An accounting fiasco is unfolding at Metropolitan Mortgage & Securities Inc. as independent auditor Ernst & Young LLP quit after concluding the financial books couldn’t be trusted.
The abrupt action was the latest blow to Metropolitan, the target of two lawsuits investors filed this week that may become class-action claims.
Ernst & Young, one of the four leading corporate auditing firms in the country, abandoned Metropolitan and its affiliated companies after determining “it could not rely on the representations of management,” according to a press release from Metropolitan.
In at least two transactions, the company booked profits that Ernst & Young implied had been inflated.
That finding has caused more problems for troubled Metropolitan, which has 35,000 investors, many of whom are seniors living in the Spokane region.
Tom Turner, a senior executive, has been fired, Metropolitan’s board announced Thursday. No reason was given. He was president of Summit Securities and started with the company in 1985 as a financial analyst. Summit, which is headquartered in Idaho, is a sister company to Metropolitan. Both firms are controlled by Spokane businessman C. Paul Sandifur Jr.
Metropolitan executives declined to be interviewed. In a press release, Chief Financial Officer William Smith, who has been named president of Summit, stated Metropolitan would try to hire another auditor.
Deborah Bortner, director of the Washington State Securities Division, dismissed such an attempt.
“Look for a new auditor? Give me a break,” she said. “You can’t even do an audit of this company right now because there’s nothing to base it on.
“No top-tier firm will touch this thing with all the red flags flying.”
Ernst & Young withdrew its own audit reports of Metropolitan companies for fiscal years ending Sept. 30, 2001, and Sept. 30, 2002, along with the first nine months of fiscal year 2003, ending June 30.
The U.S. Securities and Exchange Commission is investigating Summit.
Ernst & Young is questioning a $10 million to $14 million gain on Metropolitan’s books, and another $8 million to $10 million profit on Western United Life Assurance Co.’s books. Western is a Metropolitan insurance affiliate that sells annuities and life insurance policies. The investments mostly are backed by real estate assets.
Ernst & Young’s allegations come as no surprise to Gary Dubin, an attorney in Hawaii. He has been making such accusations against the company for at least two years, regarding major commercial projects on the islands.
Dubin is embroiled in a lawsuit against Metropolitan and company executives, alleging that the firm has been selling overvalued assets to itself and recording profits.
There’s no indication that Dubin’s claims - which have been refuted by Metropolitan - are connected to Ernst & Young’s concerns with Metropolitan’s books.
Dubin said Thursday that these dealings enabled the company to appear profitable during the past several years, especially when auditing giant Ernst & Young signed off on the books.
“This then allowed the companies to sell stocks and debentures to investors who thought these guys were legitimately profitable,” Dubin said. “Now in Spokane you’ve got all these elderly people putting their money into this supposed profitable, safe company.”
Dubin’s lawsuit began when Metropolitan was attempting to foreclose on his client, who borrowed money from the Metropolitan companies to finance the logging of rare, valuable Koa wood from a Hawaiian forest.
He said he quickly became suspicious of Metropolitan’s bookkeeping when it booked $10 million to $14 million in profits on the Koa wood project before a single tree was cut or a logging permit granted.
Dubin has since turned the case into a personal crusade against Metropolitan and Sandifur.
The company declined to comment on Dubin’s allegations.
Dubin has sent numerous letters to Ernst & Young since 2002, warning auditors of potential accounting problems.
“We believe that your clients may well have fraudulently placed upon their books tens of millions - if not hundreds of millions - of dollars of inflated valuations as to real property and contract interests in several states,” Dubin wrote in a letter dated Oct. 18, 2002.
When Ernst & Young didn’t take action and continued signing off on Metropolitan’s financial statements, Dubin sharpened his criticism.
Last August he wrote another letter to Ernst & Young’s general counsel in New York City, accusing the firm of “gross failure to properly audit the books and accounts” of Metropolitan.
“This has permitted the Metro Group to include relatively worthless multimillion-dollar assets on their books, to engage in dishonest intra- and inter-company conflicted transactions, and to maintain inadequate loss reserves, which now threaten to result in the possible widespread loss of policyholder funds and public shareholder equity.”
Ernst & Young replied to the letters by saying it would evaluate Dubin’s allegations.
A spokesman for Ernst & Young declined to comment on the Metropolitan action, saying that the firm doesn’t comment on its customers.
Dubin, however, holds Ernst & Young responsible and said angry investors may turn on the auditing firm for financial relief.
“They’re implicit and they have deep pockets,” Dubin said. “They’re next.”
He also targeted PriceWaterhouseCoopers LLP, another of the big auditing firms that signed off on Metropolitan’s books until Ernst & Young took over in 2001.
Another Hawaii project Dubin questioned is a 3,000-acre property called the Dillingham Ranch.
Metropolitan purchased it for $17 million and booked it as a $29 million asset, Dubin said.
The property is owned by Western United Life Assurance, which Metropolitan asked state regulators to oversee while it tries to weather the current financial crisis.
Bill Ripple, spokesman for Washington Insurance Commissioner Mike Kreidler, said the agency is conducting an audit of Western to ensure accuracy and determine if assets are indeed sufficient to cover liabilities.
Ripple stressed that Western policy and annuity holders are safe.
Earlier this week, investors filed lawsuits against Metropolitan, alleging the company fraudulently deceived investors by selling preferred stocks, unsecured bonds called debentures, and investment certificates as safe, conservative investments appropriate for retirees.
Stung by Metropolitan’s Dec. 26 suspension of dividend and interest payments, investors now seek hundreds of millions of dollars in a lawsuit they want to turn into a class-action case.
The lawsuit allegations mirror the findings of fraudulent sales practices handed down by the National Association of Securities Dealers last fall.
The NASD censured Metropolitan’s brokerage affiliate, fined it $500,000, ordered it to pay $2.8million in restitution and set up a special escrow fund to repay other investors who were misled.
Also, the brokerage was not allowed to market new issues of preferred stock and debentures that sustained Metropolitan’s cash flow.
The company has been in financial trouble since, suspending interest and dividend payments for the first time in its storied, 50-year history.
Trading of Metropolitan’s preferred stock has been halted and the American Stock Exchange has started delisting procedures.
Attorneys representing investors call the company a sophisticated Ponzi scheme that has collapsed now that there’s no new investment available to repay its maturing debts.
The lawsuits threaten to pull the firm into bankruptcy.
Metropolitan has not issued a financial report since June 30.
Ernst & Young was supposed to audit the books and release year-end results in February. Thursday’s resignation now puts that deadline into question.
Metropolitan financial officer Smith said the company was looking into the problems and would report its findings.
“We are committed to conducting a full investigation into this matter,” he said in the press release, “and we are working diligently to identify and correct any errors which may have occurred.”
Local journalism is essential.
Give directly to The Spokesman-Review's Northwest Passages community forums series -- which helps to offset the costs of several reporter and editor positions at the newspaper -- by using the easy options below. Gifts processed in this system are not tax deductible, but are predominately used to help meet the local financial requirements needed to receive national matching-grant funds.
Subscribe to the Coronavirus newsletter
Get the day’s latest Coronavirus news delivered to your inbox by subscribing to our newsletter.