A judge’s ruling Wednesday scuttled efforts by Metropolitan Mortgage to collect potentially damaging documents pointing to alleged malfeasance by its former auditor.
The ruling is a small victory for that auditor, Ernst & Young LLP, which is fighting claims that it was negligent in an accounting fraud that ultimately sent Metropolitan into bankruptcy.
The documents in question were collected by an examiner appointed by U.S. Bankruptcy Judge Patricia Williams. The examiner, widely praised for his report on unscrupulous business dealings and accounting methods at Metropolitan, is now finished with his work. Many of the documents he collected will not become part of the public record.
“Unfortunately, this means more time being spent and more money being spent to get these documents,” said P.J. Grabicki, an attorney representing creditors. Those same documents could be needed in the future to bolster creditors’ claims against Ernst & Young.
The examination cost $2 million, money that came out of the pool of funds available for repaying creditors. Headed by Samuel Maizel, the examination resulted in two lengthy reports that blamed the firm’s failure on chairman and CEO C. Paul Sandifur Jr.
It also raised suspicion about the role of Big Four accounting firm Ernst & Young LLP and other companies that had a role in Metropolitan’s dubious accounting methods, business dealings and securities offerings.
When it failed, about 16,000 investors had about $580 million with the company in the form of unsecured bonds and preferred stock.
Jim Clanton, who leads the Metropolitan creditors’ committee, said in court papers that investors were promised the documents to bolster their allegations that Ernst & Young knew about questionable business dealings at Metropolitan and had an obligation to stop it.
“It would be fundamentally inequitable, unfair and wasteful to have spent all of this money on examination … and not receive the benefit of access to this documentary evidence,” he wrote.
In court last week, Ernst & Young argued that documents pertaining to its work on Metropolitan’s books were private papers initially turned over to the U.S. Securities and Exchange Commission as part of a broad investigation.
The documents were never intended to be handed over to the company or creditors – especially to help them recover money through arbitration and lawsuits.
Ernst & Young attorney Lori Lynn Phillips called the attempts to obtain the documents a backdoor effort. She said Metropolitan and the creditors should have to use traditional discovery to press its claims, not rely on documents given to the examiner from the SEC.
Judge Williams agreed and said that although the examination was ordered to benefit the creditors, turning over the documents went too far and would have had a “chilling effect” on future bankruptcy examinations and SEC investigations.
The SEC initially sought Maizel’s appointment and gave him boxes of documents collected during its own investigation into Metropolitan’s business dealings and accounting methods.
Ernst & Young and other businesses that turned over documents to the SEC by request or subpoena did so with an implied understanding the regulatory agency would regard the documents as private papers – not public records, attorneys said in a court hearing last week.
Ernst and Young and Metropolitan will likely engage in arbitration to settle creditors’ claims against it.