Ex-Met exec denies misleading auditors

SEATTLE – Thomas Turner, formerly the No. 2 executive at the Metropolitan Mortgage & Securities group, pleaded not guilty Thursday to seven felony counts of misleading auditors.

Turner appeared in U.S. District Court in Seattle to answer to a grand jury indictment for his alleged role in the collapse of Metropolitan. The Spokane company’s bankruptcy has rendered near-worthless some $460 million in unsecured bonds held by thousands of investors across the Northwest.

Turner was arrested in Reno on Monday after charges were filed. A judge there released Turner from jail on personal recognizance.

He is the first former Metropolitan executive to be charged with crimes.

However, Joe Capone, an attorney with the U.S. Department of Justice’s fraud section, which is prosecuting Turner, said the criminal investigation into Metropolitan continues. He declined to elaborate after the court hearing.

Capone would not say whether Turner would be, or had been, offered a deal in exchange for his cooperation with the ongoing investigation, though he did say Turner controlled at least part of the outcome of the criminal proceedings.

U.S. District Judge Mary Alice Theiler set Turner’s trial for Dec. 5. Each felony charge carries a maximum 20-year prison term and a $10 million fine.

Turner, 55, is considered a central figure in the accounting problems that eventually propelled Metropolitan into bankruptcy. As president of Summit Securities Inc., an affiliate of Metropolitan, he was an architect of the conglomerate’s commercial real estate dealings and a key confidant of Metropolitan President and CEO C. Paul Sandifur Jr.

After Thursday’s hearing, Turner deferred questions from several reporters to his defense attorney, David Marshall, who also declined to answer questions. Marshall is a private attorney who’s representing Turner in several civil matters, including Metropolitan’s bankruptcy and a class-action lawsuit. Marshall said in court Thursday that Turner would request money to pay his attorney from a Metropolitan insurance policy.

During the hearing, Turner, a Canadian citizen who has lived in the United States since he was 6 years old, sought to ease some of the travel restrictions that are part of his bond agreement.

He asked specifically to attend his mother’s upcoming 85th birthday party in Orange County, Calif. He has surrendered his passport but is allowed limited travel along the West Coast and Nevada, where he lives with his wife in a community called Sparks.

The case is being prosecuted in Seattle rather than Spokane for two reasons. First, the U.S. Attorney’s Office in Spokane was recused from the case for potential conflicts of interest, according to the U.S. Attorney’s office in Seattle. Secondly, Turner is accused of misleading auditors from Ernst & Young LLP’s Seattle office both in person and by telephone.

The seven-count criminal indictment accuses Turner of making false statements and material omissions to Ernst & Young, the outside accountants for both Metropolitan and Summit.

He was fired in January 2004 when Ernst & Young quit as the companies’ auditor and disavowed its prior audits, after it determined that Turner and others had provided misleading information.

Sandifur resigned days later as the scandal grew, lawsuits were filed and bankruptcy was imminent.

The allegations against Turner center on a complex deal with Trillium Corp., a Bellingham real estate and timber company.

In 2001, Trillium borrowed $5 million from Metropolitan and $20 million from Western United Life Assurance Co., a Metropolitan affiliate, to help it develop property in a quickly growing area of downtown Denver. Though interest-only payments were scheduled to begin in February 2002, Trillium went into default within months on the so-called Denver Commons mortgage, according to a report by a court-appointed special examiner.

The two sides began talks about restructuring the loan in mid-2002.

They agreed on a joint venture that would bring together assets from Metropolitan and Trillium to refinance the Trillium debt. The idea was to inject cash into Trillium to relieve its cash crunch, but then have Trillium buy a pair of Metropolitan properties to help the Spokane conglomerate record a quick gain, at least on paper.

The indictment says Turner called Ernst & Young several times about the deal, inquiring whether Metropolitan could book an immediate gain on the deal. This was critical so that Metropolitan could show a profit on its year-end financial reports and continue selling debenture bonds and preferred stocks to a public impressed by the firm’s ability to continually generate profits.

Ernst & Young refused to bless the arrangement because Trillium was not an independent, third-party purchaser.

As the days ticked by, the need to record a big gain for the books by Sept. 30, 2002, grew more urgent.

The idea of a joint venture was dropped and Turner found a company that would buy the Metropolitan properties, according to court records.

The company, called Jeff Properties, agreed to buy two Metropolitan properties for $24 million – one in Everett and the other in San Antonio, Texas. The sale agreement and a 20 percent down payment allowed Metropolitan to book a $10 million gain.

But Jeff Properties was actually a shell company set up by Dan Sandy, a Trillium creditor and close associate of David Syre, Trillium’s owner. Sandy installed his 18-year-old son as Jeff Properties’ executive and rewarded him with a motorcycle.

According to the indictment, Turner misrepresented the nature of Jeff Properties to Ernst & Young on several occasions.

The auditors approved the deal, which would later come to be one of the infamous “rabbit” deals completed by Metropolitan. The word “rabbit” — in reference to pulling a rabbit out of a hat — is memorialized on notes, purportedly written by Sandifur, that are now part of bankruptcy court records.

Less than a year later, Ernst & Young and Metropolitan’s internal audit committee took a closer look.

By that time, Jeff Properties was behind on its payments and Metropolitan had begun to unravel because of unscrupulous sales practices that targeted elderly investors for Metropolitan’s increasingly risky bonds and preferred stocks.

When Ernst & Young learned that Jeff Properties was fueled by Metropolitan cash to buy Metropolitan properties, the deal crumbled, the auditors disavowed Metropolitan’s financial records and the company filed for the largest bankruptcy in the history of Eastern Washington.

Turner is the first Metropolitan executive charged with crimes. But Sandifur, now living in El Centro, Calif., former Metropolitan controller Robert Ness, and former company vice president Thomas Masters were named Monday in a major civil complaint filed by the U.S. Securities and Exchange Commission.

Syre and Sandy also were named in the complaint, as was Trillium.

Separately, Portland brokers William Sears and his wife, Patricia Jean Sears-Millio, were named in an SEC complaint Monday and indicted by a Portland grand jury on 32 counts of mail fraud and three counts of money laundering.

Turner was hired by Metropolitan as a financial analyst in 1985. Within several years he was promoted to vice president.

Sandifur named Turner president of Summit Securities after spinning the company out of Metropolitan. Summit was headquartered in Idaho, in part to escape rigorous Washington state laws governing debenture companies such as Metropolitan.

In an interview last year with a special bankruptcy examiner, Turner described Summit as a business run as a sole proprietorship by Sandifur rather than as a corporation with significant public investment.