One Year Later …

Remember MF Global?

A year ago, in a flurry of transfers, security sales, and overdrafts, the brokerage firm MF Global filed for bankruptcy. When the firm collapsed, they left a $1.6 billion hole—funds that were owed to customers, $360 million of which are still missing. While the bankruptcy trustee thinks he may be able to make customers whole, that money will have to come from other creditors. Over the past year, no organization has been sued, no cash has been clawed back, and no one has been held formally responsible. Former CEO Jon Corzine has requested that a civil suit against him by shareholders be dismissed.

A congressional oversight committee has been investigating the failure for the past year and has conducted three hearings, 50 interviews, and has reviewed hundreds of thousands of documents. But one factor that hasn’t come up for much public discussion is the role of the auditor, Pricewaterhouse Coopers.

PwC is one of the Big Four auditing firms. They work with Goldman Sachs, JP Morgan, and other large financial firms. They should have known that MF Global’s policies and procedures were sloppy and disorganized. PwC should have known that money would go missing when customer withdrawals created mayhem. PwC had been inside MF Global from the beginning: they were Man Financial Group’s auditor when the Canadian firm bought the brokerage business from fraud-ridden Refco in 2005. They were the financial counsel that helped Man spin off MF Global in 2007. And they knew all about internal controls: they helped set up Refco’s. That didn’t work out so well.

Financial firms fail, sometimes due to fraud, sometimes from bad timing. The internal auditor is supposed to find trouble spots and flag them for remedial action before they blow up. Except when they don’t.

Douglas R. Tengdin, CFA
Chief Investment Officer
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