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 According to a complaint filed in U.S. District Court in Manhattan,
PwC committed professional malpractice by offering "flatly
erroneous" advice concerning, and approval of, the off-balance-sheet
accounting treatment for the debt by MF Global and its then-chief
executive, Jon Corzine.
The complaint said PwC knew that the investment would add
significant risk to MF Global's already weak finances. It said MF
Global would not have taken on the exposure, which allowed it to
book immediate revenue, had it received sound advice.
"PwC's professional malpractice and negligence were a direct and
proximate cause of massive damages the company suffered," the
complaint said.
Caroline Nolan, a PwC spokeswoman, said that the accounting
treatment that is the subject of the complaint has been examined by
trustees, regulators and a congressional committee.
"None of them has found that the accounting for those transactions
was incorrect. PwC is disappointed that this meritless claim has
been brought."
Corzine invested $6.3 billion in debt of countries such as Belgium,
Ireland, Italy, Portugal and Spain to advance his strategy of
transforming his futures and commodities brokerage into a global
investment bank.
But as Europe's economy weakened, MF Global struggled with worries
about the debt, margin calls, credit rating downgrades, and news
that money from customer accounts was used to cover liquidity
shortfalls, ending in its October 31, 2011 bankruptcy.
The complaint said it is the first seeking to hold PwC liable for
malpractice over its accounting advice for the sovereign debt. It
does not address how customer money was used. Creditors would share
in recoveries if the lawsuit succeeds.
Corzine is a former governor and U.S. senator from New Jersey, and
former co-chairman of Goldman Sachs. He is not a defendant in the
PwC case but faces other lawsuits over MF Global from investors,
customers and U.S. regulators.
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DIRECTOR "DID NOT LIKE" ACCOUNTING TREATMENT
MF Global's plan administrator is a three-member board to which
Louis Freeh, the former Federal Bureau of Investigation director and
original court-appointed MF Global trustee, assigned his rights to
pursue claims on creditors' behalf.
Corzine had made the sovereign debt investments through so-called
repurchase-to-maturity trades, in which he agreed to sell securities
and repurchase them later at higher prices, enabling MF Global to
obtain short-term funding while boosting leverage.
According to Freeh's April 2013 report on MF Global's collapse, the
company's board became increasingly concerned in 2011 over the
portfolio's growing size.
He said at least one director, David Schamis, "did not like" the
"accounting-driven structure," which let MF Global recognize upfront
profit while satisfying rating agencies, and was concerned about MF
Global's ability to unwind the trades.
Schamis, a former executive at private equity firm JC Flowers & Co,
is a founding partner of Atlas Merchant Capital in New York. He
could not immediately be reached for comment.
Former MF Global customers had also sued PwC over the company's
collapse, but a federal judge last month dismissed those claims.
The case is MF Global Holdings Ltd as Plan Administrator v.
PricewaterhouseCoopers LLP, U.S. District Court, Southern District
of New York, No. 14-02197.
(Reporting by Jonathan Stempel and Nate Raymond in New York;
editing
by Ken Wills, Jonathan Oatis and Bernard Orr)
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