GWG Bondholders Allege Former Judge Jones and Liz Freeman Orchestrated ‘Fire Sale’ of Company’s Assets, Destroyed Bondholder Recoveries in RICO Class-Action Complaint

Relevant Document:
Complaint

Bondholders of GWG Holdings have filed a class-action lawsuit against former judge David R. Jones, Elizabeth Freeman and three law firms: Jackson Walker, the Law Office of Liz Freeman PLLC and Porter Hedges. The plaintiffs, suing on behalf of a class of 27,000 bondholders, allege that the defendants pursued a “fire sale” of the company’s assets and made the bonds “entirely or nearly worthless” as part of a conspiracy to hide and profit from the romantic relationship between Jones and Freeman, a former Jackson Walker partner.

The bondholders allege that the defendants committed bankruptcy fraud, honest services fraud, mail and wire fraud, and obstruction of justice in violation of the Racketeer Influenced and Corrupt Organizations, or RICO, Act. The plaintiffs also say that Jackson Walker, Freeman and Jones engaged in a civil conspiracy, breached their fiduciary duties to bondholders and other interested parties, and were unjustly enriched.

GWG, a public financial services company that purchased life insurance policies on the secondary market, filed for chapter 11 in April 2022 in the Southern District of Texas. The case was assigned to Judge Marvin Isgur; GWG retained Mayer Brown as lead bankruptcy counsel and Jackson Walker as local debtors’ counsel. Jackson Walker has admitted that it became aware of the Jones-Freeman relationship by March 2022, the plaintiffs point out, but neither the firm nor Freeman ever disclosed the conflict.

Instead, the bondholders allege that the defendants installed Jones as judicial mediator – and later, Freeman as the trustee of the wind-down trust established under GWG’s plan. The plan also provided for GWG bondholders to receive interests in the wind-down trusts in place of their bonds.

According to the complaint, the defendants effectively destroyed the value of at least 96% of the plaintiffs’ bonds while “Freeman (and indirectly Jones) would receive over a million dollars in fees from the GWG estate.” The plaintiffs say Jackson Walker, Mayer Brown, Porter Hedges as counsel to the official committee of bondholders, and other bankruptcy professionals also received millions in professional fees.

First, the plaintiffs allege that the defendants “moved for and obtained an order from Judge Isgur appointing Jones, his long-time friend, as a judicial mediator.” Shortly before mediation began, the bondholders say that management, who had proposed a “reorganization plan that would retain 100% value for the bondholders,” was “forced to resign during a board meeting managed by Jackson Walker and Freeman.”

On the mediation itself, the plaintiffs allege that it was scheduled for two days, but it lasted less than four hours, and that there was “no meaningful discussion” of management’s reorganization proposal. Instead, “Jones swept in like a firestorm, informing the parties that the GWG proceeding was no longer going to be directed toward the goal of reorganization” and that “GWG was going to be liquidated,” according to the complaint (emphasis added).

Additionally, the plaintiffs allege that “[b]efore any party could inquire or argue in response,” Jones “advised that the judge overseeing the GWG case, Judge Isgur, was an old, dear friend who would do whatever Jones suggested.” The bondholders maintain that because Jones insisted on liquidation, the parties left the mediation “knowing there was no longer going to be any chance of a full recovery for the bondholders, investors, of GWG’s promising business prospects.”

Freeman was also appointed as wind-down trustee for the liquidating estate on Jones’ “personal suggestion,” the plaintiffs continue – and “[s]hockingly, Freeman continues to serve as Wind Down Trustee to this day, compounding her ethical breaches.”

The bondholders also allege that Jackson Walker smoothed the way for Freeman’s retention as GWG wind-down trustee. After the firm learned of her relationship with Jones, the plaintiffs say it arranged a “golden parachute” for her “quiet, planned separation” from the firm by installing her as the wind-down trustee and allowing her to collect $100,000 per month for the first six months. Instead of disclosing the relationship, Jackson Walker negotiated a separation agreement with her that she signed on Nov. 29, 2022, the day before Jackson Walker moved to appoint Jones as mediator. Her last date of employment at the firm was Dec. 1, 2022.

The plaintiffs suggest that Jackson Walker arranged the separation after it realized it was no longer tenable for Freeman to continue as a partner at the firm. But after Freeman left and formed The Office of Liz Freeman, her firm was employed as co-debtors’ counsel in GWG, according to the filing, and Jackson Walker “paid her more than $200,000” for her work in this role. As co-counsel, Freeman participated in mediation sessions during January and February 2023 overseen by Jones as mediator, the plaintiffs add.

As wind-down trustee, Freeman “recklessly commenced a fire sale of GWG’s interests, ensuring available funds for her and her live-in boyfriend to share, along with her former law firm,” the plaintiffs allege. Freeman has “already collected at least $1 million and “(because she somehow continues to serve in this position), she projects she will receive at least $665,000 in the future,” the bondholders add.

The plaintiffs say that when GWG filed for chapter 11, its primary assets were a life settlements portfolio “valued at nearly $800 million” and its equity in Beneficient LP, another life settlements company. These assets could have returned “full value to the bondholders” if they were properly managed, the complaint says. The bondholders point to Beneficient’s public listing on June 8, 2023, “with a market
capitalization of $4 billion and a stock price of $10 a share, which “would value the 170 million Ben shares owned by GWG at a value of $1.7 billion.”

However, the plaintiffs allege that the defendants were focused on a “quick cash grab” instead of returning value to bondholders. Rather than protecting GWG’s most valuable asset, its interests in Beneficient, Freeman “immediately began placing GWG’s Ben shares on the nascent public market – filing an emergency motion to do so the very day of Ben’s IPO,” the complaint says. The bondholders allege that this “broadcast[ed] to the investing public in neon lights that Freeman was planning to cut the legs out from under Ben and sending GWG’s largest asset into the gutter.”

Freeman “began recklessly unloading Ben stock” and “dumped 90% of Ben’s stock in less than a year,” according to the plaintiffs. The bondholders summarize the effect of these transactions as follows:
 

At the time GWG filed for bankruptcy, outstanding bonds totaled $1.626 billion, the plaintiffs note. The wind-down trust projects it will have $9.575 million in cash by July 31, 2026, and the litigation trustee has proposed settlements in adversary proceedings that would bring in another $58.8 million. As a result, “including the existing budget projections, the aggregate amount potentially available for distribution would be approximately $69 million,” which is “less than a 4% recovery” for the 27,000 bondholders, according to the complaint.

The plaintiffs assert that they have standing to bring their claims because they suffered direct harm from the defendants’ misconduct. The bondholders also maintain they have “personal, direct claims that belong to them and not GWG or the post-confirmation trusts.” For example, Freeman breached her fiduciary duties to bondholders as beneficiaries of the wind-down trust, the complaint says.

The bondholders also say that to the extent the court finds their claims or damages derivative of the GWG estate’s claims, they intend to move for a special appointment of Murray Holland as special administrator or special litigating trustee to assert the claims on behalf of the estate or the litigation trust.

The plaintiffs assert that if they are not permitted to sue, “no one will” (emphasis added). They point to litigation trustee Michael Goldberg, saying he is “hopelessly conflicted” because he has not sued Freeman or Jones. Moreover, he has failed to seek Freeman’s removal as wind-down trustee “despite the patent disqualifying conflict with Jones who along with Jackson Walker schemed to put her there in the first place,” Freeman’s breach of fiduciary duties to bondholders and her “unlawfully continuing to collect fees.”

The plaintiffs also point out that the official committee of bondholders has largely been dissolved, arguing that it would be “deeply conflicted” even if it was active. The bondholder committee failed to pursue the claims for two years and it was represented by Porter Hedges, “the same firm that employed both Freeman and Jones prior to their transition to clerk and judge, respectively, and where their relationship started,” according to the complaint.

Moreover, Nicholas Simms, Freeman’s ex-husband, is a Porter Hedges partner and his knowledge of the Jones-Freeman relationship is imputed to the firm, the plaintiffs allege. Porter Hedges knew about the relationship “at all times relevant to this Complaint,” the bondholders continue, but the firm “(1) never disclosed the relationship; (2) did not challenge the request to appoint Jones as mediator; and (3) did not challenge Freeman’s appointment as Wind Down Trustee or seek her removal.”

The plaintiffs attempt to head off arguments that Jones is immune from liability under the doctrine of judicial immunity. They argue that his failure to disclose his intimate relationship with Freeman was a “nonjudicial, administrative matter required of all individuals and parties to the bankruptcy proceeding” and that he committed nonjudicial acts by participating in a RICO conspiracy. Further, “Jones acted in the absence of jurisdiction by presiding over this case when circumstances required his dismissal,” the bondholders say.

According to the bondholders, they were “forced to file” the lawsuit “as quickly as possible,” because Jackson Walker recently began seeking approval of settlements with administrators in the U.S. Trustee’s litigation against Jackson Walker to claw back the firm’s professional fees.

At the same time, the bondholders maintain that they cannot be made whole in the UST fee challenge litigation. The UST “has not made any effort to claw back compensation” to Freeman as GWG wind-down trustee, the plaintiffs point out.

The plaintiffs ask the court to award them “(1) three times their actual damages, (2) attorneys’ fees, (3) pre-judgment and post-judgment interest, (4) costs, (5) disgorgement of profits and forfeiture of fees, (6) nominal damages, (7) any other damages permitted pursuant to 18 U.S.C. § 1964(c), and (8) such other and further relief as may be just and appropriate.”