Freddy is released because he was never read his rights. In the movie, "A Nightmare On Elm Street", Freddy was set free because of an improperly signed search warrant.
During the trial, the case against Freddy is dismissed because he wasn't read his rights. This would not have made the arrest illegal and would not have been cause for dismissal of the case. All it would mean is that any statement he may have made after being arrested would not be admissible in court until he was read his rights, and there was no indication that the case against him hinged on any such statement.