PwC Fails to Throw Out MF Global Malpractice Suit

PwC couldn't escape from a $1B suit brought by MF Global’s bankruptcy administrator over the auditor’s alleged negligence.

A federal judge on Friday paved the way for the MF Global Holdings Ltd.’s bankruptcy administrator after rejected PricewaterhouseCoopers’ bid to dismiss a $1 billion lawsuit. The suit accuses PwC of dispensing bad accounting advice on how MF Global should handle foreign investments made on highly leveraged European instruments that generated short-term income but saddled it with significant future liabilities.

The lawsuit, which seeks to hold PwC liable for its malpractice on advice surrounding MF Global’s business in the sovereign debt, is one of the last remaining pieces of litigation relating to the bankrupt financial services firm, following earlier settlements benefiting shareholders, bondholders and customers.

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Although the U.S. District Judge Victor Marrero in Manhattan allowed the suit to advance after determining that “PwC has not satisfied its burden of demonstrating the absence of any genuine issue of material fact,” but he said there remained open questions concerning whether PwC’s bad accounting advice contributed to MF Global’s demise. This means that the case could be unrelated to other disputes such as the infamous loss of $1.6 billion in segregated customer funds that brought down MF Global in 2011, which was the Wall Street’s largest collapse since the 2008 failure of Lehman Brothers.

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“flatly erroneous” accounting advice

The lawsuit had been initially filed in March 2014 by MF Global’s bankruptcy plan administrator. It accused PwC of negligence in approving MF Global’s accounting treatment for Corzine’s $6.3 billion wager on European sovereign debt and for some deferred tax assets.

More specifically, PwC allegedly advised MF Global to account for repurchase-to-maturity transactions as if they were sales and immediately book the revenues up to 21 months before they actually rolled in. In fact, the deals were not sales and the company shouldn’t have processed the revenues.

MF Global filed for bankruptcy on Oct. 31, 2011 after investors grew anxious over the brokerage company’s failed investments, credit rating downgrades, margin calls, and news that customer funds were used to shore up liquidity.

 

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