As revelations emerged Tuesday about alleged accounting shenanigans at the bankrupt brokerage MF Global -- which reportedly commingled its own money with customer accounts -- auditor watchdog Francine McKenna posted a terrific piece at Forbes called "99 Problems and Auditor PwC Warned about None." As MF Global's auditor, McKenna reported, PricewaterhouseCoopers gave the brokerage a clean report as recently as May (and apparently billed MF Global $12 million for its services over the last year). Angry MF Global investors are probably wondering whether they can load any of the blame for the brokerage's downfall on PricewaterhouseCoopers.
The answer, according to a prominent plaintiffs' lawyer I talked to Tuesday, is almost surely no, at least in terms of tagging the auditor with liability for MF Global's losses. The auditor has two strong potential defenses, this lawyer told me (and trust me, he knows). If PricewaterhouseCoopers is accused of negligence or malpractice, it can claim that it was deceived by MF Global's leadership, which -- if the allegations of commingling funds are true -- apparently also evaded regulators at the CME Group.
And if the trustee in MF Global's Chapter 11 proceeding in Manhattan federal bankruptcy court tries to claim that PwC somehow let the brokerage's officials get away with fraud, he'll run smack into an October 2010 ruling by the New York Court of Appeals. In Kirschner v. KMPG New York's highest court ruled that the trustee in Refco's bankruptcy couldn't sue Refco's auditors because of an age-old doctrine called in pari delicto. As I've explained, in pari delicto holds that one wrongdoer can't demand a share of the proceeds from another. Kirschner clarified that in New York, a trustee standing in the shoes of the corporation can't sue auditors for abetting an insider's fraud if that fraud in any way benefited the corporation.
So even 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.
PricewaterhouseCoopers, which didn't respond to a request for comment I left with a company spokesman, knows Kirschner very well: The New York Court of Appeals decided in a companion ruling to Kirschner that in pari delicto also barred AIG shareholders from bringing a derivative case against PwC for allegedly abetting fraud at the company.
"I don't think anyone standing in the shoes of the company can do anything against the auditor," my lawyer source said. "The New York state court has made it clear that under New York law, in pari delicto is a defense to the extent that if there were any screwups, the company committed them."
(Reporting by Alison Frankel)
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