As reported in the New York Times, Judge Martin Glenn of the United States Bankruptcy Court in Manhattan held that MF Global’s insurance company will be required to pay legal fees for the firm’s employees as they defend themselves against accusations of wrongdoing after $1.6 Billion of customer money went missing when the firm went bankrupt last Fall.
MF Global employees have already spent $8.3 Million on legal fees, and Judge Glenn has authorized them to spend an additional $21.7 Million on the insurance company’s tab. This initial cap may also be increased as litigation costs rise and new cases are brought against the employees.
MF Global purchased $375 Million in insurance before it went bankrupt to protect its employees from any liability if they were found guilty of wrongdoing while working for the firm. Because the insurance policy has a cap, however, any insurance money spent on legal fees is less money available to pay for victims’ claims if they are successful in bringing their actions. The insurance policies are also structured in a way that it makes paying legal fees a higher priority than paying for claims.
The use of the insurance funds to pay for legal fees was challenged by MF Global commodity customers who lost $1.6 Billion, and by a group who brought a securities class action against the firm, but both were unsuccessful in preserving the funds solely for claims settlement. The New York Times reported that MF Global could easily expend its $375 Million policy as demonstrated by cases brought against Lehman Brother’s former officers and directors who quickly exhausted a $250 Million insurance policy.
Although Judge Glenn recognized the potential unfairness of his decision, he ultimately held the use of the insurance funds was reasonable because MF Global employees would face “significant hardships if the policies were disabled.”