On Monday, a report by MF Global investigators has disclosed new details of the missing customers funds. This action now started before the firm filed bankruptcy on Monday, Oct. 31 and pieces of the puzzle are starting to come together.

According to the four-page statement filed by James W. Giddens, the trustee overseeing the firm’s liquidation, MF Global began to accumulate a deficit in customer segregated accounts on October 26, one day before it was audited by its regulator, CME Group Inc; the shortages continued until Oct. 31. In addition, the firm used the customer money to finance other daily activities during this time.

This use of money had been suspect for some time but now it has been confirmed. Former Chief Executive Officer Jon Corzine has maintained that he had no idea where the missing funds went.

According to Giddens, “In the past, such transfers were in amounts of less than $50 million, but as liquidity demands increased and could not be met from internal sources, much larger amounts were used, apparently with the assumption that funds would be restored by the end of the day.”

CME’s Role as Regulator

As MF Global’s regulator, CME was responsible for the enforcement of financial and reporting requirements. The exchange has come under fire whether it followed procedures and if they had missed something in the unwieldy audit trail.

After MF Global announced that its credit rating had been downgraded, the financial exchange immediately acted by sending auditors over to the firm’s Chicago offices on Oct. 27.

They reviewed the firm’s Oct. 26 segregation reports and on Dec. 15, CME’s Executive Chairman Terry Duffy testified at the House Committee on Financial Services that the reports were sound.

Duffy said to the group, “These procedures continued through Friday (Oct. 28) evening. At the time they left the office they had noted only immaterial discrepancies and we saw no indication that the segregated funds were missing as of Wednesday October 26th.”

According to Duffy, the auditors returned to MF Global on Oct. 30 after an Oct. 28 draft report showed a $900 million deficit from an  accounting error, according to The Chicago Tribune. He added, “No such error was ever found.”

On Oct. 31, MF contacted the U.S. Commodity Futures Trading Commission, which is the regulator for the U.S. commodity industry, and informed them that customer money had been transferred out of segregated accounts. This caused a $600 million shortage; it was later increased to $1.2 billion.

In Monday’s statement by Giddens, he noted the chaos of the firm’s final days by saying, “For three months our investigative team has worked to understand what happened during the final days of MF Global when cash and related securities movements were not always accurately and promptly recorded due to the chaotic situation and the complexity of the transactions.”

So what’s next in the MF Global story? Recovering the money. Giddens will now determine which individuals obtained money from the customer segregated accounts and then subsequently attempt to make customers whole. It will be a long and messy process that is expected to include a legal battle.