When regulators began to grow nervous last summer about MF Global’s $6 billion bet on European debt, they told the now-bankrupt firm to raise more money. The firm answered, a new report has found, with a workaround that allowed it to keep from having to boost capital while simultaneously avoiding oversight.

The 119-page report (PDF) from Louis J. Freeh, the trustee overseeing MF Global’s bankruptcy, helps to detail how the commodity brokerage sought to stay afloat in the months before its collapse in October 2011.

Beginning in August, the Financial Industry Regulatory Authority, or Finra, concluded that under Securities and Exchange Commission rules, MF Global needed to set aside additional capital in case its European debt holdings began to sour.

It was a ruling that drew strong protest from MF Global’s CEO, Jon Corzine. So much so, in fact, that the onetime New Jersey governor and U.S. senator traveled from New York to Washington to appeal to the SEC. As FRONTLINE reported in Six Billion Dollar Bet, Corzine had earlier success convincing regulators at the Commodities Future Trading Commission out of a ban on a finance strategy used at MF Global known as “internal repo”:

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But in this instance, Corzine lost his appeal. MF Global went on to move around some cash to protect against losses, but according to Freeh’s report, it also transferred roughly $3 billion in holdings of Italian bonds from the brokerage arm of the firm, MF Global Inc. (MFGI) to another entity called MF Global Finance USA, Inc., or FinCo.

“This strategy allowed the MF Global Group to transfer the economic benefits and risks from MFGI (a regulated entity) to FinCo (an unregulated entity), and thereby reduce MFGI’s regulatory capital requirements,” Freeh writes in his analysis.

By the time most investors learned of the Finra order, MF Global had already begun to unravel. In October it filed for bankruptcy, and in the process approximately $1.6 billion in customer money disappeared.

James W. Giddens, another trustee in the MF Global case, is now working to recover those customer funds, and on Monday, he hinted he may file claims against Corzine and other former top officials. At the same time, Freeh has estimated that former creditors of MF Global may file more than $3 billion in claims of their own.

With both trustees battling over a limited pool of money, it remains unclear to what extent they will be able to reach agreement on the dispersal of recovered funds. Both creditors and customers have legitimate legal claims, and ultimately their fight may have to be settled in court. Already, one federal bankruptcy judge has rejected a bid by customers for priority status over creditors.

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