Judge: Delphi can subpoena investors


Accusations of unfair trading most likely are coming from Delphi’s creditors.

NEW YORK (AP) — A bankruptcy judge on Monday gave Delphi permission to subpoena investors who may have been short-selling the auto parts maker’s stock or debt.

Lawyers from Togut Segal & Segal LLP, who have been looking into the matter, said Delphi had received information that “one or more investors may have been trading in or shorting one or more of Delphi’s outstanding public securities.”

Brett Barragate, a lawyer specializing in commercial financing at Jones Day, said Delphi had no incentive to aggravate investors, so it was likely that the short-selling accusations were coming from creditors who thought it wasn’t right that the short-sellers should profit unfairly. Barragate said most likely the trading was happening in the bonds, not the company’s shares. Barragate is not directly involved in the case.

A group of investors will pump in as much as $2.55 billion into Delphi in exchange for equity in the reorganized company. The group includes six major funds or banks and an unnamed group of additional investors. The six main investors, led by Appaloosa Management LP, are not under investigation.

In its filing, Delphi said the additional investors include holding companies, special purpose vehicles, fund managers and affiliates of the six main investors.

Investors who short-sell typically do so by borrowing shares that they then sell, hoping that the price will drop and that they can buy the shares back at a bargain and return them for a profit. Investors can also trade a company’s debt, and in bankruptcy it is more difficult to track the trading of claims.

Delphi’s lawyers say the company learned that investors who were short-selling may have talked to the lead equity investor, which is Appaloosa, about the possible failure of the equity investment deal. If that deal fails, Delphi would be in a bind.

At least six of the unnamed additional investors either “acknowledged some short-selling activity or have refused to cooperate with the debtor’s investigation,” Togut Segal lawyers allege.

Troy, Mich.-based Delphi, a former General Motors Corp. parts subsidiary, has been in bankruptcy since October 2005. It faces an April 4 deadline to secure financing for its bankruptcy exit.

Appaloosa is joined by Harbinger Capital Partners Master Fund I Ltd.; Merrill Lynch, Pierce, Fenner & Smith Inc.; UBS Securities LLC; Pardus Capital Management LP, and Goldman Sachs Group Inc.

Delphi “reluctantly” hired the Togut Segal law firm to investigate the short-selling allegations, lawyers said. The company said it sought the subpoenas after it had received information from a stakeholder who said they had direct knowledge of inappropriate conduct from at least one investor.

“The whole thing is curious to me, if you assume they’re going to close this deal, it seems like they’re starting out with a pretty rocky relationship with the new investors,” Barragate said. “You have to wonder how is this going to work going forward.”

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