Risk & Compliance

MF Global Suit Against PwC Cleared for Trial

A judge says a jury should decide whether PwC provided bad accounting advice that caused MF Global's collapse.
Matthew HellerAugust 9, 2016

A jury should decide whether PricewaterhouseCoopers caused the collapse of MF Global by giving bad accounting advice to the futures brokerage, a federal judge has ruled.

The decision allows the administrator winding down MF Global to proceed to trial with its $1 billion malpractice suit alleging “extraordinary and egregious” professional negligence against PwC. MF Global filed bankruptcy in 2011 amid investor anxiety about its investments in risky sovereign debt from troubled European countries.

In denying PwC’s motion for summary judgment, U.S. District Judge Victor Marrero said the administrator had “presented sufficient evidence to create a material factual dispute” as to whether the firm’s advice caused MF Global’s collapse.

PwC argued that MF Global’s business decision to invest in sovereign debt through a financial vehicle known as “Repo to Maturity,” rather than the accounting decision to record the RTMs as sales, was to blame for MF Global’s demise.

But Marrero ruled that “a jury could reasonably conclude … that PwC’ s approval of sale accounting was a proximate cause of MF Global’s buildup of Euro RTMs and of the liquidity issues precipitating MF Global’s collapse.”

The judge also rejected PwC’s argument that it was not liable because MF Global officials actively participated in the decision to use sale accounting.

“This is a major victory for the MF Global [bankruptcy] estate,” Nader Tavakoli, MF Global’s lead director, told The Wall Street Journal. “It sends a strong message concerning the need for responsibility and accountability, and we hope to secure a substantial recovery for MF Global’s stakeholders.”

The RTM strategy was developed by ex-New Jersey Governor Jon Corzine, who after joining MF Global as CEO in March 2010, took a $6.3 billion position in European sovereign debt, betting the European Union would come to the rescue of Europe’s troubled economies, averting a default.

After the bet went sour, two ratings agencies downgraded MF Global to junk, sending it spiraling into bankruptcy proceedings.

A lawyer for PwC said the firm stood by its work and “MF Global’s collapse was caused by its own business decisions and adverse market events, not any accounting determination.”