A federal grand jury is investigating Metropolitan Mortgage & Securities Inc., an indication that the bankruptcy case could include criminal elements. An attorney representing the company suggested the issues were akin to those at Enron, Adelphia and WorldCom - scandalous cases where executives have been accused of looting the companies under the noses of independent auditors.
Those also were complicated cases that were helped by the appointment of examiners, said attorney Ford Elsaesser, who was arguing for the appointment of an examiner in the Metropolitan case. He represents Metropolitan’s sister company, Summit Securities Inc.
During a bankruptcy court hearing Friday, Elsaesser said Metropolitan and Summit are trying to comply with subpoenas issued by a grand jury at the behest of the U.S. Attorney’s Office, along with subpoenas from the U.S. Securities and Exchange Commission.
The statement in open court was the first indication that a grand jury is investigating Metropolitan. Grand juries are requested by U.S. attorneys to weigh the merits of evidence that a crime has been committed.
Metropolitan’s bankruptcy is the largest in Spokane history, and multiple investigations are attempting to unravel the accounting mysteries that helped the company appear profitable while, in fact, it wasn’t.
The work is taxing for employees at Metropolitan and Summit, as well as for creditors searching for promising signs they might get back some of their money.
Although there have been no criminal indictments in the cases, the grand jury investigation out of Portland may signal a turn in the case.
Kent Robertson, chief of criminal prosecutions at the U.S. Attorney’s Office in Portland, declined to comment. So did the U.S. Attorney’s Office in Spokane.
Class-action attorneys representing some Metropolitan investors claim the company inflated property values to polish its books.
Most of the investors are at least 70 years old and living in the Northwest, attorneys said in the hearing Friday. The losses in the bankruptcy could top a half-billion dollars.
Getting to the bottom of Metropolitan’s financial collapse will be the job of special examiner Samuel Maizel.
A decorated military attorney who graduated from West Point, Maizel is now with a top-tier Los Angeles law firm considered among the best bankruptcy practices in the West.
Maizel has broad authority from federal bankruptcy Judge Patricia Williams to find out what happened at Metropolitan, who is to blame, and perhaps uncover company assets.
His appointment and potential fees of $900,000 for the first 45 days of work alarmed creditors in Spokane, where legal fees are more conservative.
Creditors’ attorney P.J. Grabicki asked Williams on Friday to limit the scope of work - and thus the money going to Maizel and his staff of investigators and forensic accountants.
Yet Williams declined to limit the examiner’s probe.
Instead, she will review Maizel’s initial report in early June and consider his fee application at that time.
Williams also approved the appointment of William Romney as chief restructuring officer, at a fee of $80,000 a month.
His work is expected to last until October.
Professional fees are going to add up in the Metropolitan case. Regional lawyers and their staffs have already accumulated $500,000 in fees.
By the end of the year, lawyers, accountants, consultants and their staffs are projected to charge Metropolitan between $9million and $11 million.
Elsaesser told the court he believed Maizel’s work would help the company, and ultimately, the creditors.
There are three ways of compiling money to help creditors, he said.
One is to squeeze the most value out of existing assets such as the Metropolitan Financial Center and the company’s valuable Hawaiian properties, along with structured settlements such as lottery prizes.
As one of its lines of business, Metropolitan offered lottery winners lump-sum payments in exchange for the right to collect the lottery money over many years.
A second source of money recovery for Metropolitan may be lawsuits against former directors and officers, and, more importantly, the accounting firms of PricewaterhouseCoopers LLP and Ernst & Young LLP, who signed off on Metropolitan’s books.
Ernst & Young resigned as Metropolitan’s outside accountant in late January after determining that company executives made “material misstatements” to auditors and couldn’t be trusted. Company owner and CEO C. Paul Sandifur Jr. resigned shortly afterward.
The third and most promising source of funds for creditors may be the successful turnaround of Metropolitan’s three insurance subsidiaries, including Western United Life Assurance Co.
The three life insurance companies are now under the control of state insurance commissioners in Washington, Idaho and Arizona.
However, Metropolitan and Summit still own all the stock in the companies.
Elsaesser called the case a “very, very difficult and complex tragedy” that still has some upside.
“You have to be optimistic this can work,” he said.
The companies are circulating drafts of a restructuring plan. Executives and attorneys declined to provide a copy to reporters.
Metropolitan has about $7.3 million in cash on hand. Summit has another $2.3 million.
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