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Enron Ruling Fuels Discontent
Hedge funds, which well-represented in the distressed-debt market, could be big losers thanks a recent ruling in the Enron Corp. bankruptcy.
Hedge funds, which well-represented in the distressed-debt market, could be big losers thanks a recent ruling in the Enron Corp. bankruptcy. When U.S. Bankruptcy Judge Arthur Gonzalez of Manhattan ruled earlier this year that buyers of creditor claims could forfeit it all if they acquired it from a party that may have engaged in “inequitable conduct.” In other words, even if the hedge fund or other investors bought the claim from a creditor and did nothing wrong, it could lose its claim because of the actions of the previous holder. Dow Jones Newswires said an immediate effect of the March ruling was that claims involving Austrian bank Bawag “ceased entirely” after it had been linked to the collapse of futures broker Refco. The financial industry isn’t just sitting back on the matter. DJN reports that several industry groups, including the Bond Market Association and International Swaps & Derivatives Association, and big firms such as Merrill Lynch and Citibank,have filed their objections to the ruling. Others have complained that the decision could have a negative impact on capital markets as well. No word yet on the impact of their protests.