January 21, 2004 in Business, City

Suits accuse Met Mortgage of Ponzi scheme, fraud

Class-action sought in bid to recoup lost millions
By The Spokesman-Review
 
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Background and the latest updates

Investors accused Metropolitan Mortgage & Securities Inc. of fraud and filed two lawsuits Tuesday to recoup hundreds of millions of dollars from the troubled Spokane firm.

It’s the first legal step in what could become a single, massive class-action lawsuit - one of the largest in Spokane history. Both lawsuits, which may eventually be combined, were filed in federal court in Spokane.

Other lawyers have said they’re exploring similar suits.

One of the suits filed Tuesday accuses Metropolitan of operating a Ponzi scheme - a type of scam in which new investments are used to pay off old debt - that collapsed last year when the company failed to get money from new investors.

The new money would have helped pay preferred stock dividends along with the interest and principal due on debentures - unsecured bonds backed by nothing more than the company’s promise to repay.

Tacoma attorney Mike Shaffer contends Metropolitan defrauded thousands of people by selling junk bonds, and owes investors about $300 million.

“It’s pitiful what this company has done,’ said Shaffer, who is working with Spokane attorney Bob Dunn. “Shame on them.’

Metropolitan spokeswoman Mary Keller said the company wouldn’t comment. In a past interview, one executive no longer with Metropolitan bristled at the suggestion that the company was operating a Ponzi scheme, saying companies routinely and legally issue new debts to fund investments and retire maturing debts.

Spokane attorney Darrell Scott filed the other lawsuit on behalf of investors.

“This is a very sad and serious financial situation,’ Scott said. “The number of people affected in this region is shocking.

“We have received hundreds of phone calls from people who had the same story: They thought they were buying an investment as safe as bank notes.’

Such investor complaints were at the heart of a punishing investigation into the sales practices of Metropolitan’s brokerage affiliate.

The National Association of Securities Dealers found the company used fraudulent and unethical business tactics from January 2001 through March 2003, when it downplayed and failed to properly disclosed the high risk of investing in Metropolitan and its sister Idaho company, Summit Securities Inc. Both are controlled by C. Paul Sandifur Jr.

The NASD censured and fined the brokerage $500,000, ordered it to pay $2.8 million in restitution to certain investors, and required the company to establish an escrow account that would be used to repay other misled investors. The process of determining who those other investors may be has yet to be fully explained.

Metropolitan neither denied nor admitted wrongdoing as part of its negotiated settlement with the NASD.

Since the settlement was announced, Metropolitan has closed its brokerage and surrendered supervision of its insurance affiliates to state regulators in Washington, Idaho and Arizona.

Scott named Metropolitan’s board members in the suit for failing to look out for the interests of investors. Most members are current and former Metropolitan employees, with the exception of Samuel Smith, former president of Washington State University, who keeps a WSU office in Seattle.

William Smith, Metropolitan’s chief financial officer, has said in the past that the company has about 35,000 investors holding $580 million in stocks and bonds.

The lawyers seek class-action status for the cases because many investors don’t have enough invested to make an individual case worthwhile.

Shaffer called the business, founded by C. Paul Sandifur Sr. in 1950, a shell game that targeted vulnerable investors.

“It became a Ponzi scheme aimed at retired and elderly investors,’ he said in a prepared statement. “It’s a huge blow to this community, especially folks who are retired or about to retire.’

Specifically, the cases allege Metropolitan and its executives violated the Exchange Act by selling securities know to be fraudulent.

The American Stock Exchange halted trading of Metropolitan’s preferred shares on Dec. 15 and is now delisting the stock. On Dec. 26, the company defaulted on its debentures and other investments, suspending all interest payments and bond redemptions.

If the cases are certified as class-action, the exact number of investors will be determined through court discovery.

“For many, it may be just $5,000 or $10,000,’ Scott said. “That may not seem like much, but for many investors, that’s a huge portion of their life savings. … We’ll work to get it back.’


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