PwC settles midtrial in MF Global accounting malpractice case
New York Law Journal
Mark Hamblett
23 March 2017

The multibillion-dollar fight between the bankruptcy administrator for MF Global and PricewaterhouseCoopers over accounting for European sovereign debt has been settled midtrial.

The settlement was reached late Wednesday and the parties informed Judge Victor Marrero Thursday morning. Terms of the deal were not disclosed and there is no indication how much PricewaterhouseCoopers paid to settle accounting malpractice claims for its role in advising the doomed MF Global and its then-head Jon Corzine on how to book the purchase of the debt of five European countries in 2010 and 2011.

The settlement came just over three weeks into a trial in which Corzine, the former co-chairman of Goldman Sachs and New Jersey governor and senator who was called in to turn around MF Global in 2010, testified before the jury in Marrero's courtroom (NYLJ, March 9).

Corzine said MF Global relied on the advice of PricewaterhouseCoopers every step of the way and it was market turmoil and a crisis of confidence that sank the company. He implied in his testimony that revelations that MF Global was using off-balance-sheet accounting, endorsed by PwC, helped finish off the company in October 2011.

a "CYA" (Cover Your Audit) by the firm

Daniel Fetterman, a partner at Kasowitz, Benson, Torres & Friedman representing MF Global, alleged that errors by the accounting giant on how to treat some $6.3 billion in transactions, followed by what he called a "CYA" (Cover Your Audit) by the firm, led to the rush for the door by investors, lenders and ratings services, propelling MF Global into bankruptcy.
But James Cusick of King & Spalding, working to fend off a claim for as much as $3 billion in damages, said Pricewaterhouse­Coopers followed correct accounting procedures.

Cusick told the jury in opening arguments that the company's plunge into insolvency was unrelated to the accounting treatment and instead was the result of MF Global's "massive investment in Euro bonds, its risky trading strategy, its unprofitable business and awful market conditions."

"It was the strategy itself that was to blame," Cusick said (NYLJ March 7).
The two sides in the case have been circling each other on a settlement for some time. A last attempt at mediation that postponed the onset of jury selection for three weeks failed to produce a deal (NYLJ Feb. 24). Marrero issued a decision last week denying PwC's motion for a mistrial in the case, holding PwC had plenty of notice on MF Global's theory of causation.

The case, MF Global Holdings v. PricewaterhouseCoopers, 14-cv-02197, focused on how much risk Corzine and his team authorized as they made escalating bets on the bonds of Italy, Spain, Portugal, Belgium and Ireland, bets they made based on the assumption that the European Union would make good on the debt.

That assumption proved correct and Corzine, who has been forced to pay a $5 million fine, accept a ban on commodities and futures trading and pay millions more in a settlement with creditors, was able to tell the jury that each bond paid off.

But he was not allowed to opine directly that the company's failure was the fault of PwC for green-lighting off-balance-sheet accounting for the transactions.

When Fetterman co-counsel Stephen Sorensen of Thomas, Alexander, Forrester & Sorensen asked Corzine if PwC had told him the accounting treatment was risky, would he have done anything differently—and asked if the Euro bond investments had been on the balance sheet, would MF Global still have collapsed—Marrero sustained defense objections.

But Corzine was able to suggest that it was a lack of market confidence that led to unjustified credit downgrades, and off-balance-sheet accounting was one of the contributors to that.

Corzine testified about how he and his people approved the method of booking the repurchase-to-maturity bond transactions for accounting purposes after a "full discussion" with PwC, MF Global's internal staff and the company's internal audit committee.

"Did the fact that PwC signed off on this give you comfort?" Sorensen asked him.

"It gave me comfort," Corzine said. "And the audit committee."
Representatives on both sides said the case was "settled to the mutual satisfaction of the parties."

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