Trustee Tracks Down $105B in Transactions in MF Global's Final Week

James Giddens, the trustee overseeing the liquidation of MF Global, said on Monday his investigators have now traced most of the $105 billion in transactions made at the bankrupt securities firm in its final frantic week alive.

Three months after MF Global filed one of the largest bankruptcies in U.S. history, officials are still scrambling to find some $1.2 billion in missing client funds.

In a report filed with the U.S. Bankruptcy Court for the Southern District of New York, Giddens said his team has identified the parties that were the "immediate" recipients of transfers from MF Global. The report didn't say which companies received the money, but previous reports have indicated JPMorgan Chase (NYSE:JPM) was one of them.

The trustee said the "ultimate recipients" of the transfers included banks, exchanges and clearing houses, MF Global affiliates, counterparties and customers.

The customer shortfall began on October 26 and grew until the October 31 bankruptcy, the trustee said.

“For three months our investigative team has worked to understand what happened during the final days of MF Global when cash and related securities movements were not always accurately and promptly recorded due to the chaotic situation and the complexity of the transactions,” Giddens said in the report.

MF Global collapsed last year due to concern about its heavy bullish exposure to the risky sovereign debt of eurozone nations like Italy. The securities firm began taking those positions at the direction of then-CEO Jon Corzine, the former governor of New Jersey and CEO of Goldman Sachs (NYSE:GS).

The report said the number of transactions executed by MF Global during a final frantic week "escalated to unprecedented levels." MF Global's computer systems and employees had trouble keeping up with these deals and a number of transactions were "recorded erroneously or not at all," the report said. In fact, these so-called "fail" transactions were five times the normal volume during this final week.

These transactions included “complex instruments,” such as off-balance sheet repurchase transactions involving sovereign debt securities and derivatives, the trustee said.

Giddens said it isn’t clear when customer money will be returned. Last week The Wall Street Journal reported that investigators believe a “significant amount” of the money may have “vaporized” and may never be recovered.

The trustee, which has distributed almost $4 billion to former MF Global customers, said it is “eager” to make further distributions but is required by law to hold an “appropriate reserve of funds” until disputed claims are resolved.

"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.

He added, “We will then determine whether there is a sound and legal basis for recoveries against third parties that will help make customers whole. These will be very complex legal and factual determinations, which we will make consistent with our duty as the advocate for the former customers of MF Global Inc.”

The report also said that the investigation found that MF Global appeared to run afoul of segregation requirements in order to fund the firm’s daily activities.

While MF Global kept those transactions to under $50 million in the past, “as liquidity demands increased and could not be met from internal sources, much larger amounts were used,” the report said.

Worries about the eurozone exposure led to credit downgrades by ratings companies, which then caused margin calls and increased demands from counterparties and exchanges for collateral, the trustee said. Likewise, customers closed their accounts and withdrew funds, putting further pressure on the firm.

Even though MF Global may not have realized it, the company experienced a shortfall in so-called 4(d) customer funds during the day on October 26, the trustee said. It remained that way until bankruptcy. This type of account is intended to remain segregated from the company's own funds, according to the Commodities Futures Trading Commission, which is a regulator that oversees brokerages like MF Global.

To reach its conclusions, the trustee said its investigators, which include legal and forensic accounting teams, have interviewed more than 50 witnesses, preserved access to thousands of boxes of hard copy documents, imaged more than 800 computer drives and are maintaining over 100 terabytes of data.

These investigators pored over 840 cash transactions that exceeded $10 million, equaling a total of $327 billion. They are still analyzing another batch of transactions with a value of more than $100 billion.