Restitution impractical for Stanford victims, DOJ says in filing

HOUSTON, Mon Jun 4, 2012 – The government said it would be “impracticable” to enforce an order of restitution against financier Allen Stanford to victims of his estimated $7 billion Ponzi scheme and that it should be permitted to compensate fraud victims with forfeited assets.

In a Monday filing with the federal court in Houston, the Department of Justice said the large number of victims, the difficulty of calculating their losses and the freezing of Stanford’s assets in various jurisdictions would make restitution difficult.

A federal jury on March 6 convicted Stanford, 62, on fraud, conspiracy and obstruction charges over what prosecutors called the sale of bogus certificates of deposit from his Antigua-based Stanford International Bank Ltd.

Stanford is scheduled to be sentenced on June 14 and could spend the rest of his life in prison. The jury also found that federal authorities should try to seize $330 million of frozen funds that Stanford stashed in 29 foreign bank accounts.

Once considered a billionaire, Stanford later claimed to be indigent.

The Justice Department said restitution would be complicated because customer accounts were credited with $1.3 billion of interest that was not paid and some customers but not others withdrew “fictitious” interest or principal from their accounts.

It said it has agreed in principle with the U.S. Securities & Exchange Commission on a joint distribution process.

The Justice Department also said a receiver winding down parts of Stanford’s business will to ensure fairness try to calculate “net” amounts lost by each investor. Such an approach is also being used in the winding down of Bernard Madoff’s firm.

How the right insurance policy can protect you in the event of fraud

Marc McTeague, President, Best Hoovler McTeague, Insurance Services, Member of the SeibertKeck Group

You may think that your employees would never steal from you, but how well do you really know and trust the people who work for you? One-third of all employees steal from their employers, and it is estimated that the average loss for an act of employee fraud is in excess of $175,000, says Marc McTeague, president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group.

“Even the best internal controls can fall short of preventing an employee from committing a dishonest act if he or she is determined to do so,” says McTeague.

Employee crime and theft have dramatically reshaped business in corporate America.  For example, on Sept. 9, 2011, Carla Jean Johnson was sentenced to 120 months in federal prison for her conviction of wire fraud that cost her employer $977,418. Columbia Lloyds Insurance Co. paid the company’s claim to cover the controller’s embezzlement.

Smart Business spoke with McTeague about why it’s worth investing $5,000 in premiums to protect your assets and ensure employee fraud doesn’t put you out of business.

What constitutes employee theft, and what company assets are most at risk?

Employee theft can be classified into two major categories: theft of property and misappropriation of funds. Theft of property can include office supplies, inventory, work in process or scrap that belongs to the company. Misappropriation of funds can include the use of accounting records to disguise or redirect accounts receivable, misuse of credit cards, payroll fraud, outside businesses paying kickbacks or other unauthorized transactions.

What protections do general insurance policies offer companies against employee theft?

A standard ISO property policy will pay for a nonemployee stealing from your organization, but what if it is internal? A majority of today’s insurance carriers offer a crime policy to cover business assets that are stolen by an employee.  When purchasing a policy, keep in mind how the policy defines an employee and who is excluded from coverage. Crime causes a greater amount of commercial property losses than any other type of property losses. Current estimates are as high as $50 million annually in the United States for employee dishonesty losses alone. Employee dishonesty is just one of many types of commercial crime exposures that you should consider.The fundamental Crime Insurance parts are:

  • Employee theft
  • Forgery or alteration
  • Inside the premises — theft of money and securities; robbery or safe burglary
  • Outside the premises — messenger
  • Computer fraud and funds transfer
  • Money orders and counterfeit paper currency

What types of policies protect employers specifically against employee theft, and how do they differ from general policies?

Commercial crime insurance coverage can be written as a part of your commercial package insurance policy or as a separate standalone policy. The advantage of a stand-alone is that you can customize forms and coverage to meet your business’ specific needs and may be an option if the commercial package insurance company is not in a position to offer you the amount of crime insurance that you need.

There are two policy forms used by carriers to offer employee theft coverage.  Selecting the correct form is important and the forms differ in the premium charged for coverage.

  • Discovery form. The discovery form covers losses that are identified, or discovered, during the policy period, even if the loss happened some time before.
  • Loss sustained form. The loss sustained form will cover only losses that occur during the policy period and up to 12 months after the policy expires. Keep in mind that employee theft can take time to discover. This form could expose you to the risk of financial loss spread over multiple years.

What types of fraud can occur with employee pension or 401(k) plans, and how can they be prevented?

In 1974, the Employee Retirement Incomes Security Act (ERISA) established insurance guidelines to protect the assets of any employer-sponsored pension, profit sharing, or employee welfare plan. ERISA requires that 10 percent of any benefit plan assets be covered by insurance to protect the plan(s) from employee dishonesty. Coverage protects the participants and beneficiaries from dishonest fiduciaries who handle the plan assets.

There are two ways to provide such coverage, either by endorsing the crime policy or purchasing a separate bond through your insurance company. Keep in mind that it is important to regularly review your plan and review the information provided by your administrator.

What procedures can an employer implement to reduce the risk of employee theft?

In a slow economy, businesses have experienced stalled growth, reduced revenue, liquidity concerns and implementing procedures to reduce theft becomes a higher priority as a loss becomes more certain. A business owner should look into implementing loss control procedures to protect the company’s assets. Here are a few examples:

  • Isolate duties — split the job of taking money in and sending it out for deposit. Books kept by one person should be reconciled by another.
  • Require countersignatures on all checks.
  • Perform background checks.
  • Establish a code of conduct.
  • Implement whistleblower programs.

Nearly every business needs to consider purchasing a commercial crime insurance policy, although determining as to what limit can be difficult. Companies should consider the financial impact of an employee theft claim and discuss this with their accountant, attorney and insurance agent.

Marc McTeague is president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. Reach him at (614) 246-RISK or [email protected]

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

How the right insurance policy can protect you in the event of fraud

Andrew Rowles, Client Adviser, SeibertKeck Insurance Agency

You may think that your employees would never steal from you, but how well do you really know and trust the people who work for you? One-third of all employees steal from their employers, and it is estimated that the average loss for an act of employee fraud is in excess of $175,000, says Andrew Rowles, client adviser at SeibertKeck Insurance Agency.

“Even the best internal controls can fall short of preventing an employee from committing a dishonest act if he or she is determined to do so,” says Rowles.

Employee crime and theft have dramatically reshaped business in corporate America.  For example, on Sept. 9, 2011, Carla Jean Johnson was sentenced to 120 months in federal prison for her conviction of wire fraud that cost her employer $977,418. Columbia Lloyds Insurance Co. paid the company’s claim to cover the controller’s embezzlement.

Smart Business spoke with Rowles about why it’s worth investing $5,000 in premiums to protect your assets and ensure that employee fraud doesn’t put you out of business.

What constitutes employee theft, and what company assets are most at risk?

Employee theft can be classified into two major categories: theft of property and misappropriation of funds. Theft of property can include office supplies, inventory, work in process or scrap that belongs to the company. Misappropriation of funds can include the use of accounting records to disguise or redirect accounts receivable, misuse of credit cards, payroll fraud, outside businesses paying kickbacks or other unauthorized transactions.

What protections do general insurance policies offer companies against employee theft?

A standard ISO property policy will pay for a nonemployee stealing from your organization, but what if it is internal? A majority of today’s insurance carriers offer a crime policy to cover business assets that are stolen by an employee.

When purchasing a policy, keep in mind how the policy defines an employee and who is excluded from coverage. Crime causes a greater amount of commercial property losses than any other type of property losses. Current estimates are as high as $50 million annually in the United States for employee dishonesty losses alone. Employee dishonesty is just one of many types of commercial crime exposures that you should consider.The fundamental Crime Insurance parts are:

  • Employee theft
  • Forgery or alteration
  • Inside the premises — theft of money and securities; robbery or safe burglary
  • Outside the premises — messenger
  • Computer fraud and funds transfer
  • Money orders and counterfeit paper currency

What types of policies protect employers specifically against employee theft, and how do they differ from general policies?

Commercial crime insurance coverage can be written as a part of your commercial package insurance policy or as a separate standalone policy. The advantage of a stand-alone is that you can customize forms and coverage to meet your business’ specific needs and may be an option if the commercial package insurance company is not in a position to offer you the amount of crime insurance that you need.

There are two policy forms used by carriers to offer employee theft coverage.  Selecting the correct form is important and the forms differ in the premium charged for coverage.

  • Discovery form. The discovery form covers losses that are identified, or discovered, during the policy period, even if the loss happened some time before.
  • Loss sustained form. The loss sustained form will cover only losses that occur during the policy period and up to 12 months after the policy expires. Keep in mind that employee theft can take time to discover. This form could expose you to the risk of financial loss spread over multiple years.

What types of fraud can occur with employee pension or 401(k) plans, and how can they be prevented?

In 1974, the Employee Retirement Incomes Security Act (ERISA) established insurance guidelines to protect the assets of any employer-sponsored pension, profit sharing, or employee welfare plan. ERISA requires that 10 percent of any benefit plan assets be covered by insurance to protect the plan(s) from employee dishonesty. Coverage protects the participants and beneficiaries from dishonest fiduciaries who handle the plan assets.

There are two ways to provide such coverage, either by endorsing the crime policy or purchasing a separate bond through your insurance company. Keep in mind that it is important to regularly review your plan and review the information provided by your administrator.

What procedures can an employer implement to reduce the risk of employee theft?

In a slow economy, businesses have experienced stalled growth, reduced revenue, liquidity concerns and implementing procedures to reduce theft becomes a higher priority as a loss becomes more certain. A business owner should look into implementing loss control procedures to protect the company’s assets. Here are a few examples:

  • Isolate duties — splitting the job of taking money in and sending it out for deposit. Books kept by one person should be reconciled by another.
  • Require countersignatures on all checks.
  • Perform background checks.
  • Establish a code of conduct.
  • Implement whistleblower and hotline programs.

Nearly every business needs to consider purchasing a commercial crime insurance policy, although determining as to what limit can be difficult. Companies should consider the financial impact of an employee theft claim and discuss this with their accountant, attorney and insurance agent.

Andrew Rowles is a client adviser at SeibertKeck Insurance Agency. Reach him at (330) 867-3140 or [email protected]

Insights Business Insurance is brought to you by SeibertKeck Insurance Agency

How to reduce the risk of fraud by keeping internal controls current

Ernie Rossi, Audit Partner, Sensiba San Filippo LLP

Savvy business owners know the value of internal controls and the critical importance of reviewing those controls on a regular basis. Effective internal control systems must be adapted to changes in business practices and the global economy. So how do today’s top businesses keep up?

Smart Business spoke with industry expert Ernie Rossi on the prevention and detection of internal fraud. For almost 20 years, Rossi has educated clients on maintaining effective internal controls. As an audit partner at Sensiba San Filippo LLP, Rossi teaches clients best practices for establishing internal controls and keeping them in step with the times.

What kinds of businesses need to protect against fraud?

No company is 100 percent immune to fraud. However, certain types of companies are at greater risk. Small companies tend to have limited resources, meaning they have employees who perform multiple duties. This is a problem because small businesses cannot easily separate what a good internal control structure would call ‘conflicting tasks.’ Properly separating tasks forces perpetrators of fraud to conspire in order to steal, and collusion is more difficult than acting alone.

Larger businesses may be more capable of separating tasks, simply due to having more staff, but over time, they can experience increasing risk of fraud if they become lax in pinpointing loopholes in their systems. Given time, people find weaknesses in the system, and can exploit these.

One common denominator among companies is that few believe they are susceptible to internal fraud. But statistics in this area are clear — most often, fraud is perpetrated by a long-term employee or friend. It is best to have well designed and implemented internal controls that reduce, as much as possible, the opportunities to commit fraud in the first place.

Under what conditions does internal fraud occur?

Internal fraud can be compared to a ‘perfect storm’ in which a motivated perpetrator meets poorly designed or poorly implemented internal controls and little or no monitoring of those controls. It is generally a rationalization on the employee’s part that they are entitled to the fraud. For example, the perpetrator might say, ‘The owner makes way too much money,’ or, ‘I work really hard, and the business doesn’t properly reward me for my efforts.’

You can distinguish between businesses that have poorly designed internal controls and those whose controls are poorly monitored. Internal controls may be in place, but sometimes the business’s culture evolves to a point where controls are allowed to be ignored. One common example: An increasingly busy workplace where checks are signed without thorough review of supporting invoices.

How can companies prevent internal fraud?

Companies that are led by a management team who sets the ‘tone at the top,’ by modeling the greatest degree of integrity, may be at less risk for internal fraud.  Business owners who play fast and loose with tax laws and company assets can expect employees to feel comfortable doing the same. While some business owners recognize the risk of fraud, they are often unsure about the steps required to prevent it. Companies should start small. The first step is to leverage a third party to review the business and uncover potential problems through an assessment of internal controls. This will help identify the areas of biggest risk — the low-hanging fruit.

The second step is to implement controls, such as separation of duties of employees, to shore up vulnerabilities uncovered in the assessment. Next, periodic reviews by internal managers and external assessors will help to keep controls from slipping out of practice.

It’s also important to educate employees about the purpose of the controls. Increased awareness, along with the knowledge that internal controls are a priority, will serve as a strong deterrent. Communicate that internal controls will ultimately protect employees if and when a fraud is committed by allowing them to quickly be eliminated from suspicion.

Financial audits can be helpful, but audits alone cannot replace internal controls or a thorough risk assessment. Audits only test a sample out of thousands of transactions, which are selected at random. So, the audit may catch an error, but it is no guarantee that the error is going to be a result of the fraud.

What qualifies an individual or a firm to assess risk?

Consider hiring a CPA with audit experience. They need not specialize in fraud, but they should be someone with lengthy experience in public accounting. Generally, CPAs with significant public accounting experience are well suited to evaluate controls that currently exist and assist in developing additional or more effective controls.

Basic assessments can be conducted over a few days or weeks, depending on the size of the business and amount of time needed to document the business’s day-to-day practices. The assessment does not need to be done all at once. The business owner should meet with the selected professionals, perform a general assessment, and then design a plan over time to develop and implement a comprehensive internal control system. After controls are implemented, periodic maintenance should be performed. Over time, even good controls will become less effective. Eventually people find their way around the controls, especially if they know they are not monitored regularly.

How does a service provider help clients protect themselves against fraud?

Any service provider should talk with clients about controls frequently, and not just during an annual audit or financial statement preparation. In every meeting, they should listen for key phrases or changes to the business. For example, the phrase, ‘We’re having cash flow problems,’ may indicate a control issue.

In order to truly reduce the likelihood of fraud, education and communication should be top priorities on both sides of the table.

Ernie Rossi is an audit partner at Sensiba San Filippo LLP, a regional CPA firm based in the San Francisco Bay area. He may be reached at (925) 271-8700 or [email protected]

Insights Accounting is brought to you by Sensiba San Filippo

Taylor, Bean & Whitaker Mortgage ex-CFO pleads guilty in mortgage fraud case

ALEXANDRIA, Va., Tue Mar 20, 2012 – Taylor, Bean & Whitaker Mortgage Corp’s. former chief financial officer pleaded guilty on Tuesday to charges he helped mislead investors and cover up shortfalls that led to the collapse of one of the largest mortgage companies during the recent U.S. financial crisis.

Delton de Armas, 41, of Carrollton, Texas, pleaded guilty to one count of conspiracy to commit bank and wire fraud and one count of making false statements, charges that each carry a maximum five-year prison term.

He admitted to helping inflate TBW’s balance sheet and helping the firm provide false financial statements to the federal loan enterprise known as Ginnie Mae, according to papers filed in federal court in Virginia.

He failed to intervene and report growing shortfalls in one of TBW’s primary funding mechanisms, Ocala Funding, which had two major investors: Deutsche Bank AG and BNP Paribas SA, the court documents said.

“I regret that anybody was hurt and that I didn’t speak up more,” de Armas said in a barely audible voice during his plea hearing in federal court. Sentencing was set for June 15.

De Armas worked under the firm’s former chairman, Lee Farkas, who last year was sentenced to 30 years in prison after being convicted on 14 counts of conspiracy, bank, securities and wire fraud that brought down the firm and one of the top U.S. banks, Colonial Bank.

“As CFO, Mr. de Armas could have put a stop to the fraud the moment he discovered it. Instead, the hole in Ocala Funding grew to $1.5 billion on his watch, and as it grew, so did his lies to investors and the government,” U.S. Attorney Neil MacBride said in a statement.

SEC-Citigroup $285 million fraud settlement gets new life

NEW YORK, Thu Mar 15, 2012 – A federal appeals court stopped just short of throwing out a judge’s controversial rejection of the U.S. Securities and Exchange Commission’s $285 million settlement with Citigroup Inc. in a fraud case.

The 2nd U.S. Circuit Court of Appeals said that U.S. District Judge Jed Rakoff in Manhattan appeared to have failed to give proper deference to the SEC, and may have overlooked the potential that Citigroup did nothing wrong.

While saying it needed to hear further arguments, the 2nd Circuit said there was a “strong” likelihood that Rakoff’s decision would be overturned.

The accord, announced in October, was intended to resolve civil fraud charges that Citigroup sold $1 billion of risky mortgage-linked securities in 2007 without telling investors that it was betting against the debt, resulting in more than $700 million of losses.

Rakoff rejected the settlement on Nov. 28. He said the SEC’s failure to require Citigroup to admit or deny the charges left him no way to know whether the settlement was fair.

That part of the ruling called into question the SEC’s decades-long practice of not requiring settling companies to admit or deny its charges.

He also called the $285 million payout “pocket change” for the third-largest U.S. bank, and said the accord did not serve the public interest.

The SEC and Citigroup had no immediate comment. Rakoff, who is sitting with the 2nd Circuit this week to hear cases, was also not immediately available for comment.

How tax filings and documents can assist forensic accountants in litigation support matters

Walter M. McGrail, JD, CPA, Senior Manager, Cendrowski Corporate Advisors

According to the Association of Certified Fraud Examiners, a typical organization loses roughly 5 percent of its annual revenue to fraud. When applied to the Gross World Product, this figure translates into approximately $3 trillion in fraud losses each year.

Though the economy appears to be on the mend, fraudulent activity remains prevalent in today’s business environment. When a fraud is suspected, a company or its counsel may retain a forensic accountant to investigate the matter.

“Forensic accounting is an important branch of accounting, and perhaps one of the most opaque,” says Walter McGrail, CPA, senior manager of Cendrowski Corporate Advisors. “It is a crucial tool in the investigation of white collar crime.”

Smart Business spoke with McGrail about fraud, forensic accounting and the tools used by forensic accountants in their work.

What is a forensic accountant and how is that person involved in fraud investigations

A forensic accountant is an individual who combines expertise in accounting, auditing, finance and investigations to assist legal professionals. Forensic accountants are typically engaged as expert witnesses, or they employ investigative skills that may require courtroom testimony; these individuals serve at the intersection of business and law.

Fraud investigations, including activities centered on obtaining evidence, performing interviews, writing reports and testifying in a case of fraud, are generally performed by forensic accountants looking to reconstruct historical events leading to the event. Historical event reconstruction is often critical for the accountant to understand the motive for perpetrating a fraud, the opportunity that allowed the fraud to occur in the organization and the rationalization employed by the fraud perpetrator in performing a fraudulent act.

These three elements comprise what forensic accountants call the ‘fraud triangle,’ and each element must be present in order for a fraud to occur.

Where might a forensic accountant begin his or her fraud investigation?

One of the first steps involved in a forensic investigation is to conduct a background investigation on the key players believed to be involved in the fraud. Knowing as much as one can about the individual or individuals in question sets a good foundation for future work that will be conducted in piecing together historical events.

Background checks will reveal if an individual has a history of criminal or civil litigation, as well as whether or not he or she is under financial duress or other pressures. These pressures may provide the rationalization needed for a fraud to occur. Background checks might also shine light on the motives for an individual to perpetrate a fraud.

Can a forensic accountant discern information from tax filings and documents?

Tax matters can become a basis for leads and disclosures on any forensic accounting engagement, and tax professionals are a vital part of any forensic accounting team.

Tax filings and documents are often a great source of information in the conduct of a forensic accounting engagement. These reporting devices are oftentimes generated by third parties. Information included on Forms W-2, 1099, 1098, etc., is typically prepared by third parties and reported directly to the taxing authorities, as well as to taxpayers.

Tax reporting may reflect financial information that is not otherwise made readily available by the target of a forensic examination. Taxpayers that otherwise keep information close to the vest often feel compelled to make accurate filings with tax authorities to avoid running afoul of tax laws. It’s one thing to treat financial information as proprietary and restrict its disclosure to third parties; it’s another thing altogether to misrepresent tax matters to federal, state, or local tax authorities.

Taxpayers also often use professionals to assist with their tax reporting compliance. While tax professionals may serve as advocates for their clients, rarely will independent accountants risk becoming complicit with inaccurate reportings.

How might a forensic accountant use tax returns to deduce information?

Tax filings can often be compared one to another in order to identify forensic financial information. Comparing business returns such as Schedules K-1 to US 1040s and federal returns to state returns and business returns (US 1065 or US 1120S) to business general ledgers often results in financial revelations not otherwise readily available to the forensic accountant. Moreover, there may be tax benefits motivating persons to make full disclosures to taxing authorities. For example, tax refund claims generated by losses or credits which can result in immediate cash flow generally require a fair amount of supporting disclosure and documentation.

By utilizing a forensic accountant, an organization can not only determine how and why a fraud occurred but can use the information gathered in a courtroom against the perpetrator.

Walt McGrail, CPA, is senior manager of Cendrowski Corporate Advisors. Reach him at (866) 717-1607 or [email protected]

Regulators sue former top executives at Fannie, Freddie

NEW YORK ― Six former top executives at Fannie Mae and Freddie Mac were sued by U.S. regulators, who said they misled investors over the mortgage finance companies’ exposure to risky home loans in the lead-up to the 2008 financial crisis.

The U.S. Securities and Exchange Commission brought civil fraud charges on Friday against former Fannie Mae CEO Daniel Mudd, former Freddie Mac CEO Richard Syron and four other one-time high-level executives at the companies. Regulators say the executives made it appear that their companies had far less exposure to riskier mortgages in their loan portfolios than in fact existed.

Freddie Mac and Fannie Mae have been propped up by $169 billion in federal aid since they were rescued by the government in 2008. Both companies were chartered by Congress to foster a liquid mortgage market.

The SEC said both firms have agreed to cooperate with the agency and have agreed to admit responsibility for the alleged conduct, without agreeing or denying that they are liable. The firms have also entered into non-prosecution agreements with the agency, the SEC said.

Attorneys for Mudd and Syron did not immediately respond to requests for comment.

Mudd, 53, was CEO of Fannie Mae from June 2005 until September 2008, when the FHFA put it into conservatorship. Mudd is now chief executive of asset manager Fortress Investment Group.

Syron, 68, was chairman and CEO of Freddie Mac from December 2003 until September 2008 when the FHFA stepped in.

“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” said Robert Khuzami, director of the SEC’s Enforcement Division, in a statement announcing the charges.

“These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books,” Khuzami said.

The civil charges were brought in two separate lawsuits filed in U.S. District Court in Manhattan. The SEC accused the six former executives of knowingly approving false statements to investors.

The regulator is asking the court to order the former officers to pay back alleged illegal profits, as well to impose penalties against them, court documents showed. The documents did not specify what amount the SEC would be seeking.

Former chief Corzine apologizes for collapse of MF Global

WASHINGTON ― Former MF Global chief Jon Corzine apologized to customers, employees and investors who have suffered because of the brokerage firm’s collapse, but said he does not know where missing customer money is.

“Their plight weighs on my mind every day — every hour,” Corzine said in lengthy remarks prepared for delivery on Thursday before a hearing of the U.S. House of Representatives Agriculture Committee.

“I simply do not know where the money is, or why the accounts have not been reconciled to date,” he said.

In separate testimony, a top executive of futures exchange operator CME Group Inc said MF Global misused hundreds of millions of dollars of customer funds by moving the money to its own accounts, the strongest accusation yet against the bankrupt futures brokerage.

“Transfers of customer funds for the benefit of the firm constitute serious violations of our rules and of the Commodity Exchange Act,” CME Executive Chairman Terrence Duffy said in prepared remarks.

CME, the biggest U.S. futures exchange operator, was a hands-on regulator of MF Global. Duffy said the brokerage admitted during a call with regulators that customer money was transferred out of segregation to the firm’s own accounts.

MF Global collapsed in late October after it was forced to reveal that it had made a $6.3 billion bet on European sovereign debt.

The court-appointed trustee has estimated the shortfall of customer money at $1.2 billion, but CME has disputed that figure as being too high. In his prepared testimony, Duffy indicated the shortfall was roughly half that amount.

Nine witnesses are scheduled at the hearing, but Corzine, a former governor of New Jersey, is the star. He is breaking his silence for the first time since MF Global’s Oct. 31 bankruptcy and his resignation days later.

Neither MF Global nor any of its executives has been charged with wrongdoing, but the failure of the firm — which froze the money of thousands of customers — has attracted the attention of the FBI and federal prosecutors.

Corzine said he believes “it is appropriate” for him to attempt to respond to lawmakers’ questions on Thursday, but said he may be unable to answer certain inquiries because he had limited access to documents since he left the firm.

He also distanced himself from some hands-on aspects of the firm’s business practices.

“Even when I was at MF Global, my involvement in the firm’s clearing, settlement and payment mechanisms and accounting was limited,” Corzine said.

He did say he accepts responsibility for the repo-to-maturity trades that related to the firm’s European sovereign debt exposure.

“At the time that MF Global entered into the transactions, I believed that its investments in short-term European debt securities were prudent,” he said.

Former Madoff trader to plead guilty next week to fraud charges

NEW YORK ― A former trader at Bernard Madoff Investment Securities is expected to plead guilty next week to defrauding Madoff’s customers by helping falsify records and fake trades starting in the early 1970s, federal prosecutors said in a letter Wednesday.

David Kugel, a former supervisory trader in the proprietary trading operations at Madoff’s investment fund, will appear in Manhattan federal court on Monday, according to a letter sent to U.S. District Judge Laura Taylor Swain.

Kugel has been cooperating with the government in its investigation of Madoff and the fallout from what prosecutors said was a decades-long $65 billion Ponzi scheme, prosecutors said. His guilty plea comes as part of his deal with federal prosecutors in exchange for his cooperation, according to the letter.

He is being charged with taking part in a conspiracy to commit securities fraud, falsify broker-dealer records and create records of fake trades used to dupe clients of the fund’s investment advisory business, prosecutors said.

Kugel also faces charges of bank fraud, securities fraud and falsifying records of an investment adviser and broker-dealer, prosecutors said.

Prosecutors said that Kugel began participating in the fraud starting in the early 1970s. That’s several decades before Madoff admitted to have begun running his Ponzi scheme, which, he said during his guilty plea, started in the 1990s. An attorney for Kugel did not immediately return a request for comment Wednesday.

Kugel was one of several former Madoff employees sued by the trustee liquidating Madoff’s investment management firm in 2010, seeking to recoup $70 million they allegedly withdrew improperly.

Madoff is serving a 150-year sentence in a North Carolina federal prison after admitting in 2009 to having run a decades-long Ponzi scheme.