The trial in which a number of hedge funds and creditors are partly blaming PricewaterhouseCoopers for the collapse of MF Global is about to begin in U.S. District Court in New York. The plaintiffs, alleging malpractice involving “erroneous accounting advice,” are seeking over $3B in damages. Former MF Global CEO Jon Corzine, also an Ex-Goldman Sachs (GS) co-chairman and formerly both a New Jersey governor and US senator, is expected to testify in court.
MF Global, once a global financial derivatives broker, is no longer in business. The firm failed in 2011 after customers left when they learned that Corzine had placed big bets on European sovereign debt during a volatile time for the markets. This caused a $1.6B shortfall in client accounts.
Yet, because MF Global employed repo-to-maturity instruments to bet on the debt, this let the firm report the bets as gains, which enhanced the way its revenue looked. Also, clients’ funds were commingled with MF Global’s funds even though they should not have been mixed together.
Now, led by hedge fund founder Nader Tawakoni, the plaintiff creditors and hedge funds, including Caspian Capital, Knighthead Capital, and Empyrean Capital, contend that the advice that PwC provided MF Global over to how to deal with these European bond purchases was flawed. According to Tavakoli, who spoke with The Wall Street Journal, the plaintiffs believe that MF Global wouldn’t have had to shutter its business were it not for PwC’s allegedly “egregious negligence.”
Tavakoli added that it was this negligence that cost thousands to become unemployed and MF Global stakeholders to sustain “catastrophic losses.” The lawsuit even argues that the advice that PwC provided played a role in Corzine betting on the European bonds at all. Now, with this case going to trial, PwC continues to defend the work that it did for MF Global, including maintaining that its audit work for the firm met professional standards, was correct, and not connected to the latter’s failure.
PwC Taken to Task for MF Global Failure
This is not the only legal attempt to go after the accounting firm over the MF Global debacle. In 2015, PwC agreed to pay $65M to resolve a class actions securities case brought by investors who accused the company of doing an improper job with its audits of MF Global prior to its collapse. MF Global shareholders accused PwC of stating that the financial derivatives broker was financially healthy even though it knew, or if not then it should have known, that its financial statements were not accurate. Despite settling, PwC also stood by its audits then.
This is also not the latest lawsuit seeking to hold those considered responsible for MF Global’s demise and the resulting investor losses. In January, Corzine settled the US Commodity Futures Trading Commissions’ lawsuit against him by agreeing to pay $5M. He also consented to be barred from being allowed to trade client funds in commodities and other CFTC-regulated instruments.
Corzine was not allowed to use insurance money to pay the settlement. He accepted responsibility for MF Global’s collapse.
Also, in 2016, a judge approved a $64.5M settlement between MF global customers and ex-MF global executives, including Corzine.
Hedge Funds Reach for Gold in MF Global Lawsuit Against PwC, The WSJ, March 6, 2016
Corzine, others settle MF Global lawsuit for $64.5 million, Reuters,July 25, 2016