As the sprawling probe that includes regulators, criminal and congressional investigators, and court-appointed trustees grinds on, the findings so far suggest that a "significant amount" of the money could have "vaporized" as a result of chaotic trading at MF Global during the week before the company's Oct. 31 bankruptcy filing, said a person close to the investigation.
Many officials now believe certain employees at MF Global dipped into the "customer segregated account" that the New York company was supposed to keep separate from its own assets—and then used the money to meet demands for more collateral or to unfreeze assets at banks and other counterparties as they grew more concerned about their financial exposure to MF Global.
Investigators also are examining other scenarios that have gained traction in recent weeks, such as the possibility that MF Global suffered steep losses on investments made using customer money. Officials investigating the case have looked into whether such investments were appropriate under rules at the time.
As money poured out of MF Global, much of it likely passed through J.P. Morgan Chase & Co. and other banks where the securities firm had accounts, as well as trade-clearing partners such as Depository Trust & Clearing Corp. and LCH.Clearnet Group Ltd., people familiar with the matter said.
Those companies have denied being knowingly in possession of any missing MF Global money, and any efforts to make them fill the hole would face daunting hurdles. And because the firms usually were middlemen between MF Global and other counterparties, the funds they touched were then scattered widely, complicating the search.
Of the $6 billion kept at MF Global by farmers, hedge funds, floor traders and other customers when panic erupted over its exposure to European
sovereign debt and shaky financial outlook, about $5.3 billion has been located, according to James Giddens, the bankruptcy trustee for the securities firm's U.S.-based brokerage operation.
But hundreds of millions of customer dollars are potentially snarled in litigation with other parts of MF Global, including its U.K. arm, and U.S. officials might never be able to recover those funds. As a result, Mr. Giddens believes the shortfall is at least $1.2 billion, though regulators at the Commodity
Futures Trading Commission and CME Group Inc., parent of the Chicago Mercantile Exchange and New York Mercantile Exchange, have estimated the total is smaller than that.
Since MF Global filed for Chapter 11 bankruptcy-court protection, hundreds of regulators and law-enforcement officials in the U.S. and U.K. have scoured emails, wire transfers and other documents from the company's final days. Mr. Giddens's investigations include about 14 lawyers and 60 forensic accountants.
Lawmakers have pushed for answers from Jon S. Corzine, the former New Jersey governor and Goldman Sachs Group Inc. chairman who led MF Global into its big European bet and was CEO when the company failed.
On Thursday, a House Financial Services subcommittee will zero in on the securities firm's risk-management practices and the role of credit-rating firms in the collapse. Among the people scheduled to testify at the hearing is Michael Roseman, a former chief risk officer at MF Global who raised serious concerns several times in 2010 about the growing bet on European bonds by Mr. Corzine.
So far, Mr. Giddens's office has returned about 72% of the money in customers' U.S. accounts when MF Global filed for bankruptcy at the end of October. Money in accounts outside the U.S. remains frozen, and officials have gotten few big breaks in the case.
"I'm trying to be optimistic, but as it drags on longer, you become leery," said Peter Suarez, who trades futures contracts from his home in Marlboro,
N.J. Since some of his money is still tied up with MF Global, he has been forced to reduce his trading activity in wheat, stock indexes and the British pound.
Four days before the bankruptcy filing, MF Global appeared to have excess money of $200 million in its customer accounts, according to a statement sent to CME Group. CME, the CFTC and Securities and Exchange Commission, among others, regulated MF Global.
By Oct. 31, MF Global acknowledged there was a shortfall in its customer segregated account. That account normally held money required to be set aside by customers, excess amounts from customers and some of MF Global's own funds. While the firm could invest customer money and move around its own funds, federal rules require customer funds to be set aside and kept safe.
The person familiar with the probe said perhaps hundreds of millions of dollars in customer money likely went to J.P. Morgan. According to an Oct. 29 letter from the New York bank to MF Global, the securities firm moved $200 million out of its "commodity customer segregated account" to cover overdrafts in accounts at J.P. Morgan. The money wound up in "the MF Global U.K. Ltd. account," according to a copy of the letter reviewed by The Wall Street Journal.
In Congressional testimony in December, Mr. Corzine said he was trying to eliminate the overdraft by getting money moved from elsewhere in MF Global. Regulators now suspect the money might have belonged to customers, people familiar with the matter said.
Mr. Corzine testified that he was assured by people who worked for him that the money was moved properly, adding that he never directed anyone to misuse customer funds.
J.P. Morgan, a big creditor of MF Global, has said it is cooperating with authorities. A spokeswoman declined to comment Sunday.
Mr. Giddens also is looking at whether transfers of "tens of millions" from MF Global's margin account to Depository Trust & Clearing Corp., known as DTCC, during the last week of October might have involved customer funds, according to people familiar with the matter.
In a statement, a DTCC spokeswoman said the company "has no knowledge that any of the funds deposited by MF Global include any missing customer funds." DTCC said it is cooperating with Mr. Giddens. LCH.Clearnet declined to comment.
The shortfall is widely blamed on the pell-mell panic inside MF Global to keep the securities firm alive long enough to arrange a sale. A rescue deal fell through.
In recent weeks, though, some investigators have begun to explore whether MF Global was investing customer money in ways aimed at boosting returns for the firm, according to people close to the probe. Mr. Corzine, using options available under the rules at the time, was keen on the company earning more than it had in the past, people familiar with his thinking say.
Those investments, which don't include the company's European bond bet, might have suffered losses during the firm's prebankruptcy fire sale—especially if MF Global used so-called repurchase agreements to boost returns on customer money, according to the people close to the investigation.