Top executives of Metropolitan Mortgage & Securities Inc. were accused of fraud Monday, the first federal charges since the company went bankrupt.
The actions allege former Metropolitan Chairman and CEO C. Paul Sandifur Jr. and other executives falsified financial results through circular real estate deals to show profits. The manipulation maintained the company’s image as a safe investment haven and allowed it to continue issuing new securities, according to charges from the U.S. Securities and Exchange Commission and the U.S. Department of Justice.The scheme unraveled in 2003 as investigators scrutinized the Spokane company’s books. Within months, Metropolitan, which once employed about 700 people, influenced Spokane politics and occupied a white downtown high-rise, filed for bankruptcy protection. Few investors could act quickly enough to escape. The company’s failure stripped 10,000 investors of $450 million.
“It’s our own little Enron,” said Jim Clanton, who lost money with Metropolitan and sits now on a bankruptcy creditors’ committee. “We’re looking forward to the day the people who perpetrated this crime are brought to justice.”
Sandifur and members of his senior executive team were named in a sweeping civil complaint filed by the SEC. Those senior executives are former president Thomas G. Turner, 54, of Sparks, Nev.; former controller Robert Ness, 41, of Bellevue, Wash.; and former vice president Thomas R. Masters, 54, of Spokane.
As the SEC leveled civil complaints against executives, the FBI arrested Turner and jailed him in Reno, Nev., following a criminal indictment against him by a Seattle grand jury on Monday.
The seven-count criminal indictment against Turner alleges he made false statements and material omissions to auditors of a public company.
“These charges are part of an ongoing criminal of the failure of Metropolitan and the resultant millions of dollars in losses to investors,” according to a Justice Department press release.
In addition to Turner, a Portland couple who sold Metropolitan stocks and bonds also were charged Monday.
The executives are accused of engineering bogus deals that the company called “rabbits.” The nature of these deals shared a common attribute: they materialized in the final days of Metropolitan’s fiscal year, allowing the company to report profits instead of losses.
One of these “rabbit” deals allowed Metropolitan to show a $10 million gain though a deal with Trillium Corp., a Bellingham, Wash., real estate company.
SEC investigators allege that in 2002, Metropolitan executives concocted a deal to finance the purchase of its own property by Trillium.
To evade accounting principles that prohibit a company from reporting profits by selling properties to itself for inflated amounts, Metropolitan and Trillium agreed to run the money through a shell company they set up, the SEC alleges. Called Jeff Properties, the shell was actually incorporated by an 18-year-old high school student, who was the son of a Trillium creditor, in exchange for a Honda 50 motorcycle, according to investigators.
Metropolitan’s financial auditor, Ernst & Young LLP, resigned after exposing the deal two years ago.The episode contributed to Trillium’s own bankruptcy earlier this year. Trillium president and CEO David Syre, 64, of Bellingham, and Trillium creditor Dan Sandy, 50, of Rochester, also were named in the SEC”s civil complaint. Sandy’s son, Jeff Sandy, the teen who incorporated Jeff Properties, will not be charged, according to the SEC.
The civil charges against Trillium executives “should serve as a reminder that customers and other business partners will be held accountable when they facilitate a public company’s financial fraud,” said Marc Fagel, an SEC associate administrator in San Francisco.
The SEC will seek unspecified fines, and the surrender of all money earned, such as bonuses and stock dividends, that were paid to executives as a result of the bogus dealings. The SEC also wants Sandifur, Ness and Turner barred from serving as officers or directors of public companies in the future.
Sandifur’s attorney, Kelly Corr, said the former leader of Metropolitan “lost virtually his entire net worth” when Metropolitan and its sister company, Summit Securities Co., went bankrupt.
“There’s a lot of Monday-morning quarterbacking going on now and people are making him out to be a scapegoat,” Corr said.
Turner was president of Summit Securities. He was the second-highest-paid executive in the conglomerate once valued at $2.7 billion, and was an architect of Metropolitan’s questionable investment and commercial loan activities.
The Turner indictment alleges he misled auditors from Ernst & Young. He is expected to make a court appearance in U.S. District Court in Seattle.
Though charges were filed in Seattle, the federal prosecutors working the Metropolitan case are part of the Department of Justice’s fraud section based in Washington D.C.
The same “rabbit” deals that drew the attention of the SEC were misrepresented to auditors by Turner, according to the indictment.
Investigators on Monday also snared two Portland, Ore., brokers in the Metropolitan collapse.
William Sears, 56, and his wife, Patricia Jean Sears-Million, 50, have been charged with 32 counts of mail fraud and three counts of money laundering by the U.S. Attorney’s Office in Portland, Ore.
The indictment accuses the brokers of falsely representing the risks of investing in Metropolitan; falsifying information to boost a client’s risk tolerance and net worth; and failing to disclose material facts about investing in Metropolitan.
The federal criminal charges handed down by a Portland grand jury against the brokers dovetails with SEC action against the Searses, who sold more than $35 million in Metropolitan stocks and debenture bonds to clients.
The U.S. Postal Inspection Service and the Internal Revenue Service worked closely on the Sears charges, the result of a Portland grand jury.
Such dealings were a long way from the sort of thrifty business that snapped up family home mortgages, a practice perfected by Sandifur’s father 50 years ago when he co-founded the firm with brother Charles Sandifur.
The two men built a company and never missed a payment.
Today, investors have long since shaken off the bewilderment of Metropolitan’s collapse, and want action.
“People took a beating and suffered,” Clanton said. “We’ll certainly be glad to see some significant penalties brought.”
Maggie Lyons, the acting chief executive of Metropolitan, said the major developments change little about the ongoing work of recovering money for investors.
“Our goal remains to work with the creditors’ committees in trying to recoup as much as we possibly can for the bondholders,” she said. “Many who have had their life saving tied up in Metropolitan and Summit Securities are now looking at a fraction of their investments.”
She said the hope is that federal actions won’t damage recovery efforts.
Metropolitan’s liquidation plan calls for an initial payment of between 7 cents and 9 cents on the dollar early next year.
There has been concern that Metropolitan’s bankruptcy strategy of pursuing claims of professional negligence against auditing firms to boost the recovery could be jeopardized by pinning all the blame on Sandifur and other executives.
Last week, Metropolitan filed suit against PriceWaterhouseCoopers LLC, another of its auditors, accusing the Big Four accounting firm of professional negligence.
A spokesman for PriceWaterhouseCoopers called the action unwarranted and said the firm would vigorously defend itself.
Metropolitan also has entered into arbitration with Ernst & Young, which begin auditing Metropolitan in 2001 and resigned amid the Metropolitan/Trillium scandal.
The SEC’s Fagel said investigators will not pursue civil penalties against the auditing firms.
Lyons said the cause – and potential jackpot – of suing the accounting firms will continue.
“We think we have claims with merit and we’ll aggressively pursue them.”