April 30, 2012 Articles

Privilege-Waiver Issues in Bankruptcy after MF Global

Management's fiduciary duty prior to bankruptcy is to the shareholders, but afterward, the trustee's role is to administer the estate for the benefit of creditors

by Meryl B. Vinocur and Catherine G. Pappas

In late October 2011, it was discovered that MF Global, Inc., a major commodities broker-dealer, had transferred $700 million from customer accounts to the broker-dealer and made a loan of $175 million in customer funds to its U.K. subsidiary to cover massive liquidity shortfalls. Customer accounts were frozen, and the parent company, MF Global Holdings, Ltd., with certain of its subsidiaries, including the broker-dealer, filed for bankruptcy on October 31, 2011. These events have led to a teaching moment concerning waiver of the corporate attorney-client privilege by the debtor's trustee and the effect of waiver on the debtor's officers and directors and those of the debtor's subsidiaries.

Countless questions have been raised regarding the mismanagement of client funds at MF Global, and investigations have been launched by, among others, the Commodity Futures Trading Commission, the Securities and Exchange Commission, and James Giddens, the trustee appointed by the Securities Investor Protection Corporation (SIPC) to liquidate MF Global under the Securities Investor Protection Act (SIPA). As part of the investigations, these entities have requested from parent MF Global Holdings, now a debtor in bankruptcy, communications relating to customer accounts and other business operations. Louis Freeh, former Federal Bureau of Investigation director and the Chapter 11 trustee appointed to manage MF Global Holdings' assets in bankruptcy, initially denied these requests, claiming that such communications were protected by the attorney-client privilege. Freeh's refusal to provide such communications was not well received by the various constituencies clamoring to marshal MF Global's assets in the wake of its rapid collapse. Yet, Freeh was within his rights to do so, even if it conflicted with the interests of the SIPC trustee of the subsidiary broker-dealer.

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