Federal law enforcement authorities investigating the implosion of MF Global say the likelihood of a criminal prosecution in the case has grown in recent weeks, as investigators actively discuss providing immunity to a key witness who could provide details about who was responsible for transfer of money out of customer accounts during the firm’s final frantic days, the FOX Business Network has learned.

People with direct knowledge of the investigation say that in recent days federal law enforcement authorities have held high-level discussions about granting immunity from prosecution to former MF Global assistant treasurer Edith O’Brien in exchange for her cooperating in the probe.

Granting immunity from prosecution is rare in criminal cases primarily because prosecutors are wary of giving possible targets free reign to discuss their alleged crimes without fear of facing charges. In fact until recently, federal prosecutors have brushed off offers of a so-called “proffer” agreement by O’Brien’s attorneys in which she would gain immunity in exchange for her cooperation in the ongoing criminal probe, these people say.

But federal authorities investigating the MF Global collapse centering on the disappearance of $1.6 billion in customer funds have recently had a change of heart, people with direct knowledge of the matter tell FOX Business. Prosecutors believe O’Brien, as the firm’s assistant treasurer and one of the people in charge of MF Global’s funding, holds the key to whether senior officials at the firm, including former chief executive Jon Corzine, either gave direct orders for the transfer of customer funds to keep the firm alive during its final days, or knew customer funds were being used.

It’s unclear if prosecutors will grant O'Brien immunity or when they will make their final decision, but people close to the investigation say they are leaning toward a proffer deal.

Granting O’Brien immunity could pose a major headache for Corzine. As the FOX Business Network was first to report, criminal authorities from the US Attorneys office for the Southern District of New York and the US Attorney’s office in Chicago were starting to conclude that no criminal activity took place regarding the missing money and that the use of customer funds was the result of confusion at a firm.

But now criminal authorities are once again actively weighing criminal charges against senior officials at the firm, including Corzine, based on the prospect of O’Brien’s testimony.
Even if Corzine didn’t give direct orders to use customer money, people with direct knowledge of the investigation say he could still face charges of “conscious avoidance” or that he was willfully ignorant that customer funds were being improperly or possibly illegally used.

“That is the only way I see that they can go forward with a criminal case,” said Columbia law school professor John Coffee. “It’s her exchanges with senior management including Corzine” that could lead to charges.

Officials from the Justice Department declined to comment; a spokesman for Corzine declined comment. An attorney for O’Brien didn’t return calls for comment.

Corzine, the former New Jersey Governor, US Senator, and chief executive of Goldman Sachs (GS), took over MF Global in 2010, and vowed to remake the firm that long specialized in buying and selling commodities for investors into a mini Goldman Sachs by taking risks in various markets around the world.

It was that risk-taking that led to MF Global’s bankruptcy in November 2011, when the firm disclosed it made big bets on European sovereign debt and lenders began cutting lines of credit. During those frantic final days, the firm became short of operating cash, and began transferring funds from various accounts to meet those needs.

That’s when officials at the firm began dipping into segregated customer accounts to satisfy creditors, an apparent violation of US securities laws if the money isn’t replenished. When MF Global declared bankruptcy the firm announced that the customer money was missing, and possibly used to meet the firm’s cash needs.

The big question is who at the firm gave the order to use the customer funds. Corzine has testified before Congress that he was given direct word from people in the firm’s “back office,” which handles matters involving creditors, that customer funds were not being improperly used. A spokesman for Corzine has said he never gave O’Brien -- who was in charge of the back office -- orders to use customer funds for the purpose of meeting funding needs.

Emails recently released by a House of Representative subcommittee investigating the matter show that while Corzine may have approved the use of money from segregated accounts to meet funding needs, he did not explicitly approve the use of customer funds for that purpose.

O’Brien refused to answer questions at the hearing invoking her Fifth Amendment right against self incrimination. But that didn’t end her involvement in the bigger investigation; her attorneys continued to discuss matters with the Justice Department, and in recent days prosecutors began to actively discuss a potential immunity deal.

Charles Gasparino joined FOX Business Network (FBN) in February 2010 as Senior Correspondent.