruptcy reorganizations.

The Wall Street trade associations, whose members include Goldman Sachs Group Inc. (GS), JP Morgan Chase & Co. (JPM) and Merrill Lynch & Co. (MER), made the same argument Thursday. They said that "many, if not most" of their members were surprised by Gropper's decision, and that it could have a "serious detrimental impact" on future Chapter 11 reorganizations.

The associations said they took no position on the dispute between Northwest Airlines and the hedge funds subject to the disclosure order. Many of those funds bought Northwest's stock after the company began its bankruptcy reorganization, and have been upset by the company's Chapter 11 plan, which leaves stockholders with nothing. Some of the funds have argued that Northwest's stock could be worth as much as $33.50 a share in the event of a merger with another airline.

"Although the debtors and certain equity holders are at odds in these cases, there are countless examples in other cases where groups of stakeholders have cooperated, many times in the guise of 'ad hoc' committees, to create imaginative and strikingly successful solutions," the associations said in their court papers.

The funds facing the disclosure requirement include Owl Creek Asset Management, Anchorage Capital Group, Citadel L.P., Gracie Capital, Greywolf Capital Management, Latigo Partners, Marathon Asset Management, Mason Capital Management, Sandell Asset Management Corp., Savannah-Baltimore Capital Management LLC, Seneca Capital and Taconic Capital Advisors LLC.

In the papers they filed with the bankruptcy court, the funds said they currently face a "Hobson's choice" between "active participation in the (Northwest) bankruptcy and protection of their commercial interests."

Gropper ruled last week that Rule 2019 of the U.S. Bankruptcy Code required the funds to disclose their because they were conducting their activities in the Northwest bankruptcy case as an unofficial committee.

"Rule 2019 protects other members of the group - here, the shareholders - and informs them where a committee is coming from by requiring full disclosure of the securities held by members of the committee and the respective purchases and sales," Gropper said.