By Christopher Doering
WASHINGTON (Reuters) - Regulators now have a more complete picture of money transfers in the final days of bankrupt brokerage MF Global, but must sort out which transactions were legitimate before more money can be released to customers, a top official told Reuters on Wednesday.
Jill Sommers, who is heading the Commodity Futures Trading Commission's review of MF Global, said regulators "are far enough along the trail" that they know where the money went.
"Now it's just finding out which ones of those transactions are legitimate and which ones of them are illegitimate," Sommers said.
The CFTC and the trustee liquidating the firm are under intense pressure from lawmakers and customers to provide answers about what happened to hundreds of millions of dollars in customer money that went missing as the firm collapsed.
MF Global officials, including former Chief Executive Jon Corzine, have told lawmakers they simply do not know where the money is, and deny authorizing any misuse of customer money.
"We certainly don't want to lead anyone to believe we don't know what happened. We do know, and we see where all the transactions went," said Sommers, a Republican commissioner, in an interview on Wednesday.
She declined to reveal details on the fund transfers until investigators have determined the purpose of all the transactions. Sommers could not estimate when regulators will complete their investigation, but said "really good progress" is being made.
Fellow CFTC Commissioner Bart Chilton, a Democrat, tempered expectations. Chilton said in a statement after Sommers' remarks were published that a thorough accounting of all customer funds remains a work in progress.
"Based upon the most up-to-date information available, I do not have confidence that we know where all the money went," Chilton said.
MF Global filed for bankruptcy on October 31 after it was forced to reveal that it had made a $6.3 billion bet on European sovereign debt, spooking investors and customers.
The ensuing search for missing money has sent reverberations through the farm belt and trading floors, and has attracted the attention of the FBI and federal prosecutors.
A trustee liquidating the firm has estimated the shortfall could be as high as $1.2 billion.
LEGITIMATE VS. ILLEGITIMATE
Sommers said on Wednesday that just because money was transferred out of a customer account to the broker-dealer account "doesn't mean it was illegitimate."
Under certain circumstances, brokerages are allowed to take customer funds and invest them in a range of approved securities.
However, in exchange for using the cash, firms are required to back it up with high-quality collateral such as U.S. government securities.
CME Group, MF Global's front-line regulator, has stated plainly that the firm misused customer funds as it faced a liquidity crisis.
At a Senate Agriculture Committee hearing on Tuesday, CME Executive Chairman Terrence Duffy escalated the allegations, saying a CME auditor participated in a phone call during which an MF Global employee indicated that Corzine knew the firm used customer money to lend $175 million to its European affiliate.
Duffy said the matter had been turned over to the Justice Department, but he did not provide more details about the loan.
'DOWN TO THE PENNY'
Sommers said investigators are now trying to back up thousands of transactions with underlying documentation such as a signature or email to determine whether the customer approved the transfer into a broker-dealer account, a complicated process.
Until regulators can determine which transactions were illegitimate, they will not be able to determine the shortfall in customer funds, and how much money will ultimately be distributed back to customers, Sommers said.
A judge on December 9 approved an additional $2.2 billion transfer to MF Global's U.S. commodities customers, bringing the recovery to 72 percent of accounts.
"Until you actually know down to the penny which ones of those transactions were not legitimate transfers, you're not going to know whether or not you can claw back some of that money from other accounts," Sommers said.
"Until you know the exact shortfall, you're not going to know how much can then be distributed to customers above the 72 percent."
Pat Roberts, the ranking Republican on the Senate Agriculture Committee, said Sommers' revelation sets off the next chapter in the MF Global saga.
"Now the next step is to find out were (the transfers) legitimate or were they illegitimate, and then the big question is: who on Earth was responsible," he told Reuters Insider.
(Additional reporting by Nick Brown in New York; Editing by Karey Wutkowski and Tim Dobbyn)