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Hedge Funds, Investors in Bankruptcy May Keep Prices Secret, New Rule Says

Date: Thursday, June 10, 2010
Author: Bloomberg

Distressed-debt investors shouldn’t have to disclose the price or purchase date of their securities when they participate in bankruptcy cases, a U.S. judiciary advisory group said.

Hedge funds and other so-called vulture investors that form a group during a bankruptcy won’t be forced to make public details of their debt holdings under a proposed change to the bankruptcy code drafted by an advisory panel of the Administrative Office of the U.S. Courts.

The move is a victory for funds that invest in the debt of ailing companies and sometimes seek to take control after a bankruptcy. The funds opposed an earlier plan by the rules committee to have investor groups to reveal the date they acquired a company’s debt and, if ordered by a judge, the price.

“We consider that confidential and proprietary information, and we don’t share it with anybody,” said Kirk Wickman, chief administrative officer for Angelo, Gordon & Co., a prominent distressed investing fund that lobbied against the original proposal.

The rule, known as 2019, would apply to any creditors or equity holders that team up to advocate for positions, a common tactic in bankruptcy cases. The rule, already part of U.S. bankruptcy law, is being rewritten by the judiciary to clarify and broaden the disclosure provisions.

‘Very Unsettled’

“I think it was very unsettled where this rule was going to go,” said Elliot Ganz, general counsel for the Loan Syndications and Trading Association, an industry group that pushed for the latest changes.

While distressed funds sought to scale back the disclosure requirements to protect what they see as confidential information, U.S. Bankruptcy Judge Robert Gerber in Manhattan told the rules committee at a hearing earlier this year that price and date purchase is “sometimes relevant,” according to his written testimony.

Gerber, who oversaw the bankruptcy of General Motors Corp. and Adelphia Communications Corp., said at the hearing that judges should retain the power to require disclosure of both date and price information.

He is “unwilling to accede to the notion” that a court’s power over disclosure “could ever be circumscribed by parties’ claims to the confidentiality of their trading practices,” he said.

Judge’s Power

The rules committee’s proposal states that judges will retain the power to order disclosure. Gerber’s office said today that he declined to comment.

The committee removed the provisions about prices and dates after investors complained, John Rabiej, the chief of the committee’s support office, said in an interview today.

“They all seemed to be satisfied with that,” he said.

Investor groups would still have to identify their members and reveal the “disclosable economic interest” they each hold in a company, including debt and derivatives, according to the proposal.

Investors groups will only have to reveal the date of a purchase if they claim to represent a class of creditors outside the group, according to Ganz.

The latest proposal next will be considered by other parts of the judiciary before it goes to the Supreme Court and ultimately Congress for review before taking effect on Dec. 1, 2011, Rabiej said.