A federal judge in New York has refused to dismiss a $1 billion lawsuit against PricewaterhouseCoopers over its audits of the bankrupt investment firm MF Global.
The brokerage firm collapsed in October 2011 after former New Jersey Governor and Senator Jon Corzine took over as chairman and CEO in 2010 and pushed it to invest in risky sovereign debt from troubled European countries. The firm had $44.4 billion in liabilities and equity of a little over $1.4 billion before its failure. In the brokerage’s waning days, the firm borrowed approximately $1.6 billion from customer accounts in an effort to cover up the shortfall, though it later reimbursed the funds to investors.
MF Global was found to have resorted to off-balance sheet transactions known as “repo-to-maturity,” in which it used the sovereign debt bonds as collateral for the loans it took out, while earning money from the spread between the rate on the bonds and the rate it paid to the counterparty on the financing.
PwC settled another lawsuit involving MF Global in 2015 for $65 million for failing to detect problems with the firm’s financials during its 2011 and 2011 audits, without admitting wrongdoing (see
The plan administrators, MF Global Holdings, claimed in their complaint that PwC had committed “extraordinary and egregious” professional negligence for approving MF Global’s off-balance sheet accounting for the European sovereign debt transactions and approving MF Global’s decision not to record a valuation allowance against its deferred tax asset before September 2011. Both of those decisions, according to the plan administrator, were substantial causes of MF Global’s bankruptcy.
U.S. District Court Judge Victor upheld the claims Friday brought by MF Global Holdings against PwC for professional negligence, clearing the way for the case to proceed to trial. MF Global was represented by the New York law firm Kasowitz Benson, Torres & Friedman LLP, led by partner Daniel J. Fetterman.
“We are pleased with Judge Marrero’s thoughtful and well-reasoned decision,” Fetterman said in a statement. “It is a significant victory for MF Global on all contested issues, and we look forward to presenting at trial the evidence concerning PwC’s extraordinary and egregious malpractice alleged in the complaint and its role in causing MF Global’s demise.”
PwC’s attorney continued to defend the firm’s work. "PwC stands by its work for MF Global,” said PwC trial counsel James P. Cusick in a statement Friday. “MF Global accounted for the repo-to-maturity transactions correctly. MF Global’s collapse was caused by its own business decisions and adverse market events, not any accounting determination.”
