Examiner wants closer look at Metropolitan’s auditors
Thu., July 8, 2004
A court-appointed examiner wants to continue investigating Metropolitan Mortgage & Securities Inc.’s collapse.
Specifically, examiner Samuel Maizel wants to scrutinize the work of Ernst & Young LLP, and PriceWaterhouseCoopers LLP – deep-pocketed accounting firms that for years signed off on questionable bookkeeping at Metropolitan.
To do so will take at least 60 days and could cost up to $900,000, according to a request filed with U.S. Bankruptcy Court.
Maizel’s interim report released a month ago mostly blamed Metropolitan’s bankruptcy on C. Paul Sandifur Jr., the Spokane power broker who amassed a $2.7 billion financial conglomerate of insurance companies and investment services.
Though the report was a scathing indictment of Sandifur’s managerial shortcomings and potentially fraudulent business dealings, Maizel left open the possibility that Metropolitan’s independent auditors didn’t do enough to check Sandifur.
The examiner’s report – the culmination of 45 days of interviews, research and document collection – was 250 pages long and explored in great detail questionable business practices that have spurred criminal investigations.
Maizel was unavailable for comment Wednesday, but in a court motion seeking a 60-day extension to finish the examination, he wrote that creditors would be best served if he were allowed to complete the work.
Yet, Maizel’s efforts have not convinced cost-conscious creditors that more work is needed.
Attorney P.J. Grabicki, representing the thousands of creditors who purchased Metropolitan bonds, says he’s fed up with mounting costs that the company must pay rather than returning any money it has to investors.
He plans to file an objection to the examiner’s request for more time.
Metropolitan Chief Restructuring Officer Bill Romney said he anticipates the company will join with creditors to oppose the request, even though he had high praise for Maizel’s first report.
Again, costs are at issue.
The bill for the first report has not been submitted, but it could hit $900,000 — approximately the same amount a second report could cost.
Also, the company anticipates it will spend up to $750,000 on copy costs to comply with subpoenas issued by the U.S. Securities and Exchange Commission, a federal grand jury investigation out of Portland, and the examiner’s office, said Romney, who was hired from outside the company to steer Metropolitan through bankruptcy.
Another $1 million has been spent complying with the various inquiries, he said.
Grabicki and Romney said it might be best to hire lawyers that specialize in investigating and suing accounting firms rather than paying more money for a second examiner’s report.
In court papers, Maizel said such a strategy would waste perhaps millions of dollars as new lawyers retrace the same records and come to the same conclusions he and his staff of attorneys and accountants did during the initial 45 days.
Ernst & Young came under fire from the examiner for not putting a stop to Metropolitan’s practice of using 11th-hour deals to show profits at the end of its fiscal year.
Sandifur dubbed the deals “rabbits” according to handwritten notes. The name supposedly reflected transactions akin to the magic act of pulling a rabbit out of a hat.
George Greer, a Seattle attorney representing Ernst & Young, said the firm’s management would not comment on the Metropolitan troubles.
Ernst & Young quit as Metropolitan’s auditor in January and disavowed audits dating back to 2001 saying it couldn’t trust the numbers it was getting from the company.
Already the accounting firms have been sued in a class-action claim brought by investors.
The examiner’s report suggests that Metropolitan and its family of subsidiaries and affiliates may have been insolvent in early 2003 – a year before the company filed for bankruptcy. That coincides with the SEC’s decision that denied Metropolitan’s attempts to sell more preferred stocks and unsecured bonds called debentures. Without a fresh influx of cash from investors, Metropolitan buckled under the weight of maturing debts.
For years, Metropolitan used its myriad companies to move money around, the report said. It detailed how the company did business with itself and booked gains from these close deals. The same small group of executives was involved in running the various companies.
“How can an auditor approve of a company that uses a second mortgage by a related entity to prop up its first mortgage?” Grabicki asked. “It’s unbelievable. There’s no way an accounting firm … could let this happen.”
Grabicki added: “If we present this in court, it’ll blow their socks off.”
Part of the creditors’ strategy is to sue the accounting firms, former executives such as Sandifur, and other professional firms to try to regain some of the half-billion dollars they lost, lawyers have said.
Metropolitan plans to form a litigation trust – essentially an account where any money collected from lawsuit awards or settlements would be held for distribution to creditors.
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