Small Met recovery possible

Investors in bankrupt Metropolitan Mortgage & Securities Co. could recover as little as 15 cents on the dollar, a devastating loss of wealth for the thousands of people who entrusted their savings to a company that’s now plagued by accounting scandals and federal investigations.

The executive hired from outside to run Metropolitan after it filed for bankruptcy protection said Thursday the recovery depends on the successful sale of notes and property, especially beachfront lots in Hawaii that could be worth tens of millions.

“We’ve just begun to market the assets, and based on that alone, we estimate (a return) of 15 to 20 percent,” said Bill Romney, Metropolitan’s chief restructuring officer.

The number, which could mean total losses to investors of nearly $500 million, does not take into account other potential sources of money that creditors are pinning their hopes on: suing the auditors that were charged with ensuring Metropolitan’s books were honest, and selling the company’s three insurance subsidiaries. Investors could recover more, depending on how successful those strategies are.

Romney said those strategies are part of the company’s plan of reorganization. A draft of the plan is circulating among attorneys this week, along with a disclosure statement that serves as a sort of prospectus for creditors to consider before deciding whether to vote for or against the plan. The draft of the plan may be released by the end of the month.

There are thousands of creditors, many of whom are seniors living in the Northwest.

Attorneys involved in the case said they can’t comment on the merits of the plan.

But several had said earlier that a claim against Metropolitan’s former auditors, accounting firms Ernst & Young LLP and PriceWaterhouseCoopers LLP, would be a tough legal fight.

Ernst and Young resigned as Metropolitan’s outside auditor in January after determining that executives lied about real estate transactions designed to inflate profits and deceive regulators and investors. Ernst & Young also disavowed nearly three years of its audits, saying it couldn’t trust Metropolitan’s books.

Another unknown is the value of the company’s three insurance affiliates, which now are under the control of regulatory officials in the three states in which they’re based.

Idaho regulators have indicated a willingness to consider the sale of Old Standard Life Insurance. Arizona officials have taken a similar position on Old West Insurance.

However, Washington’s insurance commissioner’s office remains committed to rehabilitating Western United Life Assurance Co. and returning that company to creditors, Romney said. Before Metropolitan unraveled and filed for bankruptcy protection, former Chief Financial Officer Bill Smith estimated that about 87 percent of the company’s assets were held within that subsidiary, known as WULA.

The insurance commissioner’s office took over WULA in March, saying it wanted to protect policyholders and separate the tightly regulated company from Metropolitan.

Many of the problems afflicting Metropolitan were outlined in a scathing report by independent examiner Samuel Maizel.

Filed in June, Maizel’s report blamed former Metropolitan CEO C. Paul Sandifur Jr. of operating a financial house of cards that finally collapsed under government scrutiny.

Maizel also scrutinized accounting irregularities and questionable real estate deals that may be the basis of any legal claim against outside accountants. He has asked the bankruptcy court for another 60 days to further investigate the actions of accountants, as well as potential claims against Sandifur and other executives and officers.

Also, the examiner expects to look at the legal liability of Metropolitan’s Denver-based law firm, Kutak Rock LLP, which continues to do legal work for Metropolitan. That work included drafting the reorganization plan and the disclosure statement, according to Kutak Rock’s own billing statement charging Metropolitan more than $160,000 in attorney’s fees from February through May.

Today, lawyers will argue in federal Bankruptcy Court in Spokane over Maizel’s request to continue the examination of Metropolitan. The two creditors’ committees involved in the case oppose more investigation. The first round cost about $900,000. Another 60 days could cost equally as much and creditors’ attorney P.J. Grabicki said the next phase of investigation targeting accounting firms should be done by the lawyers who potentially could sue Ernst & Young on behalf of the investors.

Supporting Maizel’s request, however, is the U.S. Securities and Exchange Commission and the Washington State Attorney General’s Office.