The U.S. Supreme Court has declined to review a Second Circuit Court of Appeals decision that rejected the claims of a group of former MF Global Inc. customers that said PricewaterhouseCoopers LLP (PwC) failed to properly audit the brokerage firm before it went into bankruptcy in 2011. The high court denied the MF Global customers’ petition, which argued that the Second Circuit’s May decision improperly allowed PwC to use an “equal fault” defense to obtain dismissal of the suit.
The appellate court’s ruling found that the investors could not sue PwC on behalf of the brokerage due to the legal principle in pari delicto, which bars courts from interceding in disputes between two alleged wrongdoers. The order lets stand the Second Circuit’s reasoning that alleged bad acts by PwC and MF Global were “sufficiently linked” to trigger the in pari delicto defense, and that the customers couldn’t preempt the defense by arguing that it would undermine a federal regulatory scheme because they were bringing claims under New York state law. The circuit court subsequently denied rehearing in July.
The MF Global investors, who accused PwC of failing to detect glaring accounting and internal controls issues at the company during 2010 and 2011 audits, argued in their petition for writ of certiorari that the Supreme Court should clarify that the in pari delicto defense should also be denied in private state law actions, not just in actions under federal law, when those suits “are the only vehicles to enforce important federal statutory or regulatory schemes.” The petitioners told the Supreme Court that allowing the defense would interfere with the private enforcement of securities laws that protect the public, and render auditor duties meaningless under certain U.S. Commodity Future Trading Commission (CFTC) regulations and erode federal protections for commodity customers. The petition stated:
Here, without such private enforcement, [futures commission merchants], on behalf of their customers, would have no redress against auditors who fail to perform the de facto regulatory duty delegated to them by the CFTC, thus removing auditors’ incentive to meet their obligations and undermining the protections for commodity investors contemplated by Congress and the CFTC.
The case is part of a broader, ongoing class action against MF Global and its top executives, including former CEO Jon Corzine, the former governor of New Jersey. The litigation came about because of MF Global’s October 2011 bankruptcy following catastrophic “wrong-way bets” on European sovereign debt. About $1.6 billion in customer money vanished, causing investigations by the CFTC, the U.S. Department of Justice (DOJ) and other federal regulators.
The CFTC fined MF Global $100 million in December 2014 in a related class action but is continuing to press its case against Corzine. On April 17, PwC reached a $65 million settlement in a related class action led by a different group of MF Global investors. Other companies to reach settlements in litigation related to MF Global’s demise include six banks that underwrote a June 2010 MF Global stock deal: Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Goldman Sachs & Co., JPMorgan Securities LLC, Merrill Lynch Pierce Fenner & Smith Inc. and RBS Securities Inc. The former MF Global customers are represented by Andrew J. Entwistle of Entwistle & Cappucci LLP.
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