Risk Management

11:47 AM
Ivy Schmerken
Ivy Schmerken
Commentary
Connect Directly
Facebook
Google+
Twitter
RSS
E-Mail
50%
50%

Did PwC's Role as Auditor Rubber Stamp MF Global's Internal Controls and Allow it to Raid Customer Funds?

PricewaterHouse Coopers was added to a lawsuit by MF Global Customers, which accused it of turning a blind eye to the firm's internal controls.

The parade of lawsuits against MF Global to recover customer funds that were raided from segregated accounts has grown larger this morning and could be given a boost by the inclusion of a big-pocketed accounting giant.

Today's Wall Street Journal reports that lawyers for MF Global customers have added Pricewaterhouse Coopers LLC, the bankrupt broker's auditor to the lawsuit The lawsuit accuses the auditor of failing to monitor the firm's internal controls, which it proclaimed as adequate. But the addition of PwC, a corporate giant with big pockets, could boost the chances of customers seeking to recover $1.6 billion in lost monies.

As many as 36,000 customers have filed claims with the bankruptcy trustee James Giddens'office to recover their funds which were used to meet margin calls by MF Global for its risky bets on sovereign European debt. According to the article, customers have received 80 cents on the dollar on cash owed to them, while those that invested on foreign exchange have only received 5 cents, due to disputes on treatment under UK bankruptcy law.

The amended lawsuit was filed in a New York federal court this morning and reportedly reiterates accusations against Jon Corzine, MF Global's former chief executive and other officials at the failed securities and commodities brokerage firm. Corzine and his cohorts were accused of breaching the fiduciary duty of customers as well as violating the Commodity Exchange Act.

From The Wall Street Journal:

The complaint alleges that PwC, as MF Global's auditor, said that the firm's internal controls for safeguarding customer assets were adequate when in fact they weren't, and that PwC should have known they weren't.

The complaint alleges that PwC breached a fiduciary duty to MF Global and its customers and was negligent in its work at the firm. "If they had made sure the internal controls were adequate, there never would have been an invasion of customer funds," said Merrill Davidoff, a managing principal at Berger & Montague, which is also representing the commodities customers.

What is potentially damaging is that PwC may have been alerted to deficiencies in MF Global's internal controls. What's more the brokerage firm drew on customer funds at least five times in 2010, according to the compliant cited by the WSJ, which may not have been against commodities laws, but should have raised red flags.

In 2010 and 2011, according to the complaint, PwC was copied on several MF Global internal-audit reports that indicated there were deficiencies in the firm's internal controls, the complaint alleges.

In 2010, according to an internal review by MF Global cited in the complaint, there were five instances in which the firm drew on customer funds to such a degree that it was "funded by clients." That isn't necessarily against federal commodities rules, but it exposed the firms' clients to risks.

The complaint also alleges that PwC failed to adequately examine and evaluate MF Global's procedures and controls for protecting customer funds, failed to adequately test calculations for the segregation of customer funds and failed to issue going-concern warnings for MF Global when it should have.

A PwC spokeswoman declined immediate comment until the firm had time to review the complaint.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
Comment  | 
Print  | 
More Insights
More Commentary
Data Integrity: A Necessity, Not an Option
Financial institutions that have taken on the data integrity task in the past now have to spend more money on hardware, software, and people just to keep up with the demand.
What Colombia’s New IT Campaign Means for Latin American Tech Investment
Colombia’s campaign is the latest example of how Latin America is trying to edge into the global technology space.
Initial Margin: When Does More Turn Out to Be Less?
Changing margin regulations are set to affect the OTC derivative market, including initial margin risk models for non-cleared OTCs.
The Mainframe Innovation Drag
It may be time for a consortium of firms motivated around the objective of eliminating the mainframe. What if every self-clearing firm decided to participate in building a modern, back-office system as an open-source, cloud-based project?
Big Data DIY
Now that we have passed the initial hype phase of big data, companies are searching for real business value from their investments. Consultants can play a part, but only if financial firms insist on a new partnership model.
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - July 2014
In addition to regular audits, the SEC will start to scrutinize the cyber-security preparedness of market participants.
Video
Inside Abel Noser's Trading Floor
Inside Abel Noser's Trading Floor
Advanced Trading takes you on an exclusive tour of Abel Noser's New York trading floor, where the agency broker known for transaction cost analysis, is customizing algorithms for the buy side, while growing its fixed income trading and transitions business.