* MF trustee seeking release of $25 mln in insurance funds
* Policies cover liability from acts of directors, employees
* Ex-CEO Corzine, other directors face civil suits
* Customers claim right to insurance funds
By Nick Brown and Aruna Viswanatha
April 2 (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 currently 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 Nov. 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 Oct. 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."
SEEKING A SMOKING GUN
A group of former MF Global customers, meanwhile, told federal investigators in a memo dated Monday they believed they had found evidence of criminal fraud at the company.
As customers sought to withdraw funds through wire transfers in the final days of the firm, the Commodity Customer Coalition said, MF Global did not wire the funds but instead issued checks to the customers.
Those checks later bounced, but as MF Global overrode customer requests for wire transfers, it was also wiring money out of its customer segregated funds account to cover an overdraft at an MF Global account at JPMorgan in the UK, the customer group said.
Since checks can take days to clear while wire transfers clear immediately, the group suggested MF Global made the change to purposely slow redemptions. The time lag would artificially reduce the assets MF Global was required to keep segregated while not reducing the actual assets the firm had in the customer bank account, the group said.
Representatives for Freeh and Giddens could not immediately be reached for comment on the customer memo.
Reuters in February reported that authorities have struggled to find clear criminal intent in MF Global's implosion.