In the fight to get their missing money back, not all customers at MF Global Holdings Ltd. were created equal.
Andrew McCormick, a commodity-fund manager in Seattle, had about $480,000 at MF Global when the firm collapsed in October. Half of his money was invested in the U.S., and the other half went into non-U.S. investments.
So far, the 27-year-old Mr. McCormick has recovered about $175,000 on his U.S. holdings—or 72% of what he is owed. On the rest, "I haven't seen a penny," he said. Instead of hunting for new clients, he spends more time trying to get his money back and making sure other brokerage firms are safe to deal with.
About 1,700 clients with a combined $700 million at MF Global are in the same predicament, with nothing to show for the investments they made outside the U.S. Those customers comprise a sliver of the 36,000 that MF Global's U.S. brokerage unit had when the firm sank, but they represent nearly half of the estimated $1.6 billion still missing.
Their situation is a product of several regulatory and legal loopholes that can put investors who plow money into holdings outside the U.S. at a disadvantage if their brokerage firm goes bust.
The disparity has been felt more broadly in recent years as it has become much easier for investors in the U.S. to access foreign markets directly.
Some non-U.S. markets are owned by U.S. companies such as NYSE Euronext NYX and Nasdaq OMX Group Inc. NDAQ.
James Giddens, a trustee representing the U.S. brokerage unit of MF Global, says he should be allowed to wrest control of $700 million now stuck outside the U.S. at a different unit overseen by auditing firm KPMG LLP. KPMG insists it has the right to distribute the money under U.K. law.
"We certainly understand the frustration of customers," says Kent Jarrell, a spokesman for Mr. Giddens. "We're doing everything we can and are pushing for an expedited process with the U.K. courts." On Thursday, Mr. Giddens's office said the two sides had started a legal proceeding in the U.K. court system.
Meanwhile, investigators are examining the regulatory inconsistencies that let MF Global use an "alternative" calculation in determining how much money it needed to set aside to protect the assets of customers investing outside the U.S.
For U.S. accounts, MF Global was required to segregate each dollar of customer money. For non-U.S. accounts, the firm was allowed to segregate far less—in some cases just 50 cents of every $1 of customer money—people familiar with the matter say. The remainder could be used by MF Global to make investments or for other purposes.
Investigators are looking into whether the loophole allowed MF Global to appear stronger than it otherwise would have in the past week before its bankruptcy, according to people familiar with the matter. The use of the alternative calculation for non-U.S. accounts allowed MF Global to hold between $800 million and $1 billion less for those accounts in its final days, these people say.
While such moves were allowed under the rules, MF Global was one of the few brokerage firms to use the alternative calculation, people familiar with the matter added. MF Global made the switch after acquiring some assets of bankrupt competitor Refco Inc. in the mid-2000s, these people say.
The practice continued under former Chairman and Chief Executive Jon S. Corzine, though MF Global also kept track of accounts using the more conservative method, people familiar with the matter say.
At an industry meeting after the MF Global bankruptcy, a Commodity Futures Trading Commission official questioned whether foreign-customer accounts should be calculated the same way as U.S. customers accounts. Several regulators and industry officials responded that a change would be a good idea, but it isn't clear how soon the CFTC might move.
On Friday, a CFTC official said that he expects "substantial changes" to customer-account rules aimed at better protecting their funds.
Another area of confusion is determining which non-U.S. customers who invested outside the U.S. through MF Global had a right to have their assets kept separate from the firm's own bets.
So far, customers whose accounts were segregated under U.K. law have received back about 26 cents on the dollar.
Customers whose funds weren't segregated by MF Global and others are classified as general creditors. They've gotten nothing so far.
KPMG said in late April that it was reviewing about 1,200 claims, generally from clients outside the U.S., in which customers said their funds should have been segregated yet MF Global's computer systems in the U.K. classified them as "nonsegregated."
Some of those clients called MF Global just before the bankruptcy to make sure their accounts were segregated. In some case, customers were told their assets would be segregated, but that didn't always happen, according to people familiar with the matter.
Mr. McCormick, the Seattle trader, says he called MF Global to try to pull his money out of the firm on the morning of its Oct. 31 bankruptcy filing. It was too late. His cash was tied up.
A week or two later, officials in the U.S. gave him the first chunk of money from his investments in the U.S. But an MF Global account he used to trade foreign contracts such as palm-oil futures on the Singapore Exchange remains frozen.
Some MF Global customers say they had no idea that CFTC rules left them vulnerable to such different outcomes.
"I am not an accountant. My background is in systems development and portfolio management," says Mr. McCormick, whose fund is called MKC Global Fund. "There was no communication" about the greater risks associated with his non-U.S. account.
Mr. Giddens hopes to soon distribute up to the first 10 cents for every $1 in accounts like Mr. McCormick's. The money is coming from a pool of money recovered by the trustee. Another round of payments on U.S. accounts is expected to increase total recoveries to about 80 cents on the dollar from the current 72 cents.