A federal judge Friday reined in a probe of leaks from the hard-fought bankruptcy of rare-earths producer Molycorp, handing a win to Bloomberg News.

Judge Christopher S. Sontchi said the Molycorp disclosure order "is overly broad and needs to be narrowed," at a hearing Friday morning in U.S. Bankruptcy Court in Wilmington, Del.

The news organization had challenged a court order issued last week by Judge Sontchi, which required some 123 people to disclose what they had told Bloomberg reporters about Molycorp.

The judge reversed his order after urging from Bloomberg to weigh First Amendment interests against the court's power to control the bankruptcy proceeding. The judge ordered the destruction of the disclosure documents which were filed Tuesday in the Wilmington bankruptcy court.

The judge said a more tailored approach is needed to replace his original order which, according to Bloomberg, "sweeps in, and requires a report to the government regarding, two months worth of newsgathering by Bloomberg that is not alleged to involve any violation of a court order or any law or rule."

Molycorp and its creditors, which crafted the original order in the first place, argued unsuccessfully that it should remain standing.

A producer of elements used in technology, Molycorp is deep in debt, up for sale and caught in clashes between powerful groups of creditors. Private-equity firm Oaktree Capital Management is on one side and a coalition of bondholders on the other.

Exchanges in the case have been bitter and heated, with debates about the auction process at the heart of disputes. The disclosure order grew out of a chambers conference with the judge, and was drafted by parties engaged in finger-pointing over a number of issues.

The Bloomberg stories name bidders at the Molycorp pre-auction and disclosed that a mediation had failed.

Those disclosures, according to lawyers for Molycorp and its creditors, ran afoul of the agreed rules of engagement in the bankruptcy case.

They also hit a sore spot in the bankruptcy battle, involving what the distressed business is actually worth. Molycorp, according to a chapter 11 plan backed by Oaktree, says its business was worth less than what some potential purchasers were willing to offer for it, a revelation that casts a shadow on the auction and reorganization efforts.

Bloomberg pointed out that the disclosure order didn't reflect any of the fine points about court orders and what was considered out of bounds in terms of talking to reporters. As a court order, it is an intrusion of governmental authority into the protected area of speech, and should be narrowly tailored to accomplish its legitimate purpose without collateral damage to constitutional rights, the news organization argued.

Molycorp and its creditors defended the disclosure order on the grounds that all the people forced to file sworn statements with the court had done so voluntarily.

On that point, as well, the judge sided with Bloomberg's lawyer Thomas Henthoff, who said the consent "was not freely given."

Write to Peg Brickley at peg.brickley@wsj.com

(END) Dow Jones Newswires

January 22, 2016 13:15 ET (18:15 GMT)

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