Met creditors want to sue accounting firm
Sat., Aug. 21, 2004
Creditors in the Metropolitan Mortgage & Securities Co. bankruptcy case want to hire a law firm by next month to sue the big accounting firm Ernst & Young LLP, the creditors’ lawyer said in a hearing Friday.
Stung by the realization that assets such as property and notes might only be enough to return 15 cents on the dollar, creditors have pinned their hopes on a legal theory that Ernst & Young failed in its watchdog role as Metropolitan’s auditor.
Worried about the rising costs of the bankruptcy proceeding, however, creditors bristle at the notion of paying a second $900,000 installment to a special examiner who is delving into details of Metropolitan’s former operations.
“We know what happened. Now it’s time to move on with this case,” said P.J. Grabicki, the attorney representing creditors.
Yet, there’s a strong push to keep special examiner Samuel Maizel on the case. He released a widely praised interim report in June.
Government agencies investigating and regulating Metropolitan say retaining Maizel is important.
U.S. Bankruptcy Court Judge Patricia Williams, who heard arguments Friday, is scheduled to decide Monday whether the examiner will continue his work.
Maizel is ready to begin work immediately. With a team of forensic accountants and attorneys familiar with the Metropolitan case, he can finish his work in 60 days and hand over a final report before Halloween, according to a proposal before the court.
In particular, Maizel wants to look into the auditing practices of Ernst & Young and its predecessor as Metropolitan’s auditor, PriceWaterhouseCoopers LLP.
The liability of the firms could be in the tens or hundreds of millions of dollars, Maizel wrote in his initial report.
Grabicki worried that Maizel’s work would be a costly waste.
He said creditors want to hire lawyers to take on Ernst & Young, and that those attorneys would have to do their own investigation and hire their own experts regardless of what Maizel uncovers.
The creditors are interviewing five law firms as candidates to pursue lawsuits against the auditing firms, and Grabicki promised to bring a motion in September seeking to hire one of them.
Furthermore, Grabicki said, Maizel’s specialty is bankruptcy, not litigation against major accounting firms.
In the middle ground is the Washington insurance commissioner’s office, which wants Maizel to remain a part of the bankruptcy case but doesn’t want him to investigate the auditing firms.
The insurance commissioner’s office has taken control of Western United Life Assurance Co., the main business arm of Metropolitan where up to 87 percent of the company’s assets were held. The reorganization plan says that Western United and its Idaho sister company, Summit Securities, plan to have a combined $50 million to return to creditors after selling property and other assets. The firms have about $13 million of cash on hand right now.
Michael Lubic, attorney for Western United, said the company has hired lawyers to sue Ernst & Young and that the lawsuit could be filed as early as this autumn.
Western, he said, wants Maizel to remain on the case in a watchdog role to lessen conflicts of interest.
The company also favors more examination of other professional firms such as Kutak Rock LLC, a Denver law firm that worked as Metropolitan’s securities counsel.
Other groups supporting further examination by Maizel expressed disbelief that a newly released plan of reorganization and its accompanying disclosure statement were written in consultation with attorneys from Kutak Rock.
Brad Jones, who is representing investors in a separate class-action lawsuit against auditors and former executives, said allowing a potentially liable firm such as Kutak Rock to be involved with the reorganization plan is “inexplicable and inexcusable.”
Grabicki defended Kutak Rock’s role in drafting and writing the plan. He said the law firm was one among several working on the plan and didn’t “pull one over on anybody.”
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