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From Securities Regulation Daily, July 09, 2014

Judge says MF Global’s $1 billion malpractice suit versus PwC is still on

By Mark S. Nelson, J.D.

A federal judge today refused to dismiss MF Global Holdings LTD.’s (MF Global’s) plan administrator’s malpractice suit against auditor PricewaterhouseCoopers LLP (PwC) over PwC’s advice on MF Global’s accounting for risky sovereign debt wagers. The Big Four auditor had asked the court to toss the suit because it said both it and MF Global were equally at fault. The court previously asked MF Global and PwC to focus on this possibly dispositive issue, but now briefing on the remainder of PwC’s motion to dismiss will resume (MF Global Holdings LTD. v. PricewaterhouseCoopers LLP, July 8, 2014, Marrero, V.).

Accounting for risky bets. MF Global once embraced the repurchase-to-maturity or “RTM” strategy for investing in risky European sovereign debt as a way to restore the firm’s prior investing glory. But a series of events that destabilized Europe’s economy turned the RTM strategy against itself, resulting in huge losses and launching MF Global on a path to its eventual collapse.

The plan administrator for MF Global now claims that PwC committed professional malpractice by giving MF Global defective advice on how to account for the RTM transactions. The suit also claims PwC erred in its advice to MF Global on capital reserves the SEC and Financial Industry Regulatory Authority had imposed once MF Global’s business began to slip, and in how it told MF Global to account for deferred tax assets.

Not so equally at fault. In denying PwC’s request to dismiss MF Global’s suit, Judge Victor Marrero noted that the in pari delicto doctrine promotes judicial economy by telling courts to stay out of disputes between two wrongdoers in order to avoid rewarding either of them for unlawful acts. In the bankruptcy setting of this case, the trustee must likewise abide by the doctrine, except in the rare case of a corporate agent whose acts benefit only himself or someone else.

Lawyers for PwC had argued that Commodities Consumer Action, another case in which claims against PwC were dismissed on the basis of in pari delicto, ought to spur the court to dismiss MF Global’s malpractice claims here. But the court said that case was inapt because MF Global’s officers there had engaged in allegedly improper transfers of customer funds, which PwC failed to detect.

By contrast, said the court, in pari delicto could apply to MF Global’s malpractice claims here only if it participated in PwC’s allegedly faulty accounting advice. The court said MF Global’s complaint bore no facial allegations that MF Global participated in getting PwC’s advice.

The court, however, did not say that in pari delicto can never apply in the context of accounting advice. Judge Marerro said the doctrine could apply if the plaintiff intentionally helped get the defective advice by deliberately providing erroneous financial statements. But according to the court, MF Global’s complaint did not justify pursuing this theory so early in the case.

Moreover, the court rebuffed PwC’s argument that in pari delicto should apply because of the risky nature of MF Global’s RTM strategy. The court said the doctrine is more limited than PwC suggested and that giving it wider berth could insulate auditors from nearly any malpractice suit.

The case is No. 14-cv-2197 (VM).

Attorneys: Daniel J. Fetterman (Kasowitz Benson Torres & Friedman LLP) for MF Global Holdings Ltd. James J. Capra, Jr. (King & Spalding LLP) for Pricewaterhousecoopers LLP.

Companies: MF Global Holdings LTD.; PricewaterhouseCoopers LLP; Financial Industry Regulatory Authority

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