Auditors at PwC May Share Blame for MF Global Collapse
(CN) - PricewaterhouseCoopers, MF Global's auditor, may be liable for giving "egregious" advice regarding the brokerage's investment strategy that led to its collapse, a federal judge ruled.
MF Global Holdings collapsed in October 2011 and then couldn't account for what it had done with more than $750 million of its customers' money.
After the collapse, CEO Jon Corzine, a former governor of New Jersey, was accused of running the company in an arrogant manner and placing bad bets that horrified his underlings, particularly on European sovereign debt.
Corzine joined the firm in 2010 with plans to make it a major player on Wall Street.
"Corzine caused MF Global to make significant investments in various instruments, such as the sovereign debt of certain European countries. Over time, at Corzine's direction, these investments grew substantially and became a material portion of the Firm's balance sheet, even as the investments grew increasingly risky," the complaint by the Commodity Futures Trading Commission states.
As the firm's financial situation became dire, it used nearly $1 billion dollars of customer funds to support its own operations, then filed for bankruptcy protection.
MF Global tried to spread the blame in March, filing a $1 billion complaint against its longtime auditor, PricewaterhouseCoopers. The complaint claimed that the accounting firm's "extraordinary and egregious professional malpractice" caused MF Global's collapse.
In a victory for MF Global on Wednesday, U.S. District Judge Victor Marrero declined to dismiss the action.
PricewaterhouseCoopers (PwC) moved to dismiss based on the theory of in pari delecto, Lain for "in equal fault," arguing that both parties are equally at fault, giving no one a superior claim, and rendering the dispute moot.
Judge Marreo in Manhattan faulted PwC's reasoning, which he said would allow the in pari delicto doctrine to "insulate an auditor from liability whenever a company pursues a failed investment strategy after receiving wrongful advice from an accountant."
"Such a broad reading of the doctrine would effectively put an end to all professional malpractice actions against accountants - an outcome not in line with [New York law]," Marrero continued.
In ongoing litigation, MF Global will need to prove that it "innocently accepted PwC's negligent advice in carrying out the RTM [repurchase-to-maturity] strategy," the 16-page ruling concludesDaniel Fetterman of Kasowitz, Benson, Torres & Friedman, an attorney for MF Global's plan administrator, called the ruling "a significant step forward in enabling companies ... to hold their accounting firms liable for malpractice."