Auditing firm asks dismissal of Met suit

An auditing firm that signed off on Metropolitan Mortgage & Securities Co.’s financial reports years ago was duped by dishonest executives and can’t be blamed for the Spokane company’s financial disaster, attorneys for PricewaterhouseCoopers LLP argued Tuesday in federal court.

The Big Four accounting firm on Tuesday asked U.S. District Judge Fred Van Sickle to dismiss a major lawsuit brought by Metropolitan alleging that auditors were negligent in not putting a stop to the company’s questionable finances in 1999 and 2000.

The judge said he planned to rule in 10 to 14 days, setting up an early test for a key piece of Metropolitan’s strategy of pinning at least part of the blame for the company’s bankruptcy on the professionals who were hired to ensure its financial integrity.

Much of the court hearing focused on a legal doctrine called in pari delicto. Translated as “equal fault,” PricewaterhouseCoopers attorney Robert Varian said case law favors dismissal of the case.

Metropolitan executives, including former CEO C. Paul Sandifur Jr. and his No. 2 executive, Thomas Turner, engaged in bad faith by misleading auditors and should be held accountable rather than attempting to blame auditors, Varian said. PricewaterhouseCoopers, he said, is being targeted because of its “deep pockets.”

Metropolitan’s case argues that Sandifur and his leadership team were too unqualified and inexperienced to run such a firm, but did not engage in criminal behavior.

It was while PricewaterhouseCoopers was auditor that Metropolitan turned from its traditional business of buying, pooling and securitizing mortgages, and ventured into the far riskier commercial loan business, said Parker Folse, the Seattle attorney who’s pursuing the case for Metropolitan in hopes of netting perhaps tens of millions of dollars. The money would be returned to thousands of Metropolitan investors.

Folse argued Tuesday that auditors owed it to the company’s board of directors and others to report the problems of Metropolitan’s ill-fated transition.

He does not allege that Sandifur engaged in criminal activity, but rather took a business gamble with other people’s money.

Sandifur stood to reap any upside of this risky commercial loan strategy through his ownership of all common stock and his ability to reward himself with dividends, Folse said. Any downside risk was borne by noteholders.

Folse said Metropolitan’s now notorious accounting treatment of real estate transactions that posted false gains should have been tested and questioned by auditors rather than blessed.

Dismissing the case, Folse said, would give auditors a free pass when instead they should have warned Metropolitan’s board of the company’s poor internal controls, its risky strategy and the danger posed to investors.

PricewaterhouseCoopers is facing a similar lawsuit brought by investors.