MF Global Shortfall Worsened as Bankruptcy NearedeShareholder ...

By Nick Brown

(Reuters) - In its chaotic final days, MF Global's floundering brokerage used increasingly large chunks of customer money in an effort to keep the company afloat, creating a massive shortfall in customer funds, the trustee liquidating the brokerage has found.

The MF Global Inc brokerage used the customer money to fund thousands of transfers worth about $105 billion in the five days leading up to the October 31 bankruptcy of its parent, MF Global Holdings Ltd (Other OTC:MFGLQ.PK - News), the trustee James Giddens said in a statement.

This finding suggests that customer cash could be scattered among hundreds of affiliates, exchanges, clearing houses and banks on the other end of those transactions, Kent Jarrell, a spokesman for Giddens, said in an interview on Monday.

About $1.2 billion remains missing from customer accounts, and recovering that amount could require lengthy court battles, Jarrell said.

Customers have long been frustrated with the inability of MF Global and investigators examining the futures and commodities brokerage's collapse to determine where their money went.

Giddens said he will now focus on determining which transactions were funded with customer cash and, where possible, submit claims to get that money back.

Customers have received about $3.8 billion of the amounts in their accounts when the broker-dealer's parent filed for bankruptcy, about 72 percent of the total value. The trustee said it remains unclear when they might receive any more.

"We're just about out of money to give back," Jarrell said. "We have a reserve, but we have to keep it in case claims come against us."

MOVING CUSTOMER CASH

In his investigation, Giddens said he found that MF Global regularly used customer money in small amounts of less than $50 million for corporate needs.

But as MF Global's financial position worsened last fall, with exposure to $6.3 billion in risky European debt, "much larger amounts" of customer money were used, "apparently with the assumption that funds would be restored by the end of the day."

That didn't happen, he said. Rather, as MF Global's finances grew more dire, there was an "unprecedented" swell in transaction activity, including billions of dollars in securities sales, draws on credit facilities and a web of inter-company loans, Giddens said.

In the end, he said MF Global was unable to replenish customer accounts, and its parent filed for Chapter 11 protection with the shortfall still unresolved.

Giddens said he is working with third parties to seek more complete information about transfers to "select" parties prior to that bankruptcy.

The case are In re: MF Global Inc, U.S. Bankruptcy Court, Southern District of New York, No. 11-2790; and In re: MF Global Holdings Ltd et al in the same court, No. 11-15059.

(Reporting Nick Brown; Additional reporting by Jonathan Stempel; Editing by Phil Berlowitz, Tim Dobbyn and Bernard Orr)

Source: http://www.eshareholder.com/mf-global-shortfall-worsened-as-bankruptcy-neared/

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