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Spokane, Washington  Est. May 19, 1883

SEC wants Met fraud investigation

State, federal regulators want to know if executives falsified accounts

An independent investigator should look into allegations that Metropolitan Mortgage & Securities Inc. executives committed fraud, according to the U.S. Securities and Exchange Commission.

The SEC and the Washington attorney general’s office filed a motion in Metropolitan’s bankruptcy case Monday seeking an outside examination.

The SEC has several concerns regarding Metropolitan and its sister Idaho company, Summit Securities Inc. Those concerns include:

  • Whether executives made material misrepresentations in their financial filings.
  • Whether the firms’ boards of directors and management are independent.
  • Whether the court should appoint a trustee rather than permit current management to continue to control the firms.
  • Suspicion about Metropolitan’s accounting methods and accuracy splashed into the public arena in late January when independent auditor Ernst & Young LLP quit and then disavowed three years’ worth of audits.

    The elite auditing firm concluded that Metropolitan executives had misrepresented facts. With an accounting scandal unfolding, Metropolitan and Summit filed for Chapter 11 bankruptcy last Wednesday.

    Helane Morrison, district administrator of the SEC’s San Francisco office, said an outside review must be approved by federal bankruptcy Judge Patricia Williams.

    “We take this action today to safeguard the interests of the more than 35,000 investors who purchased stock and bonds in Metropolitan and Summit,” Morrison said in a prepared statement. “An examiner will protect the rights of investors and help creditors locate sources of recovery.”

    Reached late Monday, Morrison said that while such SEC inquiries are not common, they’re not unprecedented.

    The SEC has been investigating Metropolitan for 13 months to determine if executives, board members or employees misled investors with fraudulent financial statements.

    Metropolitan’s chief financial officer, William Smith, said it was the SEC’s inquiry that helped drive the company into bankruptcy. The regulators refused to allow Metropolitan to raise cash by selling more preferred stocks and unsecured bonds called debentures. That forced the company into a liquidity crisis and eventually bankruptcy.

    The bankruptcy covers Metropolitan and Summit, but not the three insurance subsidiaries where more than 87 percent of the company’s assets are located.

    The insurance companies are under state administrative supervision.

    But the SEC wants the investigation to take a close look at the common and complicated transactions executed between the company’s various affiliates.

    Jack Zurlini, an assistant attorney general based in Spokane, said he was unsure if a transaction deemed improper by an investigation could be unwound.

    “Really, our foremost concern is to get accurate information out,” Zurlini said.

    Without a reliable audit in at least three years, reconciling Metropolitan’s books will be among the first and most important tasks.

    In the court motion, the SEC envisions an independent examiner assisting creditors - another name for the thousands of debenture holders, many of whom are seniors living in the Northwest.

    Already there’s been a turnover in senior management.

    Smith, who arrived at Metropolitan last summer, has been making many of the firm’s business decisions for months.

    Owner C. Paul Sandifur Jr. has resigned as chairman and chief executive officer. He said last week he was vacating his office and may soon leave Spokane, where his father founded Metropolitan 50 years ago.

    Summit president Tom Turner has been fired. There have been a few changes in management of the insurance affiliates and on the boards of directors.

    Together, Metropolitan and Summit list assets of $572.2 million and liabilities of $582.5 million. That does not include the three insurance affiliates where most assets are held.