The Plan Administrator for MF Global Holdings Ltd. has sued Pricewaterhouse Coopers LLP alleging that its “malpractice and negligence” caused MF Global Holdings to sustain more than US $1 Billion in damages in connection with its investment in certain European sovereign debt instruments before its demise in October 2011.
According to the Administrator’s Compliant filed in Federal Court in NYC on March 28, 2014, PwC provided MF Global advice that it relied on in accounting for these investments “off-balance sheet.”
MF Global Holdings was the holding company for a number of subsidiaries, including MF Global Inc. (MFGI), which was a futures commission merchant registered with the Commodity Futures Trading Commission and a broker dealer registered with the Securities and Exchange Commission. PWC acted as the independent auditor for MF Global since before its initial public offering in 2007, says the Complaint.
The Plan Administrator makes clear in the Complaint that MF Global’s accounting of its European debt investments had nothing to do with MFGI’s misuse of customer funds.
The Complaint says that PwC advised MF Global to account for its investment in European sovereign debt instruments cleared on the London Clearing House as sales, thus “immediately booking revenues…up to 21 months before the Company actually received those revenues.” PwC’s advice, says the Complaint, enabled MF Global to account for these revenues in its quarterly and annual public financial statements. Moreover, says the Administrator,
“PwC knew when it gave its faulty advice that the Company was in a weak financial condition and that huge positions in European sovereign debt posed significant additional risks to [MF Global].”
In fact, says the Administrator, MF Global’s investments did not qualify as sales under Generally Accepted Accounting Principles.
MF Global’s investments in European sovereign debt instruments apparently were structured as so-called “Repos to Maturity” (RTMs). These are a type of repurchase transactions (i.e., transactions where one party sells a security to another subject to an agreement to repurchase the same or equivalent security at a later date) where the end date for the repo matches the maturity date of the security underlying the repo. Unlike an ordinary repo, in an RTM, at the end date of the repo, the underlying security is not returned to the initial repo seller and the repo transaction is solely cash settled.
The Complaint also alleges that PwC was negligent in not advising MF Global that MFGI should have been reserving capital for purposes of its required capital computation with the Securities and Exchange Commission in connection with MF Global’s RTM transactions.
In August 2011, MFGI was obligated by the Financial Industry Regulatory Authority to recognize a US $255 Million capital charge in connection with the European sovereign debt underlying MF Global’s RTM transactions. Moreover FINRA required MFGI to apply the capital charge retroactively to July 2011. As a result, says the Complaint, MFGI became undercapitalized by US $150.6 Million, and MF Global Holdings was required to file an amended financial report with the SEC. This had serious implications, says the Complaint:
“The negative impact of MF Global Holding’s filing of an amended [financial report] was significant. It created bad press, undermined investor confidence and that of the rating agencies, and created a higher level of scrutiny and mistrust of MF Global on the part of its regulators.”
According to the Wall Street Journal, PwC has issued a statement expressing its disappointment that “…this meritless claim has been brought:”
"During the two-and-a-half years since the collapse of MF Global, the repo-to-maturity accounting that is the subject of today's 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 must formally answer the Plan Administrator’s Complaint within 21 days unless the parties agree to a later date or the Court orders otherwise. This matter is MF Global Holdings Ltd., as Plan Administrator v. PricewaterhouseCoopers LLP, 14 CV 2197 (filed March 28, 2014 in the United States District Court, Southern District of NY).
Just last week, a Federal Court in NYC rejected the efforts of three former principal MF Global Holdings officers to dismiss a lawsuit against them by the MF Global Litigation Trustee (see article, "Principal MF Global Officers Again Fail at Effort to Dismiss a Lawsuit against Them" at http://www.garydewaalandassociates.com/?p=2233).
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