I have been following the developments in the case of Washington Mutual, Inc. (a Washington State Corporation) since before the seizure on September 25th, 2008. I was a common stock shareholder at the time of the seizure, and I am currently a shareholder. Upon information and belief, I believe the following to be true.
The seizure of Washington Mutual, Inc. assets and the subsequent sale to JP Morgan Chase & Co. by the FDIC rendered many stakeholders claims worthless, including common stock, secured debt, and other unsecured creditors. In addition, the seizure and sale caused possibly thousands of Washington residents to have lost their jobs, other Washington residents have lost significant portions of their savings or retirement, some Washington Mutual employee pensions may be in jeopardy, and Washington state has lost a valuable contributor to the needs of the community.
Up until this time, many have speculated that the ultimate seizure and sale of Washington Mutual, Inc. assets to JP Morgan Chase & Co. has been the result of coercion by government officials in the Treasury Department, The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision in collusion with JP Morgan Chase & Co., media sources, and ratings agencies. Many have speculated that Washington Mutual was sacrificed to save a favored JP Morgan Chase & Co., and up until this time, this conjecture has remained in the realm of speculation.
However, recent revelations tend to indicate that the case of Washington Mutual, Inc. may be more than just a tragic case of a failed banking icon.
For instance, it was recently revealed that former Treasury Secretary Hank Paulson admitted to New York Attorney General Andrew Cuomo that he coerced CEO Ken Lewis by threat of ouster if Bank of America invoked a Material Adverse Change (NYSE:MAC) clause to block the acquisition of troubled Merril Lynch. Paulson also added, however, that he made this threat at the request of Fed Chairman Ben Bernanke. In addition, it is suggested that such action by the Fed and Treasury amount to coercing CEO Ken Lewis to withhold disclosure of materially significant information from shareholders regarding the deal. Source: Wall Street Journal.
As a further example, documents recently released as part of a Judicial Watch Freedom of Information Act request details further coercion by the government regarding TARP funds distribution. "If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance," Paulson's one-page list of talking points for a meeting with nine U.S. banks' chief executives said. "We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed." Accompanying Paulson were Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Corporation Chairman Sheila Bair and New York Federal Reserve Bank President Timothy Geithner (now current Treasury Secretary). Three and a half hours after the meeting was scheduled to begin, Paulson had obtained the bankers’ signatures on half-page forms along with the handwritten amount of the federal government’s investment, according to the documents. Source: Bloomberg.
Two months before Washington Mutual was seized, Treasury Secretary Henry Paulson warned then-CEO Kerry Killinger, "you should have sold to JP Morgan Chase in the spring, and you should do so now. Things could get a lot more difficult for you." Source: Seattle Times
In July of 2008, two months before the seizure Washington Mutual, Inc. was denied protection from illegal short-selling by the SECs naked short-sale ban that protected 19 financial institutions (eight of which were at Paulson's TARP meeting). Data through June 2008 shows that at one point that month "failures to deliver" (an indicator of illegal or naked short-selling) of Washington Mutual’s stock reached 9 million shares. From June 5 to June 19 there were, on any given day, at least 1 million WaMu shares that had "failed to deliver."
According to the OTS fact sheet released after the seizure, Washington Mutual was considered to meet OTS capitalization requirements and was in fact a solvent bank. In forward looking third quarter forecasts to the media, CEO Alan Fishman related that Washington Mutual, Inc. had access to over $50 billion in capital and enough liquidity to meet fixed obligations through 2010. According to some reports, the OTS seized Washington Mutual at the behest of the FDIC. The subsequent sale to JP Morgan Chase & Co. was conducted hastily on a Thursday evening, in a highly irregular auction that typically is designed to take place 180 to 360 days after seizure. The price paid was $1.88 Billion for a company with over $300 Billion in assets, over $20 Billion in book value, and over 2200 branches.
While all these revelations can suggest that Washington Mutual, Inc. was not a failed institution, and they can support speculation that Washington Mutual was improperly seized, recent court filings in Federal District Court in Texas and U.S. Bankruptcy Court in Delaware suggest something more sinister.
For example, the filing in U.S. Bankruptcy Court in Delaware, referring to a Texas State Court action (since removed to Federal District Court for the Southern Disrict of Texas (3:09-cv-00044)) is located at the following link:
In the above-referenced filing, it is alleged that wrongful conduct of JP Morgan Chase & Co. includes
(i) entering into false negotiations with the Washington Mutual, Inc. under the guise of a good-faith bidder during the summer of 2008;
(ii) gaining access to Washington Mutual's confidential and proprietary information through a variety of deceptive practices; and
(iii) disclosing Washington Mutual's confidential information as well as false information to the media and investors in an effort to drive down WMI's credit rating and stock price, cause depositors to withdraw deposits as a result of fear, and hamper efforts of Washington Mutual, Inc. to find a purchaser for itself.
The filing suggests that additional claims that could arise in the bankruptcy proceeding might include, without limitation, unfair competition, tortious interference, interference with prospective economic advantage, breach of contract, misappropriation of confidential information and trade secrets, and conversion. The filing further suggest that by way of these claims, JPMC may be held responsible for the destruction of Washington Mutual, Inc. and the total losses suffered by its creditors and shareholders.
In addition, the underlying Texas action alleges that JP Morgan Chase & Co. used plants or moles (e.g., the Rotella allegations) inside of Washington Mutual, Inc. for the purposes of gaining insider information and exploiting that information for economic gain. Recent news reports have stated that in 2005, a small group of senior risk managers drew up a plan to limit risky lending practices, but a new executive team at the bank nixed the plan. Thus, it is conceivable that if the allegations of insider plants are true, these same plants could have knowingly undertaken or encouraged risky or fraudulent lending practices in an effort to destroy Washington Mutual's reputation and shareholder value.
Under Federal Rule of Civil Procedure 11(b), the above-identified filings are subject to the requirement of certification "that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances . . . ." Thus, whereas previous revelations in the news or government papers regarding Washington Mutual's situation might command a relatively lower level of trust, the allegations in the above-identified filings demand the additional respect that the Federal Rules of Civil Procedure are designed to command.
The sum of these allegations is that, if any number of the allegations are true, the activities of JP Morgan Chase & Co.'s leading up to the seizure and sale of Washington Mutual, Inc. assets have the capacity of implicating the laws of unfair competition, unjust enrichment, fraud, securities violations at the expense of Washington resident investors, breach of contract (confidentiality agreement), breach of fiduciary duty, conversion, etc.
While many of such violations may be the province of federal law, it is also clear that the magnitude of the allegations and potential extent of damages suffered by Washington residents would likely raise issues of state law violations. Washington residents deserve to have a fair and complete investigation on the subject by the Attorney General of the State of Washington and to have themselves availed of Washington State law if such an investigation deems this an appropriate course of action.