Jon Corzine, the former New Jersey governor and Goldman Sachs chief who oversaw the collapse of MF Global, is poised to take the stand next week in a potentially explosive trial over the alleged negligence of the company’s auditor, PwC.
The world’s second-biggest professional services firm was the auditor of MF Global, the futures brokerage that collapsed in October 2011 after huge bets on the debt of Italy, Portugal and other EU nations.
MF Global’s administrator claims that the brokerage relied on PwC’s “flatly erroneous” accounting advice when it bought the bonds using a special kind of financing arrangement. The administrator also faults PwC’s advice on some deferred tax assets, on which the company took a $119m write-off just six days before going bust.
“The evidence will show that PwC’s negligence was the cause of MF Global’s collapse, which cost the jobs of thousands of people,” said Nader Tavakoli, director of the administrator.
It is seeking damages of $2.8bn to $3.1bn, including pre-judgment interest.
PwC says it stands by its work for MF Global, and that the brokerage correctly accounted for the so-called repo-to-maturity transactions at issue in the lawsuit. The firm plans to argue that the accounting had nothing to do with the strategy set by Mr Corzine and his team.
“MF Global failed because of its business decisions,” said Rich Marooney, partner at King & Spalding. “It decided to invest heavily in European sovereign bonds, which caused its demise. As an independent auditor, PwC doesn’t give business advice or strategic advice.”
The case is another high-profile test for PwC, which has faced a succession of challenges in recent years over its role in auditing troubled companies. Last August the firm made a dramatic mid-trial settlement of a $5.5bn negligence suit brought against it over the 2009 collapse of Colonial Bank, in which PwC was accused of failing to spot a multibillion-dollar conspiracy.
It also comes after the firm’s gaffe at the Academy Awards last month, when a partner in charge of handing the right envelopes to presenters failed to do so.
In a statement, PwC said: “There is absolutely no connection between the mistake at the Oscars and the MF Global matter.”
Jury selection begins on Monday, for a trial in New York set to last four or five weeks. Mr Corzine may be called as the first or second witness for the plaintiffs, according to people familiar with the administrator’s plans.
The evidence will show that PwC’s negligence was the cause of MF Global’s collapse, which cost the jobs of thousands of people
Mr Corzine, 70, has kept a low profile since resigning from MF Global in November 2011. He now spends his days with his family, managing his own investments, working with a homeless youth charity and teaching a course on globalisation, sustainability and human rights at Fairleigh Dickinson University in Teaneck, New Jersey.
In January Mr Corzine paid a $5m penalty to resolve a lawsuit from US commodities regulators, alleging that he failed to properly supervise employees handling customer funds.
While co-chief executive officer at Goldman in the mid-1990s, he pushed to take the bank public before being forced out by Hank Paulson. He joined MF Global in March 2010, a year after being defeated for re-election as New Jersey governor, determined to transform the brokerage into a real force on Wall Street.
The $6.3bn of debt which Mr Corzine amassed at MF Global was based on an assumption that the EU would come to the rescue of its troubled economies, averting defaults. That assumption was ultimately correct, but general market fears over big exposures to the debt of Portugal, Italy, Spain and Belgium — combined with a disclosure of the big tax write-off — prompted creditors to pull lines.
It was the largest failure on Wall Street since the collapse of Lehman Brothers in 2008.
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