Unraveling Met’s mess
A year after local financial firm filed for court protection from creditors, experts are still trying unravel the problems while investors wait and wonder whether they will ever get any of their money back
Sun., Feb. 6, 2005
Workers have stripped the big green letters that once glowed “Metropolitan Financial Center” from the downtown Spokane highrise. At 17 floors, the white building beamed strength and prosperity. But inside it was chaos. Affiliated companies conducted cozy business dealings while a Byzantine accounting system made it near-impossible to fully comprehend the financial condition of the company.
It’s why now, a year after the company filed for Chapter 11 bankruptcy, it has taken teams of attorneys, investigators and outside accountants to figure it all out. The bill so far: $7.7 million.
Unraveling the failure – determining what went wrong, who’s to blame, and what to do about it – is not over yet, but those working on the case say it’s getting closer.
Most egregious is that the bill for this work is being footed by the very people who lost the most: thousands of small investors who trusted the company, said P.J. Grabicki, the attorney representing them.
Later this year, investors who bought debenture bonds – investments secured by nothing more than Metropolitan’s promise to pay – will be asked to approve an amended plan of reorganization. When that’s done, they should expect to receive a small check from the company – perhaps as little as a nickel on the dollar.
Call it an initial return of money, with hopes that much more may follow, said Maggie Lyons, who was hired by the bankruptcy court as Metropolitan’s CEO to help untangle the books, sell assets, streamline costs and shepherd the company to extinction.
“There were a lot of ugly surprises that required a lot of footwork,” Lyons said of Metropolitan. “One of the reasons I was brought in was to figure out what the assets actually were.
“What I found was that you couldn’t even run a general ledger to figure out what you had.”
The company, she said, had failed to invest in a comprehensive accounting system.
“I guess they felt that as long as debenture holders were getting a payment and the perception was that the company was continuing to grow, then why would they need this?” Lyons said. “The nice big white building gave the impression of a fancier accounting system that what was reality.”
Lyons said Metropolitan has about $16 million cash on hand and 14 employees.
The company has sold its headquarters building, the Met Theater and the property on the north bank of the Spokane River near downtown Spokane.
Most of the money is set aside to repay creditors and the rest will be reserved to pay the bills.
The rate at which Metropolitan is spending money has slowed, Lyons said, and the number of employees should soon fall to fewer than 10.
Ford Elsaesser, one of the many bankruptcy lawyers involved in the case, knows the work and cost of sorting out Metropolitan’s affairs is unpopular.
“Listen,” he said, “as a guy living on a dirt road with bondholders, I know nobody likes high attorney fees.”
He’s quick to point out that of the $7.7 million spent from February through December, about half, or $3.8 million, was spent on lawyers and other professionals working on the bankruptcy case.
Another $3.8 million was spent complying with an investigation by the U.S. Securities and Exchange Commission.
Here’s a summary of some of the other issues facing Metropolitan one year after its bankruptcy filing.
— Some investors are not waiting for an eventual payout.
So far, 64 people have sold their bankruptcy claims to Argo Partners. The New York firm buys what it calls “distressed debt.”
Argo has paid about $1.4 million for claims totaling around $20 million, according to Lyons.
Argo Senior Vice President Matthew Gold said the company, now among the largest creditors in the bankruptcy case, will not seek a seat on the creditors’ committee.
— Among Metropolitan’s most valuable remaining assets are its properties in Hawaii.
In particular, a bitterly disputed project called the Koa Forest deal has been settled. Lawsuits and countersuits have plagued this project for years.
Elsaesser said a settlement has been reached ending foreclosure actions by Metropolitan affiliate Summit Securities Inc. against developers. In return, a large lawsuit brought by the developer against Summit has been dropped.
The Koa controversy centers on a forest of rare Koa trees. Gaining access to log the trees is difficult. The potential developer of the forest can buy out Summit during the next year for $4 million; within two years for $6 million; and within three years for $7.5 million.
If after three years Summit has not been paid, the company can foreclose on the property and market it.
All money paid for the property would be set aside in a trust to pay the holders of Summit debentures.
Another major group of Hawaiian properties Metropolitan is attempting to sell is called the Dillingham Ranch.
The land, a stunning beach tract on the north shore of Oahu has been difficult to develop. While undoubtedly attractive to buyers, there are environmental restrictions to contend with and Metropolitan is working closely with another of its affiliates, Western United Life Assurance, to market the property. WULA, as that affiliate is called, holds the note on an adjoining property.
An interesting twist to the undeveloped beach property: while the land is potentially worth millions because of its remoteness and ocean views, it is zoned for agricultural use and would allow for the construction of only one 800-square-foot home and a small barn – not exactly the type of spread someone who just paid several million dollars for the land would seek to build.
— Other valuable assets of Metropolitan and Summit include three insurance companies. Each, however, are in receivership and overseen by state insurance commissioners.
Two of them, Old Standard Life Insurance Co., and Old West Annuity and Life Insurance Co., which are headquartered in Idaho and Arizona, are for sale. The third and largest, WULA, is being run by the Washington insurance commissioner.
— Metropolitan and its affiliates will have to settle for arbitration with Met’s former auditor Ernst & Young LLP. Contract letters found during records searches dictate that any dispute between Metropolitan and the auditor has to be settled through arbitration.
Creditors and bankruptcy lawyers blame Ernst & Young for letting former Metropolitan executives allegedly perpetrate securities and accounting fraud.
Not being able to sue Ernst & Young is “not necessarily a bad thing,” said creditors’ attorney Grabicki. “It does mean we won’t have a big dog-and-pony show in front of a jury, but on the other hand, we have hired excellent counsel and this will be heard by someone who knows accounting and we think that bodes well for us.”
While the companies can’t sue Ernst & Young, however, investors can — and have.
A class-action case has been filed by investors who purchased debentures starting in the year 2000. These newer investors represent fewer than 60 percent of all debenture holders, however; many investors began buying Metropolitan notes decades ago.
— Investigations of former Metropolitan executives continue.
The U.S. Securities & Exchange Commission has spent more than a year collecting documents and issuing subpoenas to see if federal laws were broken.
While the SEC hasn’t identified specific targets of that investigation, legal bills, subpoenas and bankruptcy court filings are pouring in suggesting that former Chairman and CEO C. Paul Sandifur Jr. – who owned controlling interest in the company – and other senior executives are part of the probe.
They and former Metropolitan board members also are defending themselves against the class-action lawsuit.
The progress of a federal grand jury investigation in Portland remains secret.
A specially appointed bankruptcy examiner, Sam Maizel, found that Metropolitan executives engaged in questionable real estate deals designed to inflate profits and deceive investors, many of whom invested their life’s savings in the company.
— Documents collected during Maizel’s investigation of Metropolitan are now the subject of court hearings.
Companies who provided the documents to Maizel, such as Ernst & Young, and Bellingham-based Trillium Corp., have asked that the papers be destroyed or returned.
Metropolitan and creditors in the case want the documents preserved to help them, perhaps, pursue cases against other firms and people that may have had a role in Metropolitan’s failure.
The issue will likely be settled by Bankruptcy Court Judge Patricia.
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