(Adds PwC statement)
By Jonathan Stempel
NEW YORK, March 28 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 Oct. 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
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
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)