PriceWaterhouseCoopers settled a potential $3 billion lawsuit by the administrator of bankrupt MF Global mid-trial, ending a case that could have expanded the scope of auditor liability when companies collapse.
The global accounting firm blamed management mistakes by former Chairman Jon Corzine, who assembled a multibillion-dollar portfolio of European sovereign bonds at MF Global just as the U.S. debt rating was downgraded and the market for peripheral Euro bonds was entering a severe round of convulsions. The administrator for MF Global's estate argued accounting errors, including allowing MF Global to keep the bonds off its balance sheet, precipitated the company's collapse.
By settling before the jury had a chance to decide, PwC left open important questions about the extent to which an auditor can be held liable for its advice on complex accounting questions, which often resist a simple yes-or-no answer.
"As a settled case, there is zero precedential value," said Jacob Frenkel, a member of Dickinson Wright in Washington and former Securities and Exchange Commission attorney. "Where there was a risk of extending unreasonably the role of an auditor, the law remains as is, meaning that auditors provide reasonable assurances about financial statements and are not auditors of business judgment."
Neither PwC nor MF Global would comment on the amount of the settlement, other than to say it was satisfactory to both sides. This ends the last of the MF Global suits against it; PwC settled another lawsuit by MF Global investors for $65 million in 2015. It reached a mid-trial settlement of a $5.5 billion lawsuit over the failure of mortgage lender Taylor, Bean & Whittaker last year for an undisclosed amount.
MF Global went bankrupt in October 2011 after what was effectively a run on the bank, when its commodities brokerage customers began to withdraw funds and it was hit with margin calls over its $6.3 billion European bond portfolio. It soon emerged that the company had also tapped more than $1 billion in customer deposits to try and prop up its own liquidity, which it ultimately restored. Corzine, a former Goldman Sachs partner and New Jersey governor, paid $5 million in fines and agreed to a lifetime ban from the commodities futures business for failure to supervise in a settlement with the Commodities Futures Trading Commission earlier this year.
MF Global eventually paid back nearly all of its creditors except for unsecured bondholders. That debt now is mostly in the hands of distressed-debt investors who stand to recover the settlement proceeds. MF Global was prepared to present witnesses who pegged the losses attributable to PwC at $2 billion plus prejudgment interest. As a private partnership, however, it's unclear whether PwC could pay even a fraction of that amount.
The trial featured several days of testimony by Corzine, a familiar figure with thinning grey hair and well-tailored suits, and high-stakes brinkmanship by the lawyers on both sides. PwC resisted calls by U.S. District Judge Victor Marrero to settle the case in mediation before trial and asked for a mistrial after it said MF Global shifted its theory of the case. The trial was suspended last Wednesday for more talks, which ended in the settlement announced today.
