2nd UPDATE: MF Global Trustee: Funds Missing Days Before Bankruptcy

NEW YORK (Dow Jones)--The trustee overseeing the liquidation of MF Global Holdings Ltd.'s (MFGLQ) brokerage said Monday that a shortfall of customer funds at MF Global started five days before the company failed, growing in size until it filed for bankruptcy protection.

The trustee also said it has traced the majority of cash transactions--totaling more than $105 billion--that flowed in and out of MF Global in the week prior to its bankruptcy.

The findings were disclosed in an interim update on the trustee's investigation into the failure of MF Global. An estimated $1.2 billion in customer funds still remains unaccounted for since MF Global filed for Chapter 11 bankruptcy on Oct. 31, despite three months of investigation by the trustee, regulators and law enforcement.

The trustee, James W. Giddens, said in the update that he continues to explore ways to recover additional customer money, including making claims against recipients of customer funds and against other parties, "including employees of MF Global."

"With these preliminary investigative conclusions in hand, we will analyze where the property wired out of bank accounts established to hold segregated and secured property ultimately ended up," Giddens said in a statement. "We will then determine whether there is a sound and legal basis for recoveries against third parties that will help make customers whole."

So far, about $4 billion of once-frozen customer money held in what are known as segregated commodities accounts have been returned to customers through a series of court-approved asset transfers.

Giddens said funds moved regularly between accounts at MF Global, with increasingly larger amounts used as demands for liquidity increased. The assumption was that the funds would be returned at the end of the day. But starting Oct. 26, some funds weren't returned as expected.

The disclosure adds another wrinkle to the still-foggy timeline of MF Global's final days. Futures market operator CME Group Inc. (CME), which served as MF Global's regulator at the exchange level, sent auditors to MF Global's Chicago offices on Oct. 27 with the purpose of ensuring that customer funds were intact as the broker-dealer began to flounder.

CME examiners looked at records for Oct. 26, but noted "only immaterial discrepancies" in customer accounts for that day by the time they departed late Friday, Oct. 28.

On Oct. 30, regulators alerted CME to a potential $900 million shortfall in MF Global's report on customer funds for Oct. 28, which was confirmed in the early morning hours of Monday, Oct. 31. A subsequent revision to MF Global's report on customer-asset levels as of Oct. 27 showed a $200 million shortfall for that day, according to the sequence of events detailed by CME in December.

The number of transactions executed by MF Global during its final week increased to "unprecedented volumes," the trustee said in his report Monday. The company's computers and employees had difficulty keeping up, and some transactions were reported incorrectly or weren't reported at all.

A spokesman for CME reiterated Monday that the company was made aware of the shortfall in the early hours of Oct. 31. Executives of CME, which presides over more than 90% of U.S. futures trade, have said that MF Global broke laws designed to protect customers and that transfers of customer assets may have been timed so as to elude CME's auditor team.

The trustee said Monday that he has identified most of the recipients of MF Global's hurried last week of transactions, which included banks, exchanges, clearinghouses, counterparties and customers. The findings so far are the result of more than 50 witness interviews and the examination of thousands of boxes of documents and more than 800 computer drives.

In addition, the trustee said his staff continues to process claims filed by customers for additional funds, but it is unclear when the next disbursement of funds will be. The deadline for customers to file claims was Jan. 31.

-By Dan Strumpf, Dow Jones Newswires; 212-416-2818; dan.strumpf@dowjones.com

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