WASHINGTON (CN) - A federal judge ruled bondholders of the now defunct Washington Mutual Bank can sue JP Morgan Chase for allegedly damaging WaMu's credit rating in order to buy it at a fire sale price.
But in doing so, U.S. District Judge Rosemary Collyer also dismissed the bondholders' claims of breach of confidentiality agreement and unjust enrichment.
The bondholders sued JP Morgan in 2009, claiming that the bank spread misinformation about WaMu that caused credit raters and federal regulators to doubt the bank's ability to survive the financial crisis of 2008.
"As a result of these alleged nefarious activities, JPMC was able to acquire WaMu at a fire-sale price and the bonds were rendered worthless," states Collyer in her ruling.
According to the ruling, JP Morgan signed off on a confidentiality agreement with WaMu in 2008 regarding the possible acquisition of the bank, but then allegedly revealed some of the information to federal regulators to make WaMu appear as though it was in financial shambles. The bondholders say JP Morgan also gave the information to the credit rating agencies, but overestimated WaMu's loan losses and underestimated its liquidity and financial health.
According to the bondholders, JP Morgan's scheme was successful. The bank received the government's blessing and bought WaMu with no liability to the investors holding bonds in the bank.
The lawsuit was original filed in Texas, but was ultimately removed to the District Court for the District of Columbia, where the bondholders lost, but successfully appealed after a judge found that they couldn't seek a remedy administratively.
Judge Collyer dismissed claims that JP Morgan breached the confidentiality agreement and was unjustly enriched, but allowed the first count-tortious interference with an existing contract - to proceed to discovery.
"Count I of the amended complaint charges JPMC with underhanded commercial activities that predate FDIC's involvement (much less FDIC-Receiver) but are alleged to have directly injured these bondholders intentionally," the judge states. "Neither WaMu nor its assets is affected by the Bondholders' Count I. These conclusions open no Pandora's Box: one presumes that underhanded commercial activities designed to drive an acquisition target into FDIC receivership are rare; the nature of the bondholders' specialized contractual relationship with WaMu distinguishes them from other creditors; and it does not shock the conscience if misconduct breeds its own rewards."
The judge ordered that a discovery schedule be submitted in two weeks.
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