The Star-Ledger
Published: Feb. 19, 2012
Jon Corzine, the former governor of New Jersey, was chairman and CEO of MF Global Holdings when the firm collapsed on following a disastrous bet its futures brokerage placed on troubled European sovereign debt.
As director of the Federal Bureau of Investigation, Louis Freeh chased down allegations about then-President Bill Clinton’s personal life.
Nearly two decades on, he is knee-deep in a probe of activities of another one-time Washington heavyweight: Jon Corzine. For the nearly four months, Freeh has been engaged as a trustee in the bankruptcy of MF Global Holdings, the parent company of the futures firm that collapsed in late October and left a massive shortfall in customer accounts.
Freeh’s work is quieter now, and less politically tinged. It has not garnered the level of media attention or congressional scrutiny as have others involved in the case, though there have been grumblings behind the scene, according to people familiar with the matter.
As trustee of the firm’s Chapter 11 case, Freeh’s primary duty is to find MF Global assets that can be liquidated and turned over to unsecured creditors, which include large financial institutions such as JPMorgan Chase and Wilmington Trust and some New Jersey-based hedge funds. He also is preparing reports on his team’s findings. The first of which was filed late Thursday, in which Freeh said an extensive review of an MF Global account with JPMorgan found no evidence of customer money ending up there.
Freeh’s mandate is somewhat at odds with the other trustee sifting the remains of MF Global. James Giddens, an attorney with Hughes Hubbard & Reed, is overseeing the liquidation of MF Global Inc., the brokerage subsidiary that executed Corzine’s $6.3 billion bet on risky European sovereign debt, which helped sink the firm. His work is to track down customer money that was transferred during the firm’s final days from the accounts of its futures customers, and claw back as much of that as possible. The current shortfall is estimated to be about $1.6 billion, Giddens said in a recent report.
So far, Giddens has disbursed 72 cents for every customer dollar tied up in futures accounts, and has set up a claims process to release additional funds at later dates.
“We have a cordial, professional relationship with Judge Freeh and continue to work with him,” said Kent Jarrell, a spokesman for Giddens. “But we are separate entities with separate responsibilities under the law.”
The trustees are searching for assets that can be returned to parties they represent, creditors and commodity customers. But the judge overseeing both bankruptcies, Martin Glenn, has ruled that commodity customers do not have priority over creditors. That leaves open the possibility that creditors such as JPMorgan, which is owed $1.2 billion according to a court filing, could get repaid before customers are made whole, rankling the attorneys working on the customers’ behalf.
The attorneys also have questioned some of Freeh’s tactics. Among other things, they claim he has attempted to wrest control of a $120 million insurance fund an MF Global subsidiary set up to cover the cost of defending the firm and current or former employees against accusations of wrongdoing. The attorneys feel the fund should be held instead for the benefit of customers.
Michael Moirano, an attorney who represents a trading firm suing MF Global and its officials, said Freeh’s attorneys attempted to slip the measure by when they filed the motion at 6 p.m. on a recent Friday and set a Tuesday afternoon deadline for objections.
“The order would have taken [the insurance fund] out of bankruptcy,” he said. “My concern was the bondholders would get all of it.”
Freeh has declined interview requests tied to his work on MF Global. He was appointed Nov. 25 by a Department of Justice program that names bankruptcy trustees, on the recommendations of attorneys and government officials involved in the bankruptcy, according to court filings. His nomination was approved days later by Judge Glenn.
Freeh’s only other listed experience as a trustee was in overseeing the bankruptcy of crude oil distributor SemCrude. However, he is far from new at managing complex matters.
Louis Freeh, the former director of the Federal Bureau of Investigation, is serving as trustee to MF Global Holdings, the bankrupt parent company of the futures firm that collapsed in October.
A 1974 graduate of Rutgers Law School, the Jersey City-born Freeh joined the FBI at age 25 as a special agent. In 1981, he jumped to the U.S. Attorney’s Office of the Southern District of New York, and later led its prosecution of the so-called “Pizza Connection” heroin case, described at the time as the largest and most complex matter ever investigated by the federal government.
In 1991, President George H.W. Bush appointed Freeh a federal judge, a post he held until Clinton tapped him two years later to lead the FBI. Freeh held onto the title for eight years, despite a rocky relationship with the Clinton administration over his probe of the president’s affair with Monica Lewinsky. He resigned in June 2001, just months before the Sept. 11 attacks took the world by surprise.
Out of public service, Freeh took up the post of general counsel to MBNA America Bank and helped negotiate its sale to Bank of America, announced Jan. 1, 2006.
The following year, Freeh went into business for himself. He co-founded a boutique law firm Freeh Sporkin & Sullivan with two other former federal judges. He also set up a consultancy, Freeh Group International Solutions, to advise companies on compliance issues and conduct their internal investigations.
In his new role, Freeh has come in demand for high-profile jobs. He was appointed independent monitor over auto maker Daimler AG as part of its settlement over bribery charges, and has conducted inquiries into alleged bribery at FIFA, soccer’s governing body. Shortly before his MF Global engagement, the trustees of Penn State University tapped him for a probe of sexual assault allegations that have rocked its football program.
Freeh’s presence in the MF Global will be an expensive one. As trustee, his fee is $850 an hour, minus a 10 percent discount that is customary in bankruptcy matters, according to a court filing.
He won’t be on his own. Freeh also has secured Judge Glenn’s permission to retain a legion of attorneys from his own law firm and three others. Fees for each attorney range between $250 to $1,000 an hour, according to court filings. A separate consultancy was retained to help the sale of assets; it will net monthly fees of between $500,000 and $1.5 million, according to filings.
The only firm Glenn did not immediately approve was Freeh Group International. “I have some concern about the proliferation of professionals in the case,” he said at a Feb. 9 hearing, according to Bloomberg News. In filings, Freeh and attorneys working for him have pledged to avoid overlapping work.
The next step in the bankruptcy aims to put to rest another criticism Freeh’s operation has endured.
On Tuesday, Glenn is set to rule on an offer that Freeh’s attorneys have made to share certain internal MF Global documents with Giddens and federal authorities investigating the firm’s collapse. Freeh’s attorneys withheld the documents, which are believed to cover the firm’s final two weeks before it entered bankruptcy, on the grounds of attorney-client privilege, stating that they needed to be reviewed before they were released, according to sources close to the investigation. But some investigators and members of Congress were concerned that doing so could stymie the search of missing customer funds, said the sources.
Giddens’ spokesman said he applauded Freeh’s decision to release the documents, announced last week. “We think this will help all investigation into the demise of MF Global to move forward.”
Whether the new information will lead to any charges over the improper use of customer funds remains to be seen. Giddens’ team has traced the movement of missing customer cash through a chain of affiliated companies or third-parties. But while chaos reigned during MF Global’s final days, Gidden said in a recent report his team uncovered no evidence of fraud causing the shortfall in customer accounts.
According to a person with knowledge of Freeh’s operation, the former FBI director has concurred with this assessment.
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