Met auditor wants protection
An accounting firm caught up in the Metropolitan Mortgage & Securities Co. bankruptcy has asked a federal judge to dismiss claims that could cost it tens of millions of dollars.
The Dec. 13 court hearing sought by PriceWaterhouseCoopers LLP is the first legal test of accusations that outside auditors should shoulder blame for Metropolitan’s collapse.
About 16,600 investors owned $470 million in notes when the company filed for Chapter 11 bankruptcy protection in February 2004. Today these investments are expected to recoup between 8 cents to 14 cents on the dollar. Thousands more investors owned $131 million in preferred stocks that are now worthless.
Operating under new management since the bankruptcy, Metropolitan is attempting to boost investors’ financial recovery by alleging that PriceWaterhouse, one of the nation’s Big Four accounting firms, was negligent in performing its audits of the company. Metropolitan, in a suit filed this fall against PriceWaterhouse, alleges that in some instances the auditor helped Metropolitan erect financial schemes that masked losses.
Though both sides say they haven’t discussed a settlement, the deep pockets of accounting firms remain Metropolitan’s best chance to recover significant money for investors.
The claims by Metropolitan of professional negligence, negligent misrepresentation and breach of contract promise to be a difficult task to prove.
PriceWaterhouse says in court filings that its work auditing Metropolitan’s books was based upon numbers and reports from former Chairman and CEO C. Paul Sandifur Jr. and his financial team.
The accounting firm says it can’t be blamed by the company for auditing the very numbers provided by Metropolitan management.
The PriceWaterhouse argument to U.S. District Judge Fred Van Sickle is based on a legal doctrine called in pari delicto, which holds that Metropolitan is equally at fault and thus cannot assert a claim of wrongdoing.
“The complaint is doomed by its own allegations,” attorneys for PriceWaterhouse argue in their motion to dismiss Metropolitan’s suit. “If the financial irregularities that are the linchpin of their claims in fact occurred, Metropolitan and Summit were the primary wrongdoers.”
Metropolitan lawyer Parker Folse disagreed.
“When an auditing firm is hired, it is not to be a rubber stamp,” he said. “It is hired to do due diligence; to make sure the information presented is fair, complete and competent.”
“For an auditor to say ‘We received incomplete information’ as its defense, that’s a dodge.”
PriceWaterhouse also seeks to dismiss the lawsuit on several other grounds, including the expiration of a statute of limitations.
The firm audited Metropolitan and its group of related companies in 1999 and 2000.
Though activities during those years were not the subject of a U.S. Securities and Exchange Commission complaint against executives filed two months ago, nor included in a federal grand jury indictment of one top executive, the financial reports bear some of the same questionable dealings that helped Metropolitan show a profit even though the business was failing.
One such example was a now-outlawed tax shelter that PriceWaterhouse erected and sold to Metropolitan.
Called a foreign leveraged investment program, or “FLIP transaction,” Metropolitan created a web of offshore deals and stock holdings with foreign banks to generate mock losses. These losses were then turned into $28 million worth of income tax benefits, according to Metropolitan’s lawsuit.
Metropolitan used these benefits to show a bottom line profit rather than loss.
PriceWaterhouse auditors signed off on these financial reports, which were depended upon by brokers who, in turn, presented the results to investors.
Such dealings underscore the troubles accounting firms created by working as consultants while at the same time collecting payment for working as independent auditors, Folse said.
Folse said the audits conducted by PriceWaterhouse also helped Metropolitan meet requirements to list securities on national stock exchanges and shed what the company regarded as onerous regulation by the state Department of Financial Institutions.
No such lawsuit has been filed by Metropolitan against another accounting firm, Ernst & Young, which was hired after PriceWaterhouse.
Ernst & Young and Metropolitan signed engagement letters that call for arbitration to resolve legal disputes.