Delphi judge moves ahead in Appaloosa fraud case

A judge said he might have erred in an earlier ruling on fraud charges.

NEW YORK (AP) — A bankruptcy judge said Wednesday he may let Delphi pursue wider fraud claims against the Appaloosa Management hedge fund, which backed out of a deal to invest $2.55 billion in the auto supplier.

Appaloosa had led a group of investors to inject as much as $2.55 billion into Delphi in exchange for stock once it reorganized, but the investors withdrew from the deal in April. Delphi Corp. sued Appaloosa in May, accusing it of deliberately and secretly working to sabotage Delphi’s effort to satisfy a condition of their deal: that Delphi should raise $6.1 billion in exit financing to support its emergence from Chapter 11.

On Wednesday, lawyers for Appaloosa sought the right to improve its position in the lawsuit, but in doing so the hedge fund may have opened the door to wider charges.

Judge Robert Drain had ruled in July that Delphi could pursue a claim that Appaloosa had misrepresented its intentions. Delphi lawyers argued that Appaloosa manager David Tepper, a Goldman Sachs alum and well-known hedge fund manager, gave his verbal commitment to do the deal when he testified in December 2007. They described his testimony as a declaration that “a deal is a deal,” which to them meant that Appaloosa’s withdrawal constituted fraud.

But Drain dismissed other fraud charges, related to Appaloosa’s reported behind-the-scenes plotting to make sure it wouldn’t ultimately have to invest. Delphi lawyers claimed that investors in the Appaloosa-led group tried to get lenders to withdraw their commitments for the $6.1 billion in exit financing that Delphi needed to do the Appaloosa deal. The auto supplier also said there had been short-selling that further hindered its efforts to get the loans.

However, Drain said Wednesday he possibly made a mistake when he dismissed those other fraud charges Delphi had pursued.

“I have real doubts whether I should have dismissed the fraud claims, other than the claim of misrepresentation,” the judge said in court.

But while aspects of the fraud and breach of contract lawsuit were thrown out, Drain actually left Appaloosa more liable than two other hedge funds that were part of an investor group.

Unlike Appaloosa, Harbinger Capital Partners Master Fund I Ltd. and Pardus Capital Management LP were allowed to maintain their “corporate veil” to protect them from the actions of subsidiaries they had created to invest in Troy, Mich.-based Delphi.

Appaloosa Management LP, based in Chatham, N.J., had argued earlier that its liability in the deal should be capped at $250 million. Parent Appaloosa sought to be treated more like the other two funds, but the judge did not rule on that Wednesday. Instead, he asked both sides to submit more arguments about the fraud claims to the court by Oct. 21.