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Spokane, Washington  Est. May 19, 1883
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State sues Ernst & Young over Met abuses

Washington’s insurance commissioner has sued Ernst & Young LLP, accusing the auditing firm of failing to uncover, divulge and stop accounting abuses at bankrupt Metropolitan Mortgage & Securities Inc.

Commissioner Mike Kreidler – who took control of Metropolitan affiliate Western United Life Assurance Co. earlier this year – said the Big 4 accounting firm didn’t do its job and thus didn’t protect policyholders and investors.

Campaigning in Spokane on Thursday, Kreidler didn’t disclose how much money the state seeks from Ernst & Young on behalf of Western. But lawyers connected with Metropolitan’s bankruptcy case said the figure could be in the tens or perhaps hundreds of million of dollars.

“I won’t give a ballpark figure, but (Ernst & Young’s) failure was serious,” Kreidler said.

The lawsuit seeks recovery of damages to Western along with the costs incurred rehabilitating the insurance company, which Kreidler said was now stabilized. He also seeks recovery of attorney fees, which could run in the millions of dollars.

Allegations that Metropolitan executives inflated profits using bogus real estate deals are at the heart of federal criminal investigations by the Securities and Exchange Commission, the Federal Bureau of Investigation and the Department of Justice.

The lawsuit, which levels formal allegations of negligence, negligent representation, and breach of contract, is the first of what are expected to be several against the accounting firm.

Contacted Thursday morning, Ernst & Young officials said they had not seen the lawsuit. They did not respond to an interview request.

It is widely expected, however, that the company will aggressively fight the claims and pin blame on executives.

Ernst & Young, based in New York City, resigned as Metropolitan’s auditor in late January after determining that top executives, including owner and CEO C. Paul Sandifur Jr., and Tom Turner, withheld crucial information and deliberately misled auditors. The firm disavowed its 2001, 2002 and 2003 audits of Metropolitan.

Many of the allegations in the lawsuit stem from a highly critical investigation of Metropolitan’s downfall by court-appointed special examiner Samuel Maizel.

The report found that Ernst & Young may be negligent and pointed to 11th hour deals designed to show profits. Called “rabbits” by Sandifur, apparently because they were designed to magically appear and boost profits, the deals were not only fraudulent, but also did not comply with accounting principles.

Kreidler said Ernst & Young didn’t reveal these tricks to insurance regulators who depended on the audits as proof of Metropolitan’s soundness. Nor did the auditor disclose the poor internal controls, management and accounting controls.

“I don’t like being misled,” Kreidler said.

Maggie Lyons, the new CEO of Metropolitan overseeing the sale of the company’s assets, said Metropolitan has settled on Texas law firm Susman Godfrey for its own lawsuit against Ernst & Young, which it plans to file in a matter of months.

The hiring still needs to be approved by federal bankruptcy court Judge Patricia Williams.

“They’re heavy hitters and we have received good feedback on their abilities,” Lyons said.

Metropolitan has agreed to pay Susman Godfrey a $2.5 million fixed fee to pursue the case against Ernst & Young, along with a sliding contingency fee of 15 percent of any recovery up to about $30 million and then 20 percent of any recovery above that, said Ford Elsaesser, a local attorney representing Metropolitan’s sister company, Summit Securities Inc., in the bankruptcy.

The fees, he said, reflect the prestige of Susman Godfrey and confidence that Metropolitan has a strong case.

The lawsuits against Ernst & Young, and perhaps others against additional accountants and law firms, represent the best chance for thousands of Metropolitan investors to get some of their money back.

More than 16,000 investors – including many seniors living in the Northwest – had about $580 million invested in Metropolitan, which had grown into a $2.7 billion conglomerate.

The sale of company assets may net investors up to 15 cents on the dollar, according to the company, leaving lawsuits the only plausible scenario for a larger recovery.

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