SEATTLE – Metropolitan Mortgage & Securities Co.’s financial auditors counseled executives of the Spokane company again and again about special accounting rules designed to prevent financial fraud, one auditor testified Wednesday at the criminal trial of Met’s No. 2 executive.
Yet one of the executives allegedly brushed aside the advice, orchestrated a questionable property sale, lied about it and got caught, according to federal prosecutors and the Ernst & Young auditor, a key witness in the trial.
Thomas G. Turner, the former second-in-command of the Metropolitan group of companies, sat frowning as a partner with accounting giant Ernst & Young told a U.S. District Court jury in Seattle about how his auditors worked on Metropolitan’s books and tried to steer the Spokane financial conglomerate away from certain business dealings during the summer of 2002.
Turner’s lawyers will have their chance to question the auditor, Jack Behrens, and attempt to discredit Ernst & Young’s auditing practices during cross-examination today.
They plan to cast Turner as a victim of an auditing firm that has plenty of motive to blame one man for the failure of the Spokane financial conglomerate – a bankruptcy that wiped out a half-billion dollars of investments from about 16,000 people.
Behrens, an Ernst & Young partner who oversaw the audits of Metropolitan from 2001 to 2003, told jurors of the efforts undertaken to ensure Metropolitan’s financial reports were legitimate.
Metropolitan sold unsecured debenture bonds and preferred shares of stock to people across the Northwest. The Ernst & Young audits were depended upon by brokers and investors to make sure the company’s books were honest.
Behrens said Ernst & Young sometimes had 20 employees at a time inside the Metropolitan offices in downtown Spokane reviewing thousands of company documents.
In the summer of 2002, Metropolitan was struggling. The firm had posted losses two years in a row and needed to turn things around so it could show a profit and get authority to sell bonds and stock worth more than $150 million.
So, Metropolitan CEO C. Paul Sandifur Jr. and David Syre, the owner of a Bellingham timber and real estate development company called Trillium Corp., attempted to rework a failing business relationship between the two companies. Trillium was in default on a Metropolitan loan to develop land in downtown Denver.
Sandifur and Syre wanted to create a joint venture where the companies would contribute cash and property. When the joint venture would sell the properties, Metropolitan and Trillium would split the proceeds.
Trillium was fighting off a cash crunch and Metropolitan was desperate to dump some real estate in Everett, Wash., and San Antonio, Texas, and record a windfall profit – at least on paper.
The arrangement was explained to Behrens, who torpedoed it when he said Metropolitan couldn’t list the profit on its financial reports.
So, Turner and a Trillium negotiator had a try. They stitched together a complex deal, and Turner asked Behrens for his opinion.
According to Behrens, the true workings of the deal were misrepresented.
He testified about getting a call from Turner, who exclaimed, “Good news! We found another buyer.”
Behrens said Turner described the buyer as a man named Dan Sandy, who owned a company called Jeff Properties LLC.
He said Trillium had just repaid a loan from Sandy for about $6 million, leaving Sandy with a pile of money and a desire to buy the Everett and San Antonio properties from Metropolitan.
Behrens said the sale appeared, from the information given to him, to be an arms-length transaction and that Sandy had big plans for the property.
He told jurors that his team quizzed Turner and others about the deal and was satisfied with the answers.
Ernst & Young then completed its year-end audit of Metropolitan.
The problem, allege prosecutors with the fraud section of the U.S. Department of Justice and the FBI, is that Sandy was not independent of Trillium. In fact, they called the deal an elaborate ruse to trick auditors and allow Metropolitan to report to investors and federal regulators that it had returned to profitability.
Within months the SEC began an investigation and didn’t allow Metropolitan to sell more bonds and stock. Denying the company this cash flow sent Metropolitan into a tailspin. It defaulted on its bond payments by December 2003, was sued by investors and filed for Chapter 11 bankruptcy protection.
Bondholders have so far recovered between 6 cents and 9 cents on the dollar. They have, however, entered arbitration against Ernst & Young and have sued previous outside auditor PriceWaterhouseCoopers for professional negligence.
Questionable real estate deals were not unheard of at Metropolitan.
Sandifur kept a special file atop his office desk titled “Rabbits,” his executive assistant Kimberly Lukes testified Wednesday.
The name was derived from the special and surprise nature of certain real estate deals that, for financial purposes, were akin to “pulling a rabbit out of a hat,” she testified Turner told her.
Lukes, who began working at Metropolitan in June 1997 as a human resources receptionist, said she wasn’t privy to the contents of the “rabbits” file. She knew of it because she kept Sandifur’s calendar, organized his desktop by printing out and arranging his e-mails, and lined up his weekly meetings with a group of senior executives where these deals were listed on the agenda.
While the criminal case against Turner hinges on his representations to outside auditors on one of these deals, a parallel civil lawsuit filed by the U.S. Securities & Exchange Commission alleging similar activities is set for trial. Turner, Sandifur, Syre and Trillium are all named in the SEC suit.
Civil complaints against other Metropolitan executives and Trillium creditor Dan Sandy have been settled.