Met Mortgage investors fear massive losses

Investors stung by Metropolitan Mortgage & Securities Co.’s decision to suspend bond and stock payments are turning to lawyers for relief.

Metropolitan’s financial troubles have touched off a recent flurry of activity among several Spokane law firms.

Robert Dunn, of Dunn and Black, said he has spoken to investors who want their money and are willing to drag Metropolitan into court to get it.

Attorney Darrell Scott, a class-action lawsuit specialist with Lukins & Annis, also acknowledged that many investors are calling.

“I can’t disclose exactly what we’re discuss ing, but yes, I am talking with debenture holders about this difficult situation,” Scott said last week.

Metropolitan, which celebrated its 50th anniversary last year, is a $2 billion company with about 35,000 investors. The amount of money invested in unsecured bonds - called debentures - and preferred stocks is about $580 million, much of it from senior citizens living in this region.

Now those investments may be in danger as the company attempts to avoid bankruptcy and rebound from its worst financial crisis.

Metropolitan offers little insight into its strategy other than a statement by a company spokesman that it is trying to save money by suspending dividend and interest payments.

Company Chairman and CEO C. Paul Sandifur Jr. and Chief Financial Officer William Smith denied requests for interviews last week, but they said they would consider answering written questions sometime this week.

In October, the National Association of Securities Dealers fined Metropolitan for fraudulent trading practices. Also that month, the company disclosed it didn’t have enough money to pay its bills.

Then, in late December, the company said it needed to delay the release of its annual report so auditors could restate losses that may be greater than the $25.5 million previously reported in June.

Bondholder Keith Cauvel, who has invested tens of thousands of dollars with Metropolitan since 1981, is among those angered by the financial predicament.

“Everybody is just really nervous that they’re going to lose everything, or maybe get 30 cents on the dollar,” he said.

Cauvel used earnings from his Metropolitan investment to pay for incidentals and income taxes. When Metropolitan announced it was deferring payments such as those to Cauvel, he called attorney Dunn to see if other investors were contemplating a lawsuit.

“The way I look at it, Metropolitan defaulted on my investment, and I want my money back right now,” he said. “It’s about 20percent of my net worth, and it will hurt if I lose it.”

He sent a letter demanding payment as a precursor to a civil lawsuit. If that means Metropolitan is forced into bankruptcy, all the better, he said.

“Whatever wealth is left at that company should go back to investors,” he said.

Backed by a promise

About $100 million worth of debentures will mature this year, many in the next 90 days.

With Metropolitan in the midst of a liquidity crisis, its ability to redeem those bonds is severely compromised.

Debentures are unsecured bonds backed by nothing more than a company’s promise to repay.

In the past, bond maturity dates would often come and go. Many debenture holders were delighted with the returns, and rather than redeem the bonds, renewed them instead.

That may be unlikely now.

With suspended payments, regulatory problems, state supervision of insurance affiliates and little information from company executives, more than 200 investors have called The Spokesman-Review searching for information and ways to get their money out.

Cauvel said he would be more understanding if Metropolitan had been forthcoming.

Even Deborah Bortner, director of Washington state’s securities division, expressed frustration that her telephone messages to Metropolitan were not promptly returned.

“They haven’t even had the courtesy to send out letters to their investors saying what’s going on,” she said. “I think that’s outrageous.”

Bortner, however, cautioned anxious investors.

She said Metropolitan and its affiliates have valuable real estate that could be sold or leveraged to pay off debts.

One example is the 76-acre Summit property on the north bank of the Spokane River.

Metropolitan recently entered into an agreement with Seattle developer Nitze-Stagen to build a new mixed-used neighborhood including housing, office and retail space on the site.

Nitze-Stagen President Kevin Daniels said his firm has the finances and staff to move the project forward.

However, he’s keeping an eye on partner Metropolitan’s finances.

“I am concerned about how Met’s issues may impact the property,” Daniels said. “I am not in a position to know anything more than what has been reported in the press, so … I wait to be informed.”

Daniels added: “(Nitze-Stagen) is fully committed to the Summit project, and has been very impressed working with Met’s staff, the city departments, and the (West Central) neighborhood.”

Cash-flow trouble

Metropolitan has been reeling from three money-losing years since 2000 and has been shaken by the devastating sanctions from the National Association of Securities Dealers, the private-sector enforcer of federal securities laws.

The NASD accused the company’s brokerage affiliate of using fraudulent, deceptive and unethical business practices to sell debentures and stock from January 2001 through March 2003.

Metropolitan settled the NASD complaint without admitting or denying the charges. It agreed to a censure and a $500,000 fine. The company will also pay $2.8 million in restitution to investors and maintain $1 million in a special escrow fund to settle other claims arising from the NASD investigation.

Also, the settlement stripped the brokerage’s ability to deal in securities offered by Metropolitan and its sister Idaho company, Summit Securities Inc.

Without the ability to generate cash from the sale of securities, the companies lost a critical source of new capital that could be used to finance investments and pay off maturing debts.

A cash crunch quickly ensued, and Metropolitan suspended dividend payments on its preferred stock.

In December, Metropolitan’s brokerage affiliate was shut down. The day after Christmas the company announced it wasn’t going to make payments on debentures. Metropolitan has made good on all its debentures since it began selling them in 1953.

While investments in Metropolitan stocks and debentures are in question, the annuities and life insurance policies sold by the company are sound.

State insurance regulators in Washington, Idaho and Arizona took a supervisory role to ensure they stay that way.

James Odiorne, deputy commissioner of company supervision for Washington state’s insurance commissioner, said regulators strongly pushed for Metropolitan to voluntarily relinquish supervision of Western United Life Insurance, its successful insurance business.

The state feared that without supervision, annuity and policy holders would lose confidence in the insurance company and pull out their money. Such a run on the bank could have devastated the company.

“That can kill a company, and so far that hasn’t happened to Western because we think people know their money is insured and safe,” Odiorne said.

History of prosperity

Founded by the late C. Paul Sandifur Sr., Metropolitan perfected the practice of buying discounted real estate contracts. Business blossomed as the company kept purchasing and holding the seller-financed notes during the next three decades.

The company bankrolled its unconventional business by selling debentures.

The formula worked. And though the company had some ups and downs, it steadily grew after C. Paul Sandifur Jr. took over as president in November 1981.

The company nurtured a special relationship with investors. Money entrusted to Metropolitan paid handsome returns and turned the company into one of Spokane’s largest and most influential.

In his 1991 autobiography “Just Give Me Real Estate,” Sandifur Sr. wrote: “I am amazed today at the millions of dollars that come into us, and how people trust us with their life savings. It creates a humbleness on my part and I question how any worthy, conscientious person could violate the trust that has enabled us to prosper as we have.”

The troubles facing Metropolitan are worrisome not just to investors, but many others in the community who rely on the generosity the company has bestowed over the years.

Today, the firm and Sandifur are leading philanthropists.

Whether it’s the multimillion-dollar restoration of The Met Performing Arts Center in downtown Spokane or contributions to charities, few companies and individuals can match Sandifur’s generosity, said Karen Mobley, director of the Spokane Arts Commission.

“Nobody probably does more for the performing arts,” she said, “so there’s no question the arts community is pretty concerned about what’s happening with Metropolitan.”

The company continues to underwrite The Met theater each year at a cost of more than $300,000, according to people familiar with the operation.

Also, the company is involved in building a nightclub complex along West Sprague between Lincoln and Monroe streets.

Sandifur himself draws a comparatively modest executive salary that reached $500,000 three years ago.

Metropolitan’s rising success and desire to be a big community player was punctuated in 1997 when it paid $11.7 million cash for the 18-story Farm Credit Banks Building.

The white high-rise, renamed the Metropolitan Financial Center, is among the tallest and most visible buildings in Spokane. The company draped a giant American flag on the side of the building following the Sept. 11, 2001, terrorist attacks on the United States.

The firm’s success also fueled Sandifur’s political interests.

Metropolitan has financed political action committees that backed former Mayor John Talbott, along with tenacious City Council member Steve Eugster and council members Cherie Rogers and Steve Corker.

The reform-minded candidates rode a wave of voter dissatisfaction in the late 1990s and turned city politics upside-down.

A flashpoint was the city’s controversial role in funding the River Park Square parking garage in downtown Spokane.

River Park Square is owned by Cowles Publishing Co., which also owns The Spokesman-Review.

Metropolitan’s role in the 2003 city elections was muted, although the company contributed money to opponents of former Mayor John Powers in the primary.

The next step for Metropolitan may be the release of its annual report in February, when investors should have a better idea of the company’s overall financial health.

If the company continues to miss payments, investors are poised to sue.

“We can’t afford to lose (our money) and will fight it,” investor Diane Hall said.

Her 84-year-old mother has about $250,000 invested with Metropolitan.

“I think my mom didn’t really understand what she was invested in,” Hall said. “This was supposed to be a safe place for her money.

“We may not see our money, but I believe in karma.”