May 30, 2007 in City
Testimony begins in Met exec fraud trial
SEATTLE – Federal prosecutors called a former executive of Metropolitan Mortgage & Securities Co. a liar who schemed to mask losses at the Spokane financial conglomerate by deceiving auditors.
The executive’s attorneys, however, tried to direct at least some of the blame for the company’s failure toward those auditors.
The arguments came on the first day of testimony in the felony accounting-fraud trial of Thomas G. Turner, the first former Metropolitan executive to face criminal charges for his role in the company’s demise.
Turner’s trial began Tuesday morning in U.S. District Court in downtown Seattle. A jury of eight men and five women will decide if Turner is criminally at fault for at least some of the problems that caused Metropolitan Mortgage’s failure. Turner is accused of making false statements and hiding important details from outside auditors – the people who are hired to assure investors and regulators that a company’s financial reporting is legitimate.
The collapse of Metropolitan wiped out more than a half-billion dollars of investments by about 16,000 people in the largest financial failure in Spokane history. Assigning blame has been complicated.
Investors, state insurance regulators and a special bankruptcy trust have alleged that two top-tier accounting firms – Ernst & Young, and PriceWaterhouseCoopers LLP – were negligent as outside auditors of the Metropolitan group of companies and should repay investors.
The U.S. government, however, is focused on the actions of executives. And during opening arguments, federal prosecutor Joseph Capone, of the U.S. Attorney’s Office fraud section, said Turner led an effort to whitewash the true financial condition of the Metropolitan group of companies.
Capone said the company was desperate to avoid a third straight year of losses, so in the summer of 2002, Turner led an effort to “pull a rabbit out of a hat.”
He came up with a plan initially spurred by Metropolitan CEO C. Paul Sandifur Jr. to expand a lending relationship with Trillium Corp., a Bellingham timberland company and real estate developer owned by David Syre.
The two companies had different needs and problematic business dealings.
Trillium was out of cash and in default on a loan from Metropolitan.
Metropolitan had money but needed to flip two real estate deals and show a $10 million gain. Doing so would end the 50-year-old company’s slide into the red and bolster its efforts to issue more than $150 million in new unsecured bonds called debentures and sell shares of preferred stock.
Testimony from former Trillium executive Leif Olsson recounted how Sandifur and Syre attempted to structure a joint venture that would combine real estate assets from both companies and cash from Metropolitan.
The purpose of the arrangement was to infuse money into Trillium so that it could repay Metropolitan, and allow Metropolitan to sell two troubled real estate parcels to the partnership.
The plan fell apart when Metropolitan learned it would not be allowed by strict accounting principles to book a big gain by moving the real estate.
With the joint-venture plans scrapped, Turner got to work, Capone said.
The result was a circuitous business deal where cash leaving one Metropolitan business was passed through two other companies before finding its way back into a different Metropolitan affiliate.
One of the companies involved was called Jeff Properties LLC, a shell owned by a high school kid with $64 in the bank.
The other company was Trillium.
Capone said the whole set-up was a ruse to show gains on paper.
“To be real,” he said, “(you) have to have some skin in the game.”
Olsson, granted immunity for his testimony, scribbled notes and wrote e-mails detailing the various meetings and offers between himself and other Trillium executives, and those with Turner, Sandifur and former Metropolitan controller Robert Ness.
The first-day testimony in Turner’s trial slogged through objections, the finer points of arcane accounting rules and the complex nature of high-risk commercial real estate loans gone awry.
The jurors bring diverse backgrounds to the panel. They include a retired Boeing manager and Realtor, Microsoft employees, a school district worker, the owner of a San Juan Islands creamery and a mother who worries jury duty may cut into her weekly telephone calls with her son, a U.S. soldier in Baghdad.
The trial was originally set for four days. However, attorneys told U.S. District Judge John C. Coughenour that they may need most of next week, too.
Prosecutors plan to call at least two auditors from Ernst & Young who are expected to testify that Turner lied to them about the details of the deal with Trillium.
Turner’s defense attorneys, Suzanne Elliott and David Marshall, said during their opening arguments that Turner, “always good with the numbers,” had a stellar 19-year career with Metropolitan, which hired him as a financial analyst.
He was fired in January 2003 from his position as president of Metropolitan affiliate Summit Securities Inc.; at the same time Ernst & Young quit as auditor and retracted its financial audits.
Elliott said Sandifur and Ness signed off on Metropolitan’s financial reports.
And Turner’s attorneys said he did the bidding of his boss – Sandifur.
Elliott disputed the government’s assertion that Ernst & Young was deceived and somehow “stumbled upon some records” almost a year after the deal was made that raised their suspicions of Metropolitan, all at a time when the company was in a financial plight, nearing bankruptcy and facing investor-led lawsuits.
Ernst & Young “realized that from the beginning they made a mistake,” Elliott said. “The money always made a complete circle … they blew it.”
Elliott asked jurors to remember the stakes involved: Ernst & Young faces lawsuits and arbitration liabilities that could amount to hundreds of millions of dollars.