MF Global Holdings collapsed more than 5 years ago after its risky bets on European sovereign debt came to light and spooked investors into fleeing the commodities brokerage. Now, PricewaterhouseCoopers LLP, its auditor, is facing a professional malpractice lawsuit in federal court alleging that bad accounting advice helped bring down the firm.

The closely watched case could lead to more than $3 billion in damages against PwC if a jury agrees the auditor’s advice to MF Global over how to account for its purchase of European bonds was faulty.

Daniel Fetterman, a lawyer from Kasowitz Benson Torres & Friedman LLP who is representing MF Global, said public auditors such as PwC serve an essential watchdog role in the U.S. financial system. If they don’t do their job, disaster can occur.

PwC’s lawyers say the accounting firm stands by its work for the commodity broker and that the official spearheading the lawsuit, MF Global lead director Nader Tavakoli, is simply trying to hold the Big Four accounting firm responsible for the faulty investment strategy championed by former CEO Jon Corzine.

MF GLOBAL FAILURE.  The firm failed after a series of big bets on European bonds alarmed investors and raised questions from regulators. The brokerage used so-called repo-to-maturity instruments to bet on the foreign debt, which allowed MF Global to report the transactions as a gain at the time of the sale, making its revenue look better at the beginning of the transaction.

The investment strategy was championed by Mr. Corzine, who had been a bond trader at Goldman Sachs Group Inc. before serving as New Jersey’s senator and then governor.

Mr. Corzine’s strategy to bet on European sovereign bonds ultimately proved profitable for the firms that took over his positions, but it was too late to save MF Global. The brokerage collapsed after its exposure became public, alarming investors and prompting regulators to require the firm to increase its capital reserves. That requirement put great stress on the company’s finances, forcing it to rely on intracompany transfers to meet its daily liquidity demands.

In MF Global’s final days, a $1.6 billion shortfall in customers’ (supposedly) segregated funds emerged. It took more than 2 years for the trustee overseeing the liquidation of MF Global’s brokerage unit to collect and return the money to customers. Criminal prosecutors investigated the roles Mr. Corzine and other executives played in the shortfalls but didn’t bring charges.

Last month, Mr. Corzine agreed to pay $5 million to settle a CFTC lawsuit over MF Global’s collapse. As part of the deal, the 70-year-old Mr. Corzine is prohibited from trading client money in commodities and other instruments regulated by the CFTC. Mr. Corzine is expected to testify at the trial.