In Pari Delicto: Were Pricewaterhouse and MF Global Equally at Fault for Botched European Investments?

By Ryan Thompson, Esq
In pa•ri de•lic•to  (in pah-ree dee-lick-toe)  adv. Latin for “in equal fault,” which means that two (or more) people are all at fault or are all guilty of a crime. In contract law, if the fault is more or less equal, then neither party can claim breach of the contract by the other; in an accident, neither can collect damages, unless the fault is more on one than the other under the rule of “comparative negligence.”
In a decision this month to partially reject PricewaterhouseCoopers LLP’s (PwC) motion to dismiss a $1 billion lawsuit filed by MF Global, U.S. District Court Judge Victor Marrero found that simply relying on auditor PwC’s erroneous financial guidance in pursuit of MF Global’s ill-advised foreign transactions is not enough to trigger the “in pari delicto” doctrine.

“Under PwC’s reasoning, the in pari delicto doctrine would insulate an auditor from liability whenever a company pursues a failed investment strategy after receiving wrongful advice from an accountant,” Marrero wrote. “Such a broad reading of the doctrine would effectively put an end to all professional malpractice actions against accountants – an outcome not in line with [prior case law] or the New York courts’ interpretation of it.”

This would be like a financial advisor deciding it’s safe to advise his client to invest his life savings in the lead paint business, erroneously believing a new study will prove it’s really not all that dangerous. When that inevitably fails, leaving the investor bankrupt, the advisor claims the investor is equally at fault for pursuing such a foolish investment.
Judge Marrero distinguished the instant case, MF Global Holdings Ltd., as Plan Administrator v. PricewaterhouseCoopers Ltd., from a prior case, In re MF Global Holdings Limited Investment Litigation, Joseph Deangelis et al. v. Jon S. Corzine, et al., which is commonly referred to as the Commodities Customer Action. Both cases were filed in the Manhattan-based federal court of the Southern District of New York.
“In pari delicto applied in the Commodities Customer Action because the Trustee sought to hold PwC liable for something that MF Global officers indisputably participated in: the unlawful transfer of customer funds,” Marrero explained. “[T]he in pari delicto doctrine prevents a corporation’s trustee
from suing the corporation’s auditor for negligence where the auditor negligently failed to detect illegal conduct committed by the corporation’s employees.”
Here, however, the illegal activity that some MF Global officers committed is not at issue. Instead, former New Jersey governor Jon Corzine, functioning as the CEO of MF Global at the time of its collapse, led the brokerage firm to invest billions through repurchase-to-maturity (RTM) transactions in the sovereign debts of Belgium, Ireland, Italy, Portugal and Spain.
In part, MF Global did this based on PwC’s erroneous advice on how to account for these transactions, listing such as gainful sales rather than loans, with the obligation to repay de-recognized and thus not listed as a liability. This was largely advantageous to MF Global at the time of these transactions, but ultimately backfired when it was determined to be improper. The U.S. Securities and Exchange Commission (SEC) subsequently mandated that MF Global increase its capital reserves, causing a considerable degree of financial stress on the already beleaguered brokerage firm.
“This case is one of many that arise out of the catastrophic collapse of MF Global,” Marrero noted. Ultimately, the firm declared for bankruptcy in October 2011 – which is why the lawsuit is filed by MF Global’s bankruptcy plan administrator. This is also about the same time that $1.6 billion in customer funds disappeared, leading to the Commodities Customer Action and other lawsuits.
“The upshot is that the claims here, unlike the claims in the Commodities Customer Action, do not arise out of the active, voluntary acts of MF Global employees. Therefore, the doctrine of in pari delicto does not bar the claims, at least at this early stage of the litigation,” Marrero wrote. “When it comes to PwC' s accounting opinions, MF Global was not a wrongdoer, at least based on the allegations in the pleadings.”
It is important to note that in considering the in pari delicto argument for a motion to dismiss, the decision may require factual development and therefore be inappropriate at this phase in litigation, and the doctrine should only apply to a motion to dismiss if its application is “plane on the face of the pleadings.”  Picard v. JPMorgan Chase & Co. (In re Bernard L. Madoff Inv. Sec. LLC), 721 F.3d 54, 65 (2d Cir. 2013), citing Kirschner, 938 N.E.2d at 946 n.3.
Here, according to the plaintiff’s allegations, which the judge must accept on their face during this stage of the litigation, MF Global supplied PwC with accurate information, and PwC responded with inaccurate accounting advice. The allegations place the blame entirely on PwC, at least for these specific set of circumstances related to the RTM transactions.
“While in pari delicto could apply in a professional malpractice suit in which the corporation intentionally participated in creating and employing the incorrect opinion … no such allegations have been made here,” Marrero concluded. “If discovery reveals a basis for allegations of that kind, the Court can revisit whether in pari delicto applies on a motion for summary judgment.”
The court also intends to consider various other claims in PwC’s motion to dismiss apart from the in pari delicto argument. These include the more conventional claim that PwC’s advice was not the proximate cause for MF Global’s failed European investments and subsequent bankruptcy. The Manhattan court had ordered a full briefing on those issues soon.
What if PwC could show that MF Global had knowledge that PwC’s advice in regard to the RTM transactions was erroneous? What if PwC could only show that MF Global had suspicions that the accounting advice was incorrect? Would the judge have considered applying the in pari delicto then?

Ryan Thompson, Esq

Ryan’s experience in the legal industry coupled with his work in journalism brings a unique voice to his exclusive BullsEye articles. He is an assistant general counsel and writing professor at Niagara University. He has a degree in journalism from the University of Colorado and a law degree from Brooklyn Law School. Admitted to the New York bar in 2005, he previously worked at a Fifth Avenue law firm where he specialized in in-court litigation. Lured back to the dying newspaper industry in 2007, Thompson worked as legal editor of the historic Brooklyn Daily Eagle, where he remained for nearly five years. In 2012, Thompson returned to his hometown of Buffalo and lives there now.

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