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How Much Trouble Is PwC Looking at for All This MF Global Business?

As has been reported, MF Global may have done some commingling of client money with its own which is a big no-no. This means the Feds are now on the case, which means typically cool-as-a-cumcumber cucumber Jon Corzine could be sweating a bit. MF Global’s auditor, PwC, on the other hand, has it made in the shade (at least somewhat). Why? How? Alison Frankel over at Reuters tells us:

[E]ven if it turns out that MF Global was illicitly dipping into customer accounts, if that commingling of funds helped keep the business afloat, PwC is protected by in pari delicto.

If you’ve never heard of in pari delicto, that’s the obscure doctrine that says a bankruptcy trustee that’s representing the corporation can’t go after another party for stunts pulled by said corporation. In other words, if MF Global commingled funds, if (probably more like “when”) the trustee attempts to recover funds from PwC, the firm will be protected. Francine McKenna has been writing about in pari delicto since early 2010 saying that it’s “like a pair of needle nosed pliers by audit firm defense lawyers to diffuse a bomb” and last year’s ruling for KPMG in Kirschner v. KPMG and the favorable ruling for PwC in Teachers’ Retirement System of Louisiana v. PricewaterhouseCoopers LLP reaffirmed that sentiment. PwC probably isn’t sweating this.

But what about PwC’s audit opinion on MF’s financial statements? The Grumpies pondered the idea of what might constitute grounds for P. Dubs to issue a going concern opinion for MFG:

Might that include four years (2008-2011) of massive losses, as occurred at MF Global? Might that include severely negative free cash flows for three of the last four years? Might that include an exposure to European sovereign debt that will lead to greater future losses? Might that include several downgrades in the credit ratings?

Say you’ve got a broker-dealer client that has no European sovereign debt exposure and isn’t covered by a ratings agency. You simply have massive losses for four straight years and negative free cash flow for three out of the last four and few signs that things are turning around. Do you think there’s any doubt about this business’s ability to continue as a going concern? What about substantial doubt? Throw in the Eurotrash debt and junky bond ratings again and where do you stand now? Yikes.

But PwC was cool with it. We probably know the why (money and client retention, natch). But how? Love to hear some opinions on that. No matter the answer, our lawyer friends will do well by it all.

Accounting Firms Dodge Bullet in NY Court’s Kirschner v. KPMG Ruling

Francine McKenna was the first to opine (strongly we might add) on the ruling in Kirschner v. KPMG (along with the derivative suit Teachers’ Retirement System of Louisiana and City of New Orleans Employees’ Retirement System v. PricewaterhouseCoopers) that was announced yesterday.

The New York Law Journal reported on the ruling first:

Ruling on certified questiirschner v. KPMG LLP, 151, and Teachers’ Retirement System of Louisiana v. PricewaterhouseCoopers LLP, 152—a 4-3 majority held that accountants who allegedly should have detected malfeasance by executives of Refco in Kirschner and American International Group Inc. in Teachers Retirement System cannot be sued under state law.

The Court held that the principles under which the suits were dismissed—in pari delicto and imputation—are “embedded in New York law” and “remain sound.”

Like we said, Francine had some thoughts on this and she did not hold back:

A majority of the New York Court of Appeals bought the self-serving, selfish and unjust arguments of the defendants and their flunky amicus brief toadies supporting criminal corporate fraudsters and, get this, the shareholders of the accounting firms (!!). The New York Court of Appeals abandoned the shareholders and creditors of Refco and AIG for criminals and incompetents.

If I were writing this decision as a novel of corporate cronyism to the extreme in a Utopian nirvana for capitalist parasites, I could not have imagined more contemptible excuses for judicial cowardice.

Those “flunky amicus brief toadies” include the AICPA, the New York State Society of CPAs and the Center for Audit Quality, who argued that our very capital market system was at risk if accounting firms (and other professionals) could be held responsible for fraud perpetrated by management.

We share Francine’s passion for holding accountants responsible for their culpability (plus, claiming “we were duped” does nothing for the industry’s reputation) but the ruling hardly comes as surprise. Judge Susan Phillips Read wrote for the majority:

The speculative public policy benefits advanced by the Litigation Trustee and the derivative plaintiffs to vindicate the changes they seek do not, in our view, outweigh the important public policies that undergird our precedents in this area or the importance of maintaining the “stability and fair measure of certainty which are prime requisites in any body of law” (Loughran, Some Reflections on the Role of Judicial Precedent, 22 Fordham L Rev 1, 3 [1953]). We are simply not presented here with the rare case where, in the words of former Chief Judge Loughran, “the justification and need” for departure from carefully developed legal principles are “clear and cogent” (id.). Finally, to the extent our law had become ambiguous, today’s decision should remove any lingering confusion.”


We are also not convinced that altering our precedent to expand remedies for these or similarly situated plaintiffs would produce a meaningful additional deterrent to professional misconduct or malpractice.

In other words, these particular cases didn’t present a situation that demonstrated a desperate need for change in the law nor would it prove to be a helpful deterrent of fraud in the future. Bottom-line seems to be that Francine is upset at the majority’s pragmatic attitude but what do you expect from a panel of seven judges? It’s a long shot that you come across more than a couple of judges who are willing to turn years of case law inside out and upside down just because a company went bankrupt or a pension fund lost value.

That being said, there was a very enthusiastic and compelling dissent that basically calls auditors a bunch of pansies when it comes to accepting professional responsibility, “[I]t seems that strict imputation rules merely invite gatekeeper professionals ‘to neglect their duty to ferret out fraud by corporate insiders because even if they are negligent, there will be no damages assessed against them for their malfeasance.’ ” You can check out more over at RTA.

As far as the audit firms are concerned, they have to breathing a huge sigh of relief. Considering all the lawsuits out there, firms are already slowly bleeding to death by paper cuts. If this case had gone the other way, it could very well have been a mortal wound for the firms.

Kirschner v KPMG LLP [NY Court of Appeals]
Third-Party Liability Ruled Out in N.Y. Suits for Corporate Misdeeds [New York Law Journal]
New York Court of Appeals Stands By Corporate Man: In Pari Delicto Prevails [Re:The Auditors]