NEW YORK (Reuters) - The administrator of MF Global Holdings Ltd’s bankruptcy plan on Friday sued the auditor PricewaterhouseCoopers for at least $1 billion over its advice on a $6.3 billion European sovereign debt investment that helped fuel the brokerage’s rapid demise.
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.
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