Aug 07


MF Global 5 Years Later: PWC Set To Take The Fall As Corzine Still Untouched:

Jon Corzine, former Governor of New Jersey and CEO of Goldman Sachs, took over the helm of MF Global in March 2010.  When revenue at the bank failed to live up to expectations, Corzine developed a scheme to place a massive $6BN bet on the sovereign debt of the aptly named PIIGS (Portugal, Italy, Ireland, Greece, Spain) through a financial structure known as a “Repo to Maturity”.  To summarize the strategy for all you aspiring CEO’s, when you find it difficult to generate organic revenue growth sometimes the better option is to just bet your entire firm on a single, massively-levered trade on the sovereign debt of countries on the verge of insolvency.

Well, not so much.  Deterioration of the Eurozone economies in mid-2011 resulted in massive margin calls on Corzine’s trade and a liquidity crisis at MF Global.  By the time the dust settled there was $1.6BN of cash “missing” from customer accounts which should have been segregated.  And with that, less than 2 years after Mr. Corzine took the CEO seat, MF Global filed for bankruptcy protection on October 31, 2011 in the Southern District of New York.

We know what you’re thinking…sounds reckless to risk an entire firm on the highly volatile sovereign debt of a group of countries labeled the “PIIGS”, right?  Well apparently it’s not that big of a deal unless you’re the scapegoat accountants.

Yesterday, U.S. District Court Judge Victor Marrero of New York denied PwC’s motion for dismissal of a $1 billion professional malpractice suit filed by MF Global against the accounting firm saying that the administrator had “presented sufficient evidence to create a material factual dispute” as to whether advice from PwC ultimately played a role in the bankruptcy filing.  According to the WSJ:

MF Global sued PwC in March 2014 for at least $1 billion, alleging that the firm’s accounting advice helped cause MF Global’s 2011 collapse. Officials in charge of MF Global’s liquidation claimed PwC gave “flatly erroneous” advice on how to account for the European sovereign debt that tipped MF Global into bankruptcy.

MF Global’s lawsuit against PwC claims the accounting firm’s advice is what allowed Mr. Corzine to make such a big bet in the first place, a charge PwC has denied.

In a 69-page decision, the judge said the administrator “has presented sufficient evidence to create a material factual dispute” as to whether PwC’s accounting advice played a role in MF Global’s bankruptcy in the fall of 2011.

“This is a major victory for the MF Global estate,” said Nader Tavakoli, MF Global’s lead director. “It sends a strong message concerning the need for responsibility and accountability, and we hope to secure a substantial recovery for MF Global’s stakeholders.”

Daniel Fetterman, a lawyer from Kasowitz Benson Torres & Friedman LLP who is representing MF Global, called the ruling a “significant victory” in the legal fight.

“We look forward to presenting at trial the evidence concerning PwC’s extraordinary and egregious malpractice alleged in the complaint and its role in causing MF Global’s demise,” he said.

For its part, PwC has maintained that reckless trading decisions and “adverse market conditions” were the real cause of the bankruptcy filing, not faulty accounting of the trades.

In response, James P. Cusick, PwC’s lawyer, said the accounting firm stands by its work for MF Global, and that the commodity broker correctly accounted for the so-called repo-to-maturity transactions at issue in the lawsuit.

MF Global’s collapse was caused by its own business decisions and adverse market events, not any accounting determination” said Mr. Cusick, a litigator at King & Spalding.

Lesson learned.  If you commit a murder it’s the gun’s fault, if you gain 20 lbs it’s the fork’s fault and if you place a massively levered trade that blows up your firm then it’s the accountant’s fault.  After all, it’s not the losses of a failed trade that caused the liquidity crisis at MF Global but rather the timing of the realization of those losses that are truly to blame.

As for Jon Corzine, last we heard he was trying to raise capital for a new hedge fund (one which may have trouble getting a primary dealer designation) and we are confident he will succeed for two reasons.

Reason #1:

And Reason #2:


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For those interested, the full decision can be read below:

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