MF Global Inc.’s brokerage customers may be able to recover some of their lost funds from insurance proceeds meant to pay defense costs of the failed brokerage’s directors and officers, said a trustee overseeing the brokerage’s wind-down.
James Giddens, the trustee, said proceeds of so-called directors and officers insurance may provide a source of recovery for any shortfall in customer accounts. Claims from individual customers or from the trustee himself could help recover them, he said in court papers filed in Manhattan bankruptcy court yesterday.
“The coverage under the D&O Policy is a valuable asset, which should be protected and preserved by this court for the benefit of MFGI customers,” lawyers for Giddens wrote. Giddens added that he didn’t oppose payment of some “reasonable and necessary” defense costs under the policies.
Customers have objected to the use of the failed brokerage’s insurance coverage for former employees, saying policies including one worth $170 million insurance should instead be used to repay customers whose money went missing from segregated accounts when the brokerage failed.
U.S. Specialty Insurance Co. also issued a $25 million insurance policy to the company before its bankruptcy, and seeks the ability to make payments for senior management’s defense costs in lawsuits brought by customers, according to court papers.
‘Vital for Customers’
Customers including Paradigm Global Fund Ltd. said in court papers filed yesterday that such lawsuits are “vital for customers to recover their funds in full” and that proceeds from the insurance policies shouldn’t go to pay defense costs until its decided whether the trustee can use proceeds to satisfy customer claims.
Louis Freeh, a trustee overseeing the separate, related bankruptcy of MF Global’s holding company, MF Global Holdings Ltd., has asked court permission to draw on insurance policies held by MFG Assurance, a wholly owned subsidiary of MF Global Holdings Ltd.
While Giddens oversees the return of funds to customers, Freeh oversees the return of funds to creditors, including lender JPMorgan Chase & Co.
MF Global Holdings, once run by former New Jersey Governor Jon Corzine, filed the eighth-largest U.S. bankruptcy on Oct. 31 after getting margin calls and bank demands for money. The brokerage and the parent are in different bankruptcy proceedings handled by two trustees.
Giddens currently estimates the gap between customer claims and funds available to pay them at $1.6 billion.
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).