PricewaterhouseCoopers Ducks MF Global Suit

MANHATTAN (CN) - Citing a legal doctrine that forbids one corporate wrongdoer from suing another for the same misconduct, the 2nd Circuit affirmed the dismissal Friday of attempts to hold PricewaterhouseCoopers liable for the collapse of MF Global.

After MF Global declared bankruptcy in 2011, investors besieged the company and its CEO, former New Jersey Gov. Jon Corzine, with allegations that they invested billions in several European countries' debt using risky financing structures.

The firm faced a $1.6 billion shortfall, and in the rubble of sorting through the bankruptcy MF Global could not account for $750 million of its customers' money.

A federal judge in Manhattan ultimately consolidated shareholder suits as one 14-count action against Corzine and 22 other MF Global directors, officers and underwriters.

One of the complaints was filed by commodities customers of MF Global, representing the latter's claims upon assignment by the trustee appointed to oversee MF Global's liquidation under the Securities Investor Protection Act.

They sought in part to hold MF Global's accountants at PwC liable, saying MF Global relied PwC's advice to make investments by using repurchase-to-maturity financing, in which bonds are sold and simultaneously agreed to be repurchased at a later date at which time the price might be higher.

U.S. District Judge Victor Marrero rejected that maneuver last year, however, after finding that MF Global and PwC were in pari delicto, or at equal fault.

A three-judge panel with the 2nd Circuit affirmed in a summary order Friday.

"A corporation that engages in malfeasance cannot sue outside accountants who negligently failed to detect or prevent that malfeasance," the unsigned decision says.

Judges Dennis Jacobs, Rosemary Pooler and Peter Hall sat on the appellate panel.

Marrero did reject PWC's in pari delicto defense when considering another of the MF Global cases against it.

The July and August 2014 rulings in which Marrero advanced claims against the accountants involved claims brought by MF Global's plan administrator.

In that case, Marreo said the doctrine would "insulate an auditor from liability whenever a company pursues a failed investment strategy after receiving wrongful advice from an accountant."

In trying to revive their claims against PwC, the commodities customers told the federal appeals court that, as public accountants, PwC performed "a special regulatory function" as a whistle-blower organization.

They said that allowing the accounting firm to skirt responsibility would "undermine a federal regulatory scheme," but the 2nd Circuit ruled that the specific case against PwC involved New York State law, and plaintiffs had not identified any federal law that would have pre-empted it and allowed in pari delicto.

The 2nd Circuit found the next argument, the lack of a ruling on MF Global's wrongdoing, self-defeating. That is, if MF Global was found innocent of wrongdoing, then PwC's bad auditing could have caused the firm no injury, the court said.

Since PwC owed MF Global, not that firm's customers, a duty to perform accurate auditing, the judges also declined to revive professional negligence claims.

Last month PwC reached a $65 million settlement of a separate class action, accusing it of falsely certifying MF Global's 2010 and 2011 financials.

Seven bank underwriters - including Citigroup, Deutsche Bank, Goldman Sachs, JPMorgan and Merrill Lynch - settled a related lawsuit by former MF Global stockholders for $74 million in December 2014,

Entwistle & Cappucci, the firm that represents the commodities-customer plaintiffs trying to sue PwC, said its clients "are considering their options."

"This is a very disappointing decision," managing partner Andrew Entwistle said in an email.

MF Global's attorney, Daniel Fetterman of Kasowitz, Benson, Torres & Freidman, did not return a comment.

PwC spokeswoman Caroline Nolan had no comment on the court ruling. An attorney for the accountancy, James Capra Jr. of King & Spalding, was not available for comment.

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