NEW YORK (AP) — It was not a huge bet on European bonds that caused the 2011 demise of Wall Street brokerage firm MF Global, but rather "confusion" created by its accountants about the company's financial condition, former New Jersey Gov. Jon Corzine testified on Thursday.
Corzine, who ran MF Global after leaving the governor's office, took the stand in a New York trial pitting the legal remnants of the collapsed brokerage against its accounting firm, PricewaterhouseCoopers. MF Global is seeking at least $3 billion in damages, saying PwC's negligence and malpractice caused the brokerage to go under.
At the center of the trial is $6.3 billion in assets tied to European government bonds that MF Global purchased from Italy, Spain, Belgium, Ireland and Portugal. Another issue is how PwC accounted for $72 million in what's known as tax-deferred assets that further caused uncertainty about MF Global's financial health.
Those two issues caused MF Global to be downgraded by the credit rating agencies like Moody's and counterparties to eventually cut off business from the firm. After a whirlwind week in late October 2011, MF Global filed for bankruptcy.
Corzine testified that the European bonds that MF Global invested in were relatively low-risk and the firm expected to get its money back. All of the bonds were from countries with investment-grade ratings, and at the time, the European Central Bank created a $500 billion facility to help eurozone countries meet their obligations.
"We believed the bonds would be paid in their own right," Corzine said. The thesis later proved to be correct, as all the bonds that MF Global purchased were paid back in full — but some months after MF Global filed for bankruptcy.
PwC argues that MF Global's business decisions, including its purchase of the European government bonds, were the reason why MF Global failed — not because PwC did not account for those assets as MF Global says they should have.
"PricewaterhouseCoopers stands by the work it did for MF Global as its independent auditor," said Rich Marooney, outside counsel to the accounting firm.
While Corzine did not blame PwC directly for MF Global's failure, did indicate he believed that improper accounting caused investors to be caught off guard.
For example, in March 2011 the firm had $72 million in what's known as tax-deferred assets. But six months later, PwC changed its mind on how MF Global should account for those assets. It partially caused MF Global to report a $120 million loss that quarter. But instead of investors looking at these tax-deferred assets, Corzine said investors took the loss as a sign that MF Global's European bonds were in trouble instead.
"If the marketplace knew we didn't lose money on the euro sovereign position, we wouldn't have had the confusion in the marketplace," Corzine said.
Corzine is expected to testify on Friday. Since MF Global's bankruptcy in 2011, he has kept a low profile.