MF Global Can Use Insurance for Defense Costs, Judge Rules

Jon Corzine and other former executives of MF Global Holdings Ltd. (MFGLQ), facing lawsuits over the company’s collapse, can use insurance funds to cover their defense costs.

U.S. Bankruptcy Judge Martin Glenn ruled in court papers filed in Manhattan bankruptcy court today that the so-called automatic stay that protects assets in a bankruptcy could be lifted to let insurers advance as much as $30 million.

“The automatic stay should be lifted so that directors, officers and employees may receive advancement or reimbursement of reasonable defense costs,” Glenn said.

The judge said his ruling was made without determining whether the proceeds of the insurance policies might belong to customers of the failed MF Global brokerage or creditors of its bankrupt holding company. He also said MF Global customers are qualified to object to the payment of defense costs.

The brokerage’s commodity customers objected to the proposal at a hearing this month, saying money that could cover funds missing from their accounts shouldn’t be used “to finance the defense of the culprits of the MF Global disaster.”

‘One Dollar Less’

“Every dollar that’s paid out of the policy is one dollar less to satisfy clams against each of the debtors if the commodity customers have tort claims against the parent company,” Glenn said at the April 2 hearing.

He said at the time that he would consider a cap on the outflow of money until further agreements could be reached by trustees for customer and creditor assets. Glenn said today that a cap of $30 million for defense costs is appropriate.

The insurance proceeds at issue total $375 million, Lorenzo Marinuzzi, a lawyer representing the trustee for MF Global Holdings, Louis Freeh, told Glenn on April 2. About 21 lawsuits filed against MF Global executives are expected to be consolidated.

A representative from one insurance company told the court that 33 individuals have so far sought reimbursement for $8.3 million from the company’s directors’-and-officers’ and professional-liability insurance.

MF Global Holdings, once run by Corzine, filed the eighth- largest U.S. bankruptcy on Oct. 31 after a $6.3 billion bet on bonds of indebted European countries prompted regulatory concerns, a credit downgrade and margin calls.

Customer Money

Corzine, a former New Jersey governor and once a co- chairman of Goldman Sachs Group Inc., may face liability if investigations show that he knew customer money might be used when transfers were ordered to cover an overdraft with the company’s biggest lender, JPMorgan Chase & Co.

Corzine testified before Congress that he asked for overdrafts with JPMorgan to be corrected, and that he never gave any instruction to misuse customer funds. He also said he didn’t believe anything he said could reasonably have been interpreted as an instruction to misuse customer funds.

James Giddens, the trustee unwinding MF Global’s brokerage unit, estimates a shortfall of $1.6 billion in what former customers are owed. He has said proceeds from the insurance policies may make up for some of that. At the same time, Giddens said he doesn’t oppose the payment of some necessary defense costs and suggested they should be monitored.

The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Tiffany Kary in New York at tkary@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net