As the MF Global debacle has dragged on, one thing that has become apparent is that the two trustees are on a collision course as they battle for what’s left of the bankrupt firm.
Customer advocates have grown frustrated with both the perceived timidity of MF Global Inc. (MFGI) trustee James Giddens in advocating on their behalf and the boldness of the parent company MF Global Holdings (MFGH) trustee Louis Freeh for continuing to argue that customers have no standing in the affairs of MFGH while at the same time inserting himself into the MFGI liquidation. Meanwhile, the two trustees have begun to square off.
In an April filing, MFGH and the Chapter 11 creditors’ committee claimed that the MFGI trustee had withheld information from them. While this may seem like the pot calling the kettle black in that Freeh had spent months refusing to release information based on client-attorney privilege, it engendered a rather curt response from Giddens, who noted in a reply that the MFGH filing included “incorrect statements.”
Days later, the MFGI trustee provided an update on the investigation, stating that it may pursue civil charges against MFGH. “Based on [the] investigation of conduct, allocation of responsibilities and reporting with respect to the segregated customer accounts, the trustee believes that there are claims he may assert against certain responsible individuals at MFGI and Holdings (and Holdings itself) for, among other things, breach of fiduciary duties owed to both MFGI and its customers, and violations of the segregation requirements of the Commodity Exchange Act.”
It went on to state that the trustee was committed to working cooperatively with customers to return customer property.
In elaborating on the statement, MFGI trustee spokesman Kent Jarrell said they are exploring working together with various plaintiffs’ attorneys who have filed lawsuits against officers and directors of MFGH. “Because we are statutorily required to take all means necessary to return funds to former customers, we want to see if there is a more efficient way to do it instead of having separate litigations. It is all about efficiencies. How do you get the most money back to customers?” Jarrell says. “We know where the money is; it is just a matter of can we get it back under our control for the return to customers,” he adds.
The trustee may have been emboldened by a memo sent from the Commodity Customer Coalition to the Department of Justice, U.S. Attorneys for the New York and Chicago districts and representatives of all the pertinent congressional committees, stating it believes there is sufficient evidence of an intent to commit fraud by various MF Global employees to support criminal charges.
It included documents that showed MF Global had changed procedures in its final days by sending out checks through the mail to customers instead of wiring money to them, while simultaneously wiring funds to creditors. The memo stated, “MF Global artificially reduced the amount of assets they were required to keep in segregation on paper while not reducing the amount of assets in the customer segregated bank account.”
Insurance claims
Meantime, Judge Martin Glenn lifted the automatic stay on two groups of insurance policies, allowing for proceeds of the policies to pay for defense costs of former directors, officers and employees of MFGH.
The judge placed a “soft cap” of $30 million on the policies; one a directors and officer policy totaling $225 million and the other an errors and omissions policy totaling $150 million. One policy was from MFG Assurance, a subsidiary of MFGH, which attorneys for the Sapere CTA Fund asserted should have been claimed by the MFGI estate because it covered claims arising from wrongful acts of the insured. Sapere argued that because segregated funds were violated and more than 25,000 claims were made as part of the MFGI liquidation, the proceeds of that policy should go to the MFGI estate.
John Witmeyer, attorney for Sapere, says, “The only relevant facts are undisputed. On Oct. 31 segregated funds were missing and it doesn’t matter if people think they know where [they] went. They are just not there; that breached the Commodity Exchange Act.”
The judge ruled against Sapere, but left open the question of whether customers have a claim on insurance proceeds.
The problem is that the policies are what is referred to as “wasting policies,” meaning once money is allocated it is gone. More troubling for Witmeyer is that the day after the ruling, he learned of a third MF Global policy obtained through an insurance syndicate totaling $250 million. The MFGH trustee, and perhaps the MFGI trustee, allegedly knew this policy existed and did not share that information with the bankruptcy court. In a letter to Giddens, Witmeyer says, the situation is troubling because neither trustees for MFGI nor MFGH “apprised the bankruptcy court of this additional D&O insurance. The importance of the nondisclosure of this information has been heightened by [the] decision that directs that making of inter-insurance allocations; proper allocations under insurance coverage law require taking into account the entire coverage block.”
The third policy includes $100 million of “Side A-only” coverage that would cover defense costs only for former directors, officers and employees and none of the entities that may have liability. So there is a $100 million policy that can be used only for defense costs of officers of MFGH that was not considered by the judge, while other policies that possibly could be used to cover liability claims due to errors will be at least partially tapped to defend Corzine and other officers.
