Take it from Frederick Grede, the trustee liquidating the assets of failed money manager Sentinel Management Group Inc., who says that MF Global customers may have "a harder road than perhaps they're expecting."
Mr. Grede says Sentinel customers are still missing more than $500 million after the firm allegedly took $600 in customer money and used it to secure loans to trade on the firm's own behalf. Sentinel filed for bankruptcy protection in 2007.
There's still a chance—one out of a hundred—that all of a sudden the funds will appear somewhere but I don't think that's the case," Mr. Grede said of the MF Global liquidation. "My trader friends don't like to hear me when I say that, but this is going to be a complex and litigation-filled process."
MF Global customers have so far received three large transfers of $3.8 billion, or 72%, of their money at the time of the futures firm's Oct. 31 bankruptcy filing. But one of the lawyers liquidating the firm's assets told customers Jan. 13 that additional large transfers of funds were unlikely and that the trustee was exploring possible ways to recover additional customer funds.
To be sure, the situation isn't exactly the same because Sentinel managed money for futures firms, hedge funds and individuals, and MF Global had customers that were trading directly on futures exchanges. Still, the case serves as an illustration of how difficult it can be for futures customers to recover missing money once a firm files for bankruptcy. And the dim outlook for recovery comes one week ahead of a Jan. 31 deadline looming for MF Global customers to complete a claims form detailing the assets in their accounts as of the bankruptcy filing.
Donald Horwitz, who oversaw the liquidation of municipal-bond firm Donald Sheldon & Co. in 1985, says that MF Global customers are going to have to put in a claim and stand with all the other creditors.
"It takes a long time, and the longer the money is gone, the less likely you're going to get the money back," Mr. Horwitz said, who has said the futures industry should consider an insurance fund that protects investors like the Securities Investor Protection Corp. in the securities industry.
In the Sentinel liquidation, U.S. regulators have pending enforcement cases against the firm, but there have been no criminal charges filed against Sentinel executives. The Commodity Futures Trading Commission filed a fraud case against Sentinel involving $562 million in customer funds. The Securities and Exchange Commission and the CFTC also accused Sentinel of violating rules that require firms to keep customer money and the firm's money separate. The cases are still unresolved.
Attorneys for Sentinel executives didn't immediately return calls for comment.
MF Global could face some similar charges. The firm is currently under investigation by regulators and law-enforcement agencies over the estimated $1.2 billion in missing customer money.
Our hope is still a hundred percent, but that $1.2 billion shortfall could make it extremely difficult to make that goal," said Kent Jarrell, a spokesman for MF Global trustee James Giddens. "Unfortunately a bankruptcy and a liquidation like this is a long complex process."
And even if the trustee finds the money, it could have been paid out to meet other obligations in the firm's final days, which could mean a lot of legal wrangling to get it back.
"It may be a long time before any of those funds will be returned back, if at all," said Ronald Filler, a law professor at New York Law School.
Prof. Filler also worked in futures at Lehman Brothers and came back from retirement to help the firm transfer its futures accounts in September 2008. Dealing with the Lehman futures accounts was much easier than the MF Global case, he said, because there was no shortfall in the customer accounts.
Mr. Grede said regulators have probably already sorted through the accounting at MF Global and that he would be amazed if regulators "don't have a very good idea of what the available assets and liabilities are."
But regulators may be cautious about what they say because there is likely to be a lot of litigation to try to recover money, Mr. Grede said.
The CFTC and the SEC didn't return requests for comment.
Further complicating the recovery is the law itself. Mr. Grede said the futures laws are clear, the penalties are severe, but it isn't at all clear what happens when there is a shortfall in customer accounts.
"The laws just don't anticipate what happens when somebody breaks the rules," Mr. Grede said.
He said many people think customers are at the top of the priority list when a firm goes into bankruptcy, but that isn't the case.
"Unfortunately, what I've found in the bankruptcy process over the last couple years is customers don't have the priority that they think they do," Mr.