MF Global Holdings Ltd. sued its auditor PricewaterhouseCoopers LLP (PwC) for at least $1 billion on March 28, alleging that the Big Four firm’s “erroneous accounting advice” resulted in the brokerage company’s failed investment in billions of dollars of European sovereign debt instruments and contributed to MF Global filing for bankruptcy in 2011.
According to the complaint filed in US District Court Southern District of New York on Friday, MF Global “seeks to hold PwC liable for its malpractice in connection with its advice concerning, and approval of, the company’s off-balance-sheet accounting for its investment,” the complaint stated.
“But for PwC’s erroneous accounting advice, MF Global Holdings could not have – and would not have – invested heavily in European sovereign debt to generate immediate revenues and would not have suffered the massive damages that befell the company in 2011.”
MF Global’s collapse, Wall Street’s largest since the 2008 failure of Lehman Brothers, was triggered in part by $6 billion in ill-timed bets on debt of Ireland, Italy, Portugal, Spain, and other European nations, according to a March 28 USA Today article. The investments were part of a financial strategy in which then-CEO Jon Corzine, a former US senator, New Jersey governor, and Goldman Sachs chief executive, hoped to transform MF Global into an investment bank.
The lawsuit noted that PwC advised MF Global to make those investments by using “repurchase-to-maturity” (RTM) financing transactions. According to a CNBC article, RTM is a common financing technique that usually involves a short-term agreement to sell and later repurchase a security.
But as the European economy weakened, MF Global was beset by margin calls and credit downgrades by rating agencies concerned about the New York City-based brokerage firm’s increasing debts, the USA Today reported. MF Global officials used more than $1.6 billion in customer funds to cover liquidity shortfalls.
MF Global filed for bankruptcy on October 31, 2011.
“Had PwC met its duty to provide accounting advice and auditing services consistent with the professional standards of ordinary skill, prudence, and diligence, it would have advised MF Global Holdings that the Euro RTM transactions had to be recorded on the company’s consolidated financial statements as secured financings and not as ‘sales,’” the complaint stated. “In that circumstance, the company would never have amassed the enormous Euro RTM exposure it did, nor would it have suffered massive damages as a direct and proximate result of PwC’s negligence and malpractice.”
In a statement regarding the lawsuit, PwC claimed that the RTM accounting at the center of the dispute was “examined by trustees, regulators, and a congressional committee” and that “none of them has found that the accounting for those transactions was incorrect.”
The statement concluded: “PwC is disappointed that this meritless claim has been brought.”
A November 2013 order by US District Court Judge Victor Marrero required MF Global to pay $1.2 billion in restitution to customers who lost money in the collapse, the USA Today reported. The order also required the brokerage company to pay a $100 million civil penalty. Separate litigation against Corzine is ongoing.
[For other articles about the MF Global Holdings lawsuit against PwC, click here (Going Concern), here (Reuters), here (Wall Street Journal), here (Bloomberg), and here (International Business Times).]