02 April 2012

Louis Freeh Asks for $25 Million From MF Global Estate to Pay the Defense Costs of Corzine and Execs



The legal and ethical issues in the MF Global financial collapse and bankruptcy are particularly interesting.

Here we have a company whose management, or at least some parties in that management, based on the evidence at hand, apparently stole a significant amount of money (about $1.6 billion) from their customers. Some of portion of that $1.6 Billion was transferred to at least one large bank in their last week of business. And there has been an effort after the fact to obscure the status of those funds and the details of the transfers.

I had previously thought that the trustee works under the direction of the bankruptcy court and is paid by and accountable to them, but apparently this is not the case at least in this instance.

I am not an attorney and have never been personally involved in a bankruptcy so I am not particularly knowledgeable in the fine points of US corporate bankruptcy practices. It almost appears more like a divorce than a bankruptcy.  The duality of it with the two trustees is fascinating.  And the primacy of Mr. Freeh over federal investigators was a bit surprising.

It seems odd to have dual trustees, one for the Chapter 7 brokerage, and another in the Chapter 11 representing the interests of MF Global Holdings management and the banking creditors.  Every time a headline says 'the Trustee' I have to look to see if it is Mr. Giddens or Mr. Freeh. I understand the rationale for the two forms of bankruptcy, but the structure of having two trustees answering to competing interests is awkward. Were there two trustees for Lehman and Bear Stearns?

As you may recall, Mr. Freeh had recommended paying bonuses to the executives earlier this year. He also had refused to turn over MF Global emails and documents regarding the accounts and transfers of money to federal investigators, claiming attorney client privilege between himself and MF Global, until his own people had a chance to look them all over.

Is this perhaps why it is so hard to obtain indictments in financial cases? The firms do not have to hand over any evidence until they and their attorneys have had a chance to go through everything first, and then decide what they wish to hand over to investigators?

Mr. Freeh is no stranger to federal investigations, having headed up the FBI under the Janet Reno and the Clinton Administration.  You can read more about his career in law enforcement and as a judge here.

Just as this case may provoke some activity in the regulatory area, so one might think that in addition to making an interesting case study for law schools, it could involve some changes and streamlining in the bankruptcy practices in which companies like banks and brokers are holding customer money in trust, in addition to the standard classes of creditors.  Certainly there is plenty of room for clarification.

To think that the MF Global case itself is precedent setting, without further legal clarification and remedy, is almost frightening.

Chicago Tribune
MF Global judge weighs release of insurance money
By Nick Brown and Aruna Viswanatha
April 2, 2012

(Reuters) - An MF Global bankruptcy trustee asked a judge on Monday to release $25 million in insurance money to pay defense costs for Jon Corzine and other former MF Global officers facing civil lawsuits over the broker's October collapse.

If paid out now, the money, part of $375 million in total insurance funds from multiple policies, could save the broker from facing larger claims later, Lorenzo Marinuzzi, an attorney for trustee Louis Freeh, said in U.S. Bankruptcy Court in Manhattan. Freeh is managing the company's assets in bankruptcy.

Customers of MF Global's broker-dealer have argued they are entitled to the funds to help fill an estimated $1.6 billion hole in their trading accounts.

The money is frozen because the company is bankrupt. The debate over the funds raises questions over whether insurance policies are considered part of a bankruptcy estate and who may be able to claim a right to insurance money.

The insurance policies cover liability stemming from wrongful acts of employees, directors and officers, and in some cases the company itself.

Corzine, who resigned on November 4, and other past and present MF Global officials face more than 20 lawsuits over the handling of customer funds ahead of the firm's October 31 collapse.

According to a February report from James Giddens, the trustee in charge of trying to recover customer money, MF Global staff misused customer cash to cover corporate transactions.

Defendants in the lawsuits must be afforded legal costs under the policies or they could sue MF Global for more money later, Marinuzzi said.

"We like to pick on Jon Corzine, who has a lot of money and can probably pay his own defense costs, but if you're a mid-level individual who was named in the suit because you happened to be at the company, you don't have the money and you have to get it," he said.

About $150 million of the insurance money is from policies issued by MFG Assurance Co, MF Global's insurance unit. The rest is from policies issued by U.S. Specialty Insurance Co. Officers have submitted insurance claims for more than $8 million so far, Marinuzzi said.

Judge Martin Glenn did not rule on the matter, but pressed Marinuzzi on whether customers may have a right to it.

"If the commodity customers, for example, have tort claims against the parent company, the pot is reduced if you pay out on the insurance policies," Glenn said. "Every dollar paid under the policies is one dollar less that's available for them."

Giddens may also argue that customers have a right to the funds, his lawyer said. "We may have an interest in these policies and insurance proceeds someday," attorney James Kobak said. "We're anxious that as much as possible be preserved and not be spent..."

Read the rest here.