An American International Group Inc. unit and other insurers can probe whether a “rogue trader” was an employee of MF Global Holdings Inc. as part of a lawsuit over liabilities for losses tied to the company’s collapse, a New York appeals court ruled.

A five-judge appellate panel in Manhattan today ruled today that while MF Global suffered a “direct financial loss” as a result of the trader’s actions, it wasn’t clear that he was an employee as he was paid by commission. The judges modified a lower-court ruling to allow AIG to seek evidence on his status.

The trader, Evan Brent Dooley, was sentenced to five years in prison in April for making unlawful unauthorized trades that caused the now-defunct futures firm to lose more than $141 million in 2008.

MF Global submitted a claim for the loss to insurer including New York-based AIG’s New Hampshire Insurance unit, which denied coverage based on the fact that MF Global didn’t suffer a “direct financial loss” and that Dooley wasn’t an employee, according to court filings. The insurers sued MF Global in New York State Supreme Court in Manhattan in 2009 seeking a declaration that it wasn’t responsible for the loss.

Justice Bernard J. Fried, in October 2010 denied the insurer’s request for a pretrial ruling declaring it wasn’t responsible for the loss and concluded that Dooley was an employee. The insurers appealed.

Uncertain Status

“It cannot be said as a matter of law that Dooley worked under the direct control and supervision of MF Global,” the appeals court said. “No evidence was presented as to who, if anyone, supervised Dooley, or in what capacity. MF Global argues that pursuant to CFTC regulations, Dooley was an ‘associated person’ of MF Global and that MF Global was obligated to supervise his trading activity.

“Although this is evidence of the requisite control and supervision, it is insufficient to determine that issue as a matter of law.”

An MF Global spokeswoman, Beth Sussman, didn’t comment immediately on the decision. Jon Diat, a spokesman for AIG, didn’t immediately respond to a message seeking comment.

The case is New Hampshire Insurance Co. v. MF Global Inc., 601621/2009, New York State Supreme Court, New York County (Manhattan).

Editors: Charles Carter, Fred Strasser