SEC charges whistleblower over Met transactions

The U.S. Securities and Exchange Commission’s case against former Metropolitan Mortgage executives includes allegations against a whistleblower who’s now running a real estate development business in Spokane.

Metropolitan executives recruited Thomas Masters from the Phoenix area in 2002 to handle large commercial loan projects as a vice president.

The new job was full of incentives to push through complex real estate deals that were Masters’ specialty. As new projects crossed his desk, he worked out problems and collected a commission.

Then a special, high-priced real estate deal with a Bellingham company called Trillium Corp. was routed around Masters in Sept. 2002, excluding him from a commission that he claimed violated his contract.

When Masters objected to senior Metropolitan executives, including chief executive C. Paul Sandifur Jr., controller Robert Ness, and Tom Turner, who ran affiliated company Summit Securities Inc., a chain of events began that led to his firing in 2003. He then began cooperating with federal investigators who were beginning to look closely at Metropolitan’s financial dealings.

The SEC accuses Masters of participating in one of the now infamous “rabbit” transactions – a series of circular real estate deals where Metropolitan and its affiliated companies sold property to outside buyers financed by Metropolitan.

These inflated deals enabled Metropolitan to post large paper gains, and, ultimately, profits on its financial reports submitted to regulators, and relied upon by brokers and investors.

In its sweeping civil complaint, the SEC alleges Masters took part in at least one questionable transaction called “Neighborhood II.”

The deal was completed in late September 2002, just before the company’s fiscal year ended.

SEC officials allege that Metropolitan insurance affiliate Western United Life Assurance Co. bought 188 acres of undeveloped land, and later that same day resold 130 acres to a developer for about $3.5 million. Metropolitan, through Western, earned a $1.4 million gain on the sale.

But the SEC said the deal was flawed.

The developer, investigators allege, obtained 100 percent financing for its purchase from another Metropolitan affiliate, including 20 percent for its “independent” down payment, and the remaining 80 percent financing from Western.

Such financing arrangements make it improper for Metropolitan to post a gain on the deal according to Generally Accepted Accounting Principles, a widely accepted set of standards established by the Financial Accounting Standards Board.

This improper gain was incorporated into Metropolitan’s financial results – part of a scheme to help the company mask losses as it revved up to sell another $150 million in bonds to unwitting investors, previous investigations have concluded.

Though the SEC said Masters helped structure the deal, his attorneys call the charge a heavy-handed tactic.In late 2002, after Masters learned of questionable real estate deals at Metropolitan, he confronted Sandifur, according to Spokane attorney Bob Dunn, who’s representing Masters in a lawsuit against the company. The former CEO chafed at Masters’ suggestions and Masters was soon stripped of duties. By February 2003, Masters had been fired.

He hired Dunn and sued for breach of contract.

When Dunn learned of the “rabbit transactions,” he filed a qui tam action, a civil suit filed against an employer to compel the government to act. This legal action was sealed for months and the U.S. Attorney’s Office in Spokane declined to pursue Masters’ allegations. In its sweeping civil complaint, the SEC makes no mention of Masters’ suit or his cooperation with investigators, Dunn said on behalf of Masters.

“Here’s a guy who went to Sandifur on the Trillium deal and said ‘What the hell is this?’” Dunn said, adding Masters knew right away that the deal was a poorly constructed and highly questionable

“My guy, Masters, he’s only been there five months at this point but asserts himself,” Dunn said. “He’s one of the guys that blew this whole thing open.”

Dunn said he thinks SEC officials wanted more information from Masters about the inner workings of Metropolitan without granting him any sort of immunity.

“I don’t think it’s fair of the SEC to bring the full weight of its power and authority down on a guy who they believe may helpful to them in prosecuting the true perpetrators of a fraud against the public” without offering them some sort of protection, Dunn said.

Today Masters is a manager of Consortium LLC, a real estate development company he runs along with Lorri Taylor, another former employee of Metropolitan Mortgage.

The two are attempting to develop an Indian Trail project with 42 homes called Estates at Rocky Ridge. The project is still in the planning stages, according to City Hall officials.

Masters and Taylor have other smaller projects – including one near Spokane’s Beacon Hill — and are working on some larger development proposals in the Tri-Cities.