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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Auditors of Met Mortgage lose bid

A federal judge denied on Wednesday an effort by accounting firm PricewaterhouseCoopers LLP to escape blame in the failure of Metropolitan Mortgage & Securities Co.

The Big Four accounting firm, Metropolitan’s one-time auditor, asked U.S. District Judge Fred Van Sickle last week to dismiss a lawsuit that could cost it tens of millions of dollars.

PricewaterhouseCoopers said it was misled by former Metropolitan executives and was not negligent in its auditing duties, as Metropolitan’s new management alleges.

Attorneys for PricewaterhouseCoopers argued that pinning the collapse of Metropolitan – which has erased the investments of more than 16,000 people – on auditors is impossible, given that the former executives engaged in a bookkeeping ruse to mask losses and inflate the worth of real estate deals.

They cited a legal doctrine that if both sides are equally at fault, the defendant is not liable. In this case, PricewaterhouseCoopers said the actions of former Metropolitan Chairman and CEO C. Paul Sandifur and his senior leadership team clearly showed attempt to deceive auditors.

Metropolitan, however, does not allege criminal wrongdoing by former executives in its lawsuit. Instead, the company claims that the firm’s leadership was incompetent and underqualified.

It was up to the auditors, Metropolitan claimed, to cite poor management and uncover violations of accounting principles and financial irregularities. Auditors were depended upon by the board of directors, analysts and brokers to test the numbers and scrutinize the books.

The PricewaterhouseCoopers motion for dismissal would have cut short one of the many strategies Metropolitan’s new management is using to try to recoup money for investors.

Judge Van Sickle found that the arguments for dismissal fell short. His ruling in favor of Metropolitan allows the firm to continue its lawsuit against the auditors.

PricewaterhouseCoopers audited Metropolitan’s books in 1999 and 2000. It was during these years that Metropolitan changed business strategies from that of buying, pooling and securitizing mortgages and instead began making high-risk commercial loans.

The new business model could have been a boon to Sandifur – the sole common stock owner.

Instead, the move failed and the firm filed for bankruptcy protection in February 2004.

Metropolitan executives have said the company likely will engage another former auditing firm, Ernst & Young LLC, in arbitration in an attempt to collect and distribute money to creditors.