Current directors of Metropolitan Mortgage & Securities Co. have sued their former accounting firm, PriceWaterhouseCoopers LLC, alleging that negligent audits performed in 1999 and 2000 failed to warn them that the Spokane company was headed for a financial train wreck.
The lawsuit, filed Wednesday in U.S. District Court in Spokane, seeks unspecified damages from PricewaterhouseCoopers, the accounting firm Metropolitan used for several years, concluding in 2000.
Also listed as plaintiff is Summit Securities Inc., a sister company of Metropolitan. Both companies are awaiting approval of a liquidation plan submitted to U.S. Bankruptcy Court.
Attempts to reach representatives of PricewaterhouseCoopers were unsuccessful Thursday afternoon.
Metropolitan, once one of Eastern Washington’s largest financial services companies, filed for bankruptcy in early 2004, leaving a debt of more than $600 million owed to thousands of investors.
The suit claims PricewaterhouseCoopers failed to perform its duty as an independent auditor. “Through negligence and in breach of contract, PricewaterhouseCoopers’ dereliction in the performance of its audits and misrepresentations in its audit reports enabled and concealed a foreseeable and preventable chain of events that pushed Met and Summit deeply into bankruptcy,” the suit reads.
Some money from a successful lawsuit against PriceWaterhouse Coopers would go to Metropolitan creditors.
In addition to breach of contract, the suit alleges that the accounting firm failed to perform its role of an independent auditor. In specific, it alleges the accounting firm created a flawed tax shelter plan for Metropolitan for which it received a substantial fee at the same time it was charged with reviewing and certifying the company’s books.
That tax shelter, undertaken in 1998, was referred to as a “FLIP” — foreign leveraged investment program. Met used that program to create a web of offshore deals and stock holdings in foreign banks, the suit says. The result left Metropolitan with a tax benefit of $28 million.
PricewaterhouseCoopers not only charged Metropolitan for setting up the FLIP, it also performed an audit approving the deal. The IRS later disallowed most of those tax benefits, saying the FLIP was an illegal tax shelter.
The suit asserts that the company’s financial status veered toward disaster under former Chairman and CEO C. Paul Sandifur, and that the accounting firm failed to blow the whistle on questionable bookkeeping taking place.
Before its bankruptcy, Metropolitan depended on selling debentures — or unsecured bonds — to investors. Unable to generate adequate cash due to poor commercial real-estate investments, Metropolitan continued to issue debentures despite the company’s poor performance, the suit alleges.
Seattle attorney Parker C. Folse III, who filed the suit against PricewaterhouseCoopers, said Sandifur’s actions were not challenged by the accounting firm and caused the company to crumble.
“Had PricewaterhouseCoopers done its job properly, some former company directors and state regulators would have done something to stop that from occurring,” Folse said Thursday.
This suit would be best viewed, added Folse, “as a professional malpractice suit and breach of contract suit” against PricewaterhouseCoopers.
Maggie Lyons, the acting CEO of Metropolitan, declined to say whether the company would also sue Ernst & Young, the auditing firm that took over in 2001 and 2002. Some creditors and bankruptcy lawyers now blame Ernst & Young for letting former Metropolitan executives allegedly perpetrate securities and accounting fraud.
A state lawsuit filed by another Metropolitan affiliate, Western United Life Assurance Co., against Ernst & Young, has gone to mandatory arbitration.
“I will say we are pursuing all potential claims available to us,” said Lyons.
Lyons said the company is also considering separate actions against Sandifur for alleged “fraudulent transfers” that the former president engineered as the company was facing bankruptcy.
The new lawsuit has been assigned to U.S. District Court Judge Fred Van Sickle. The same judge is handling a massive class-action suit filed in 2004 on behalf of Metropolitan investors who are seeking to recoup money from the failed company and former company officials.