It was reported on Friday that certain high ranking MF Global executives retained by the MF Global Holdings Ltd. (MFGH) trustee could be in line for bonuses.

The story has been making the rounds of various wire services and MF Global forums. Obviously and appropriately this is causing outrage by those involved with MF Global, particularly those that are still waiting for their money to be returned.

The outrage is fair but we have seen this before with bankrupt firms like American Insurance Group (AIG).  However, there is a more disturbing element to this. The decision on any bonuses received apparently will be made by MFGH trustee Louis Freeh. Freeh has been negotiating what information he will release to the various Federal investigators looking into the MF Global mess. It has always seemed odd to us that with an ongoing criminal investigation a government appointed trustee can determine what information he will release, particularly when you examine the different roles the two trustees are playing.

MF Global Inc. (MFGI) is in liquidation and its trustee is charged with getting customer money returned to them. Freeh is representing MFGH and is fighting on behalf of MF Global creditors, often in conflict with the goals of former MF Global customers. He even went so far as to try and prevent the third distribution of customer funds from monies controlled by MFGI.

The Commodity Customer Coalition (CCC) and others have been arguing that customers need to be made whole and that MFGH should not have been allowed to be placed in Chapter 11 reorganization but rather a Chapter 7 bankruptcy where customer priority over creditors would have been maintained. After all it is their money that is missing and it was the firm’s responsibility to follow the laws on segregating customer funds.

Now, according to the WSJ story, Freeh is holding to some extent the financial future of these executives, who may have material information regarding the whereabouts of customer funds illegally transferred out of segregation, in his hands.

If that is not a huge conflict of interest I don’t know what would qualify. In that case the only leverage investigators would have is potential criminal charges against those responsible for transferring funds out of segregation, which make recent stories, citing unnamed sources, suggesting that criminal charges are unlikely even more suspicious.

Regarding the bonuses, outside counsel to the Chapter 11 trustee had this to say, “The most cost-effective way to effectuate the liquidation of these estates and maximize value to creditors is to utilize the current employees. The Chapter 11 Trustee in fulfilling his statutory duties is required to receive court approval of any decisions regarding compensation for these executives. Once a decision is made regarding compensation, a motion will be filed and parties in interest will have the opportunity to respond prior to an approval hearing." 

If bonuses are forthcoming, I know at least 38,000 people who would like to respond.