Northwest Court Decision Could Deter Hedge Funds

A fight between Northwest Airlines and a group of hedge funds to force each other to tip their hands on investment decisions and discussions has led to what could be a pivotal ruling on hedge fund disclosure.

U.S. Bankruptcy Judge Allan Gropper was expected on Wednesday to make a final decision after ruling last week that a group of 13 investors must disclose information about the size of their equity stakes in Northwest Airlines Corp., when they bought and sold, and what they paid.

The outcome has the potential to deter hedge fund involvement in companies under bankruptcy court protection, restructuring lawyers say, which could take away one of the newer tools companies use to help them exit bankruptcy.

"It's a big deal for the hedge funds," Kirkland & Ellis LLP restructuring partner Jonathan Henes said. "Hedge funds just cannot disclose their trading histories and what they hold and what they paid."

Henes said that if Gropper held firm on his decision, the larger hedge funds that can afford to hire their own attorneys would continue to do so. Smaller firms, though, would be less likely to join ad hoc equity committees if they are required to disclose their trading information, he said. They don't often join official committees, which are bound by a fiduciary duty to all creditors and not subject to the rule Gropper has applied in this instance.

"From the debtor's point of view, this is very helpful info," said J. Gregory Milmoe, a bankruptcy partner at the law firm Skadden Arps Slate Meagher & Flom. "From the hedge fund perspective, this is potentially devastating proprietary information."

A group of 13 hedge funds led by Owl Creek Asset Management LP plans to ask Gropper to reconsider his decision to force disclosure of their trading activity. The group said in a Jan. 19 filing that at that time it collectively held claims worth an estimated $264.3 million and more than 19 million shares, some of which was acquired after Northwest had already entered bankruptcy.

"Each Chapter 11 has become it's own mini-trading exchange," Henes said, emphasizing that the hedge funds consider purchase prices and dates to be among their most valuable information.

Late Tuesday, representatives of Owl Creek and two other investors - Mason Capital LP and Latigo Partners LP - filed statements in an effort to convince the judge to reconsider his order. They said they do not normally share trading data with their own investors or anyone outside the fund, and that doing so would damage their bargaining positions. The investors also argued that because the shares are publicly traded, "providing the specific dates of acquisition is tantamount to providing the price."

In many bankruptcy cases, debt holders who ended up with equity at the end of a case are considered unfortunate. That is not always the case any longer, Milmoe said.

"In this day and age, with the financial instruments and some of the players so much more sophisticated, there may well be strategies where people get rich by a company failing," he added.

That makes it even more crucial for debtors to know what factors could influence its shareholders.

An official committee of unsecured creditors objected to Owl Creek's request that it be exempt from the disclosure rule. Because they formed a group and asked to be recognized as an official equity committee in January, the hedge funds subjected themselves to the disclosure rule, creditors argued.

"They cannot now hide behind the cloak of 'trade secrets' and refuse to make public information required by the bankruptcy rules," lawyers for the creditors committee wrote in opposition papers.

Lawyers for Bloomberg News, the financial news division of Bloomberg LP, also opposed the Owl Creek request, asking a judge for permission to intervene to ensure that the public at large is served.

"What happens to Northwest is a matter of significant public interest," Bloomberg News lawyers wrote in its objection.

"Main Street, as much as Wall Street, has a vested interest in the outcome of this proceeding," the Bloomberg lawyers wrote.

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AP Business Writer Stephen Singer in Hartford, Conn., contributed to this story.

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