On Anniversary of MF Global Bankruptcy, Something Still Missing

Something is still missing today, the one year anniversary of the bankruptcy of MF Global.

Of course, we’re not yet being told who has $1.6 billion of customer funds still unaccounted for. If the SIPA Trustee James Giddens tells you he may be able to make customers almost whole, it’s from other funds recovered via negotiations from other sources. Not one organization has been sued, nothing has been clawed back, no one has been held formally responsible.

But I’m talking about something more than money. What’s still missing from this sordid affair is an accounting of the whereabouts of the financial auditor, PricewaterhouseCoopers. The global audit firm would rather come off as stupid than complicit in the actions of whomever broke the law and stole MF Global customer funds. PwC prefers you believe they were “duped” and given false or no information when executives took on inordinate risk with little or no oversight, and took advantage of lax or relaxed internal controls to double down with other people’s money in the noble hope they could “save the company” for investors including Corzine’s true boss, Chris Flowers.

Rest assured, “We were duped” will be the auditor’s defense when, and if, they are ever called to answer questions from the SEC, PCAOB, or a Senate/Congressional investigative committee. More likely the audit firm has been working behind the scenes to “help” regulators and the trustees make sense of the transactions they were supposed to have been questioning while the firm was still viable. Most likely, in exchange for the promise of no prosecution, the firm has agreed to tell them where the bodies – the $1.6 billion –  is buried and point fingers at executives that lied to them or withheld information so the case against management will be stronger.

That’s how it works.

Whether civil, criminal, or private litigation, the auditors who are supposed to be standing up for shareholders and, in this case, customers who have a big stake in MF Global’s viability, are instead most worried about their own liability. And the lawyers play along. That’s how it was done at AIG and Huron, more PwC audit clients.

In the case of AIG, PwC partners agreed to testify against their client in exchange for a smaller settlement. In the case of Huron, private litigation against the firm was dropped in exchange for making the embarrassing admission the client lied to them repeatedly. In both cases, PwC is still the auditor, collecting its fees.

There’s plenty of evidence of what PwC, the auditor, saw at MF Global. The relationship was a long one. PwC is also auditor for Man Financial Group, the firm that bought a brokerage business from the fraud-ridden, failed firm called Refco in 2005, beefed it up and rebranded it, then spun it out as an IPO called MF Global in 2007. (PwC was also responsible for setting up internal controls for Refco, but escaped liability for that on a technicality. The Trustee suddenly found a conflict of interest and couldn’t do the suing himself. It wasn’t viewed as worthwhile to appoint someone else to pursue PwC.)

Conflicts abound now, too.

Giddens is using Ernst & Young as his forensic investigation firm. In addition to all the other conflicts Giddens – and Freeh – have with JP Morgan and MF Global auditor PwC, the use of Ernst & Young in this context should not have been allowed.  Ernst & Young is the same firm, according to sources, that designed and implemented MF Global’s internal controls in time for its first Sarbanes-Oxley review and same firm that Randy McDonald, the MF Global CFO prior to current CFO and PwC alumni Henri Steenkamp.

Unfortunately we can’t see what PwC ,the MF Global auditor, saw. It’s been given confidential treatment at PwC’s request. Only the SEC knows.

What I was most interested in were the filings of MF Global auditor PwC, including the specific reports the auditor is required to file that might describe any weaknesses or discrepancies in internal controls over customer segregated assets.

On November 4, 2011, days after the bankruptcy filing, I described in an American Banker column the information the regulators and investigators should be looking for:

Since MF Global is a broker-dealer and a Futures Commission Merchant, PwC’s job went well beyond a standard audit. The auditor for a firm like this must annually review the procedures for safeguarding customer and firm assets in accordance with the Commodity Exchange Act. The annual audit must include a review of a firm’s practices and procedures for computing the amounts that, by law, have to be set aside in clients’ accounts each day. MF Global also had to send regulators an annual supplemental report from PwC. This report would describe any material inadequacies existing since the date of the previous audit and any corrective action taken or proposed.

I’m sure the CFTC wants to know if PwC ever documented any material inadequacies in MF Global’s controls over safeguarding customer assets. But wouldn’t they already know that? Regulators like the CME Group, the CFTC, the SEC, and FINRA received audited financial information annually, unaudited information semiannually and monthly reports that provided a capsule view of MF Global’s financial position. MF Global is required to perform calculations daily (by the CFTC) and weekly (by the SEC) to ensure that the proper amount of customer funds is set aside in the separate accounts.

PwC’s report to the SEC of internal control discrepancies for 2010 – and there is one according to the filing index – is private. None of the auditor’s reports specific to the broker/dealer and FCM are available to the public on Edgar for 2011.

Is this just sloppy scanning? It’s no coincidence to me that auditor PricewaterhouseCoopers may also be playing a role in keeping uncomfortable or incriminating information from the public about its audit clients. PwC audits MF Global as well as Bank of America, Goldman Sachs, JP Morgan, andBarclays. (See latest record fine against PwC for looking the other way at customer funds commingling at JP Morgan. PwC is also under investigation for similar sins at Barclays.) The largest audit firms routinely request confidential treatment of their reports and contract details such as engagement partners, whether as a vendor to the government or as a defendant in a contentious lawsuit.

The audits of broker-dealers have not improved since Madoff. In fact they have probably gotten worse given the delay in enforcing the audit requirements under Sarbanes-Oxley and now Dodd-Frank. From another Forbes column of mine in August:

MF Global  – and PFGBest – were futures commission merchants, or FCMs, with broker-dealer subsidiaries. The ten futures commission merchants, or FCMs, with the most customer segregated assets under their control, almost $117 billion, as of June 30, 2012 according to reports filed with the CFTC, are audited in four cases by PwC. The rest are audited by one of the other Big Four audit firms. (A Big Four auditor obviously didn’t help safeguard customer funds any better at MF Global where the auditor is also PwC.)

  • Goldman Sachs (PwC)
  • JP Morgan (PwC)
  • Newedge (EY)
  • Deutsche (KPMG)
  • UBS (EY)
  • Citigroup (KPMG)
  • Merrill Lynch (PwC)
  • Morgan Stanley (Deloitte)
  • Barclays (PwC)

Large banks have been sanctioned recently for commingling their broker-dealer customers’ funds with their own. JP Morgan, and its auditor PwC, and Barclays were fined in the UK for not safeguarding the funds of brokerage customers.

JP Morgan was MF Global’s primary banker.

PwC has been complicit in segregation failures as well as complacent about numerous other control failures and illegal acts at JP Morgan and Barclays.

PwC also audits JP Morgan and Barclays.

From a column at American Banker earlier this year.

But JPM had an extensive relationship with Jon Corzine’s brokerage, giving the megabank a bird’s-eye view of the firm’s finances before and after it failed.

As such, JPM must have at least a clue about the other $1.4 billion of MF Global customer funds that have gone missing.

As MF Global’s largest unsecured creditor, for example, JPM was first to the courthouse to protect its rights after the Oct. 31 bankruptcy filing. And as Genova told the House Financial Services Oversight and Investigations Committee on March 28, MF Global maintained a large number of cash demand deposit accounts at JPM. Four of these accounts in the U.S. were designated as customer segregated accounts.

MF Global also cleared agency securities through JPM, Genova said. The brokerage had two revolving credit facilities in which JPM was the administrative agent for a syndicate of other banks. And MF Global had securities lending and repurchase arrangements with JPM, the largest of which involved MF Global borrowing U.S. Treasuries from JPM’s securities lending clients and posting agency securities as collateral.

JPMorgan even considered acquiring MF Global. But before anyone else outside of MF Global knew that there was a $1.6 billion hole in customer segregated funds, JPM passed on a deal.

So, let me ask you this. As a customer, should you do business with a broker-dealer or FCM that’s chosen PwC to protect your money?

I wouldn’t.

11 replies
  1. Mike Dayoub, CFP®
    Mike Dayoub, CFP® says:

    Francine I totally agree with your point about PwC’s failure to identify the lack of control that resulted in client funds being applied to Corzine’s bets.

    I am curious what you thought of yesterday’s article in the Wall Street Journal that said ” officials have found money to cover most of the estimated $1.6 Billion that belonged to customers but was used by MF Global to meet its financial obligations. ”


    Do you know what that even means? Have the client accounts been restored?

    Nice to see Mr. Corzine wondering what’s next, looking for his next job in the securities industry. Gotta love a comeback!

  2. George Smithgolf
    George Smithgolf says:

    Francine has no credibility. She bashes the Big 4 firms from the sidelines and unfortunately, does not see any of the realities of the Big 4’s defenses. She screams the firms are complicit with failed client situations. Trust me, the SEC, the FDIC, PCAOB, among others, would not permit the Big 4 Firms to remain in business if they were truly involved as Francine alleges. There are certainly shortcomings in an audit/ quarterly reviews, etc. But our US system of public companies and audits by the independent CPA firms provides significant comfort for an investor/shareholder — which escapes Francine. If she believes the auditors are so corrupt, I assume she has no investments in our US markets.

  3. Francine
    Francine says:

    @Mike Dayoub

    Mike, I feel the same way James Koutoulas feels about the sympathetic depictions of Corzine in the traditional media and the unwillingness of the prosecutors to prosecute.


    When they say they have “found money to cover” they mean they have taken it from a creditor or the company;s assets to satisfy customer claims. But they have not clawed back any customer money used to fund company activities. The hole in the balance sheet is still there. Until the Trustee and the prosecutors are willing to sue and enforce the law, the customer money that was used illegally to fund company activities is still in the hands of those who got it instead.

  4. Carl Olson
    Carl Olson says:

    Go for it, Francine.

    George Smithgolf is totally mistaken about the ability of the SEC, FDIC, and PCAOB to put CPA auditors out of business. Didn’t he read Harry Markopolous’s book “No One Would Listen” about the SEC’s dogged refusal to investigate the Madoff schemes? Doesn’t he know that it is the state Boards of Accountancy who grant CPA licenses, and that they all lack investigative staff (for instance, California has 5 investigators for 85,000 CPA licensees).

    So the CPA auditors can still thumb their noses at the investing public. Until we get organized and get adequate investigate staff.

  5. Richard Archer
    Richard Archer says:

    In light of the Sentinel ruling in August, how are they able to shift money from a creditor, especially if it’s a secured creditor (such as one of the banks that loaned money to MF) in order to restore customers’ accounts? Will the courts in the area where the MF bankruptcy will be adjudicated ignore the Sentinel ruling as not being a valid precedent?

    Also with regard to the Sentinel ruling, what’s the likelihood that audits will improve. If Sentinel becomes a precedent, then there is no real downside for investment funds, hedge funds, or even banks with investment units that use ordinary depositor account funds in order to generating trading profits for the banks. It may technically be a violation of the requirement to segregate depositor accounts from corporate accounts and not co-mingle funds. However, the Court appears to view that as a small violation of government agency rules, rather than a violation of law, unless the depositors/customers can prove the intent of the fund-investment bank execs to never return the money to the depositors. If my take on the Court ruling is correct, the auditors would have little incentive to even look at the area of diverted funds, because the consequences would probably not be material to the auditee’s overall financial position. That gives the auditors another escape clause.

    Or, am I totally misreading the potential effect of Sentinel?

  6. Richard Archer
    Richard Archer says:

    BTW – I’m glad that you and a few others are staying after MF Global and other similar situations. Without y’all staying on the trail, it isn’t likely that we would ever learn anything about it from the conventional media. Thanks!

  7. Francine
    Francine says:

    @Richard Archer

    Good question about Sentinel ruling. I don’t now how they are doing it. The machinations are very opaque. We shall see in the next report from Trustee.

    Re: “the Court appears to view that as a small violation of government agency rules, rather than a violation of law, unless the depositors/customers can prove the intent of the fund-investment bank execs to never return the money to the depositors.”

    I agree. No rule of law here as it applies to auditors.

  8. George Smithgolf
    George Smithgolf says:

    Carl Olson — naive at best… If there is evidence of complicity by the auditors, there are countless ways to get to the auditors. So between Carl and Francine, where is the evidence of complicity? This is my issue with Francine. There are huge lines between negligence, gross negligence and being complicit in some type of cover up/ponzi scheme.

  9. George Smithgolf
    George Smithgolf says:

    Oh, and Madoff….. the red flag is that Madoff did not use a large well known CPA firm. Even a mid tier firm/Big 4 would have caught the fraudulent scheme. A reputable CPA firm of any size would not have had a problem detecting the fraud at Madoff’s firm — come on think about it. I personally dealt with the New Era Philanthropy Ponzi scheme with one of my clients. There were many red flags, the most glaring being the NEP using a small local firm in Erie Pennsylvania. I personally spoke to the local CPA, Pru Bache, and others which made it very clear that this was a classic ponzi scheme. My client was maybe one of three or so “investors” that did not get burned.

Trackbacks & Pingbacks

  1. […] Now the CFTC has made even more proposals for Futures Commission Merchants or FCMs, very similar to the broker-dealer proposals, requiring audits to be performed by PCAOB registered audit firms and new “expert” audits of the Self Regulatory Organizations (SROs) by the same certified public accountants like PwC who so miserably audited MF Global. […]

  2. […] PwC was MF Global’s auditor since an IPO in 2007, a spin-out from Man Financial which PwC also audits. The CFO at the time of the billion-dollar plus malfeasance and bankruptcy was PwC alumni Henri Steenburgen.  PwC charged approximately $11 million for its audits in each of the last two fiscal years, 2011 and 2010, before MF Global failed. There was never a “going concern” warning or a qualified audit opinion citing either systems or financial reporting control weaknesses. […]

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