By Nick Brown
(Reuters) - The trustee managing MF Global Holdings Ltd's
In a letter on Monday to Sen. Jon Tester, D-Mont., trustee Louis Freeh said he has "not made ... any decisions on the subject" of bonuses, "notwithstanding reports to the contrary that have appeared in the media."
Sources close to Freeh told Reuters last week the trustee planned to ask a bankruptcy judge for approval of a retention plan that would include performance-based incentives for Operating Officer Bradley Abelow, General Counsel Laurie Ferber and Chief Financial Officer Henri Steenkamp.
The potential payouts were first reported by the Wall Street Journal in its Friday editions. The three executives could get bonuses of as much as several hundred-thousand dollars each under the plan being finalized, the newspaper said, citing sources familiar with the matter.
Tester was among a handful of legislators to cry foul over the news. In a letter to Freeh on Friday, Tester called it "outrageous" to "sanction the award of performance-based compensation" while customers of MF Global's broker-dealer unit are still missing much of their money.
Sens. Chuck Grassley, R-Iowa, and Amy Klobuchar, D-Minn., also issued statements on Friday criticizing the plan.
Ferber, Abelow and Steenkamp were kept on the payroll to help Freeh recover assets for creditors of MF Global's parent company.
That operation is separate from efforts by a different trustee, James Giddens, to recover money for customers of the broker-dealer unit who were burned when the MF parent collapsed.
The firm imploded after revealing it bet billions on European sovereign debt, a disclosure that led to credit-rating downgrades and unnerved investors. CEO Jon Corzine resigned days later.
It is not uncommon for bankrupt firms to try to retain key executives by offering bonuses tied to performance that increases value for creditors.
But pay issues are prickly in the case of MF Global, whose commodities customers are missing an estimated $1.6 billion that investigators say was improperly removed from their accounts in the days leading up to the company's downfall.
In any case, Freeh may have to meet a high legal bar under a set of 2005 amendments to bankruptcy laws that govern executive bonuses.
One section of the law requires a showing that an employee is essential to the company's operation - a tough argument in the case of MF Global, which is not really an operating company, said Peter Morgenstern, a bankruptcy partner at law firm Butzel Long.
"The company is dead," said Morgenstern, who is not involved in the case.
Another part of the law requires a showing that an employee has another job offer on the table and needs to be incentivized not to take it.
But creative lawyers have been able to get around those rules by tying the bonuses to performance incentives, said David Skeel, a bankruptcy expert and professor at the University of Pennsylvania Law School.
"What the provision prohibits is pay-to-stay," Skeel said. "It doesn't say you can't have performance-based incentives. That's still not quite squared with the spirit of the provision, but that's what's been done."
Judge Glenn granted performance-based incentives in Borders Group Inc's restructuring, but that was an "entirely different situation," Morgenstern said.
"In that case, there was an ongoing business and they were trying to preserve value either to restructure or to sell the company."
Morgenstern believes Judge Glenn would take a harder line in MF Global, requiring testimony, affidavits and other evidence showing incentives were required to get executives to cooperate with Freeh's recovery efforts.
"I would think that the judge will require they show that these people are providing something other than information that could be obtained through legal processes" such as discovery or document subpoenas, he said.
Federal authorities have been investigating the company's collapse and the huge hole in customer funds. Investigators should be able to compel important information from executives, Morgenstern said.
Lawyers for the executives could not be immediately reached.
The bankruptcy is In re MF Global Holdings Ltd, U.S. Bankruptcy Court, Southern District of New York, No. 11-15059.
(Reporting By Nick Brown; editing by Andre Grenon)