MF Global Holdings Ltd. v. PricewaterhouseCoopers LLP
2016 WL 4197062, 2016 U.S. Dist. LEXIS 104459, 199 F.Supp.3d 818 (2016)
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Rule of Law:
Under New York law, the affirmative defense of in pari delicto does not bar a professional malpractice claim against an auditor unless the client corporation engaged in intentional wrongdoing, such as by knowingly providing false information to the auditor; mere active participation in the formulation of an erroneous accounting decision is insufficient to trigger the defense.
Facts:
- In March 2010, Jon Corzine became CEO of MF Global and implemented a new investment strategy involving significant proprietary trading in European sovereign debt financed through repurchase-to-maturity (RTM) transactions.
- MF Global's internal accounting group researched how to account for these RTMs and, in a series of memos starting in 2009, concluded they could be treated as 'sales' under Generally Accepted Accounting Principles (GAAP).
- MF Global consulted with its auditor, PricewaterhouseCoopers LLP (PwC), providing its research and memos. In January 2010, PwC advised that the proposed 'sale accounting' treatment was acceptable based on the facts presented.
- Relying on this accounting treatment, MF Global significantly expanded its RTM strategy, increasing its exposure to European sovereign debt to approximately 4.4 billion Euros by June 2011.
- PwC also consulted on and approved MF Global's decision not to record a valuation allowance against its deferred tax asset (DTA) for fiscal years 2010 and 2011, reviewing and providing input on MF Global's internal memos justifying the decision.
- In mid-to-late 2011, as the European debt crisis worsened, MF Global faced severe liquidity issues, credit rating downgrades, and massive margin calls related to its European bond portfolio.
- On October 25, 2011, MF Global announced a large quarterly loss, which included a sudden decision to take a $119.4 million valuation allowance against its DTA.
- Unable to meet its obligations and after a shortfall in customer funds was discovered, MF Global filed for bankruptcy on October 31, 2011.
Procedural Posture:
- MF Global Holdings Ltd., as Plan Administrator, sued PricewaterhouseCoopers LLP (PwC) for professional malpractice in the U.S. District Court for the Southern District of New York.
- PwC's initial motion to dismiss the complaint on in pari delicto grounds was denied by the court.
- The court later granted in part a subsequent motion to dismiss, but allowed the professional negligence claim to proceed.
- Following the conclusion of discovery, PwC filed a motion for summary judgment, arguing that the claim was barred by the in pari delicto defense and a lack of evidence for causation.
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Issue:
Does the doctrine of in pari delicto bar a professional malpractice claim against an auditor where the client corporation actively participated in, but did not intentionally misrepresent facts related to, the erroneous accounting decisions that allegedly led to its collapse?
Opinions:
Majority - Marrero, J.
No. The doctrine of in pari delicto does not bar the claim because for the defense to apply, the plaintiff must have engaged in intentional wrongdoing, not just participated in the conduct that caused the injury. The court found that PwC failed to demonstrate the absence of a genuine issue of material fact regarding whether MF Global's conduct constituted intentional wrongdoing. The record contains evidence that MF Global's accountants developed their positions on sale accounting and the deferred tax asset valuation in good faith and consistently sought PwC's review and approval. While MF Global was an active participant, a jury could reasonably find that it did not intentionally provide inaccurate information or conceal facts from PwC, which is the standard required by New York law, as articulated in cases like Kirschner v. KPMG LLP. Therefore, summary judgment on the basis of this affirmative defense is inappropriate.
Analysis:
This decision clarifies the high threshold for successfully asserting an in pari delicto defense in auditor malpractice cases under New York law. It reinforces that a client's significant involvement in developing an accounting strategy that later proves to be flawed does not automatically shield the auditor from liability. The court's focus on the client's 'intentional wrongdoing'—as opposed to mere participation or even negligence—preserves the auditor's duty to exercise independent professional judgment. This ruling ensures that professional malpractice remains a viable cause of action for corporations whose auditors approve, rather than correct, erroneous accounting, unless the corporation itself acted with fraudulent intent.
