June 7, 2007 in City

Turner says he obeyed his boss

By The Spokesman-Review
 
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SEATTLE – Former Metropolitan Mortgage & Securities Co. executive Thomas Turner testified in his criminal trial Wednesday that he was only doing the bidding of his boss, C. Paul Sandifur Jr., when he signed off on a controversial real estate deal that helped bring the company down.

Turner, 56, said Sandifur and another Metropolitan executive, former Controller Robert Ness, as well as the outside accounting team of Ernst & Young LLP, knew the details of the troubled 2002 real estate deal that exploded into an accounting scandal in the weeks leading up to Metropolitan’s bankruptcy. Yet only Turner has been charged with crimes.

Turner, wearing a light gray blazer, spoke with ease on the witness stand, often turning to the jury when making a point. He smiled, sometimes corrected his questioners and appeared unruffled when confronted with evidence that challenged his sworn statements. Turner said he had been an advocate for Metropolitan’s thousands of investors, many of whom lived in the Inland Northwest.

Lawyers will make their closing statements today, and the 13-person jury is expected to begin deliberations in the afternoon.

If convicted, Turner faces the possibility of a prison sentence.

On cross-examination, federal prosecutor Joseph Capone read some of the statements Turner made earlier to a special bankruptcy examiner who flushed out many of the reasons behind Metropolitan’s collapse, which erased about a half-billion dollars from 16,000 investors.

Most had purchased unsecured debenture bonds and have been repaid between 6 cents and 9 cents on the dollar.

While Turner sought to downplay his knowledge of accounting rules that allow companies to book paper gains from property transactions, Capone elicited Turner’s admission that he kept copies of the rules in his desk drawer, brought one pertinent page with him on travels and would wave them at the company’s commercial loan staff.

The entire case centers on one property transaction, of which Turner said: “I was brought into the deal by my boss (Sandifur).”

Sandifur had asked Turner to run an analysis of a joint venture proposal in the summer of 2002 between Metropolitan and Bellingham timber and land developer Trillium Corp.

Sandifur and Trillium owner David Syre were trying to form a partnership that would help both companies: Trillium needed cash to repay loans, including some to Metropolitan that were in arrears.

Metropolitan needed to post profit in 2002 to reverse two years of losses. The joint venture, as envisioned, would be a place where property and cash could be deposited, with the profits bouncing back to the partners.

Sandifur asked Turner to analyze the potential profitability of the venture.

Turner said he spoke with Ernst & Young.

Ultimately, he testified, “I met (Sandifur), and talked with him that it was a bad idea.”

Ernst & Young partner Jack Behrens hadn’t liked it either from an auditing standpoint because Metropolitan wouldn’t be able to book any gains from the sale of real estate to the joint venture.

Turner testified that Sandifur told him to make something happen.

In mid-September, Turner testified, he was in Sandifur’s office for a conference call with Syre. It was announced that the companies had found a way to arrange a new $17.6 million loan from a Metropolitan insurance affiliate to Trillium to ease Trillium’s cash crunch.

Some of Trillium’s loan money – more than $5 million – would be paid to a creditor named Dan Sandy.

Sandy, in turn, would use the cash as a down payment to buy about $24 million worth of property for Metropolitan. The result would be a $10 million gain on Metropolitan’s books, enough to reverse what was sure to be another money-losing year.

The bigger picture was that Metropolitan, now showing profits, would be in better position to show that it should be allowed to sell $150 million in bonds and preferred stocks to investors.

Without that new infusion of cash, Metropolitan was facing its own cash crisis and bond default.

Turner said he took the new proposal including Metropolitan, Trillium and a Dan Sandy company called Jeff Properties LLC to his office with Ness and called Ernst & Young for an opinion.

In direct contradiction to the testimony of auditor Behrens, Turner said he divulged all the details and got the backing of Behrens.

When Trillium started making the payments on Sandy’s real estate loan months later, it caught the attention of Metropolitan’s new chief financial officer, along with members of Behrens’ audit team.

Turner was fired in January 2003 after a 19-year career with Metropolitan. He had climbed to the position of president of Summit Securities Inc., a Metropolitan sister company, and was considered the No. 2 executive in the firm.

He was paid a $170,000 salary in 2002.

Earlier in the day, defense witness William Holmes, of Portland, questioned the integrity of Ernst & Young’s audit of Metropolitan.

He said there were scant records of work papers, records of the procedures followed and auditing tests performed; and a general lack of analysis and a memorandum of how the firm investigated important transactions.

Ernst & Young, he said, failed to practice “professional skepticism” of the statements of Metropolitan management.

He also zeroed in on one peculiar problem.

Ernst & Young’s final audit report from 2002 shows it was “modified” at 6:53 p.m. March 4, 2004, more than one year after the report was archived.

The auditing firm finished its audit of Metropolitan’s 2002 books in about December 2002. Suspicion of the Trillium transaction morphed into a full-blown internal investigation by fall 2003. The SEC began its inquiry in November 2003.

By January 2004, Behrens, Ernst & Young’s audit partner overseeing the Metropolitan work, determined he had been lied to and misled by Turner and others. He submitted Ernst & Young’s resignation as Metropolitan’s auditors and retracted their opinions that the company’s books accurately reflected its financial condition.

The modifications made about five weeks later led Turner’s defense to speculate that perhaps Behrens or someone else at Ernst & Young reopened the archived file and changed the findings.

Ernst & Young and federal prosecutors call it a technical error that occurs when the archived audit work is opened with a computer program such as Excel and it erroneously labels the documents as modified on the date they are opened.

Behrens came under attack during his two days of testimony last week.

Turner’s defense team tried to cast the veteran auditor and Ernst & Young as eager to make Turner a scapegoat.

The auditing firm, considered one the nation’s Big 4 – or as one of the witnesses in the trial put it, “Final Four,” in reference to the collapse of Arthur Anderson LLP in the wake of the Enron Corp. scandal – has been sued by the Washington state Office of the Insurance Commission, a special Metropolitan bankruptcy trust, and is defending itself in an investor-led class action case. Its liability is estimated at tens of millions of dollars because of investor losses in the bankruptcy.

It does not face federal legal action related to this case.

Turner and Sandifur also face lawsuits from the U.S. Securities and Exchange Commission that mirror many of the allegations in Turner’s criminal case. Other former Metropolitan executives, including Ness, have settled their cases, along with Sandy. Trillium, and its owner Syre, also face lawsuits.

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