A bankruptcy judge appointed a trustee to take over the liquidation of Thornburg Mortgage after it was discovered former executives were using staff and equipment to launch a start-up venture.
The judge entered the order on Friday.
At a hearing earlier this month, the court heard how virtually every employee of Thornburg was being used to develop a new company being launched by Thornburg's top executives.
A Department of Justice official had asked the court to appoint a trustee to take over the management of the Thornburg, which filed for bankruptcy in May with $24.4 billion in assets, one of the largest filings of 2009.
The company was once one of the leading providers of jumbo residential mortgages, but now plans to liquidate.
The government attorney had argued the company's management and board of directors should not be allowed to run the company because they did little after learning on August 11 that the former chief executive and chief financial officer might be misusing company funds to develop their start-up.
The pair resigned on September 15.
The company, which recently changed its name to TMST Inc, has argued in court documents that a trustee is not needed because former chief executive Larry Goldstone and former chief financial officer Clarence Simmons have resigned and conflicted staff have been removed.
In addition to paying themselves a total of $232,000 in bonuses without approval from the compensation committee, Goldstone and Simmons directed bonus payments of $93,000 to other managers of Thornburg Mortgage who were involved in helping launch the SAF project, according to court documents.
SAF was formed to pursue a Thornburg Mortgage strategy to acquire a bank or thrift that would give the company access to deposits and Federal Home Loan Bank funds for issuing mortgages.
In a separate complaint, the company is seeking to recover from the two former executives the funds and staff costs, estimated at $200,000, that were diverted to develop SAF.
The case is In re: TMST Inc, U.S. Bankruptcy Court, District of Maryland, No. 09-17787.
(Reporting by Tom Hals; editing by Andre Grenon)