SEATTLE – Former Metropolitan Mortgage & Securities Co. executive Thomas Turner is either a scapegoat for shoddy and negligent auditing work, or a sophisticated white-collar criminal who orchestrated a sham real estate deal to inflate the defunct Spokane company’s profits.
Jurors will decide after a two-week fraud trial in U.S. District Court in Seattle.
Prosecutor William Stapleton said Turner lied on the witness stand this week about what he knew of a complicated real estate deal, and what he told Metropolitan’s outside auditing firm, Ernst & Young LLP. He asked the jury to convict Turner on three counts of lying, misleading and hiding salient information from auditors. A guilty verdict could send Turner, 56, to prison.
He is the only Metropolitan executive who has been charged with crimes in the wake of the 2003 collapse of the venerable Spokane company that once had more than 600 employees, gave generously to community groups, funded political campaigns that shook up City Hall, and most importantly, had never missed an interest payment in five decades to its thousands of small-time investors.
Defense attorney David Marshall told the jury the entire case is a study in flawed government logic.
“This is a man who’s trying to tell people what he knows when asked a question … this is not a criminal,” he said of Turner.
He blamed Ernst & Young for botching its audit work and told jurors that Jack Behrens, the audit firm’s partner in charge of the Metropolitan account, had a “miserable memory” and couldn’t be trusted.
At its core, the case pits Turner’s recollection of events against those of key government witness Behrens.
In September 2002, Metropolitan loaned Bellingham timber and property developer Trillium Corp. $17.6 million. At the same time, Trillium repaid creditor Dan Sandy more than $5 million.
Meanwhile, Sandy had set up a shell company called Jeff Properties LLC to buy two parcels of land for Metropolitan, which would then book the sale as a gain on its financial reports.
Most everyone agrees now that the circuitous nature of the deal made it ineligible for gains treatment by Metropolitan because of established accounting rules.
When terms of the deal were investigated by a new Metropolitan chief financial officer, revisited by Ernst & Young, and sought by the U.S. Securities and Exchange Commission, the finger-pointing began.
Marshall said Ernst & Young’s Behrens made Turner the fall guy to cover up his own inept auditing.
He recounted for jurors how Behrens often failed to recall events during his two days of testimony last week, and cast suspicion about why Ernst & Young has few records such as memos, e-mails and notes of its audit work on the property transaction.
“Trying to get a straight answer out of Jack Behrens was like trying to pin a button on a custard pie,” Marshall said. “Jack Behrens is an unbelievable witness.”
A conviction of Turner would give Ernst & Young someone to blame for all the troubles, he said.
Stapleton, the prosecutor, took the jury through notes, phone calls, e-mails and witness testimony, tying it all together to show, he said, how Turner negotiated the deal and hid important details from Behrens.
Stapleton said Turner had many chances to come clean about the Trillium deal and instead chose to be evasive with William Smith, Metropolitan’s newly hired chief financial officer, and lied to Behrens. Turner was eventually fired from Metropolitan after a 19-year career.
The trial attracted a steady following of lawyers representing Ernst & Young, Trillium, a Metropolitan bankruptcy trust, the SEC and others tangled up in the legal aftermath of Spokane’s largest corporate failure.
A Turner acquittal could stunt the SEC’s lawsuit against Turner, former Metropolitan Chairman C. Paul Sandifur Jr., Trillium and David Syre, Trillium’s owner. And, it could hamper any interest the U.S. Department of Justice has in pursuing indictments against others.
A conviction could undermine lawsuits of professional negligence against Ernst & Young brought by the Washington state Office of the Insurance Commissioner, the bankruptcy trust and investors.
Marshall dismissed any notion that Turner was hiding the details of the Trillium deal.
“There were a cast of thousands in this deal,” Marshall said, showing the jury selected evidence — e-mails and documents — that detailed Turner’s discussions of the deal’s workings with multiple company attorneys and outside lawyers.
Marshall also reminded jurors of Turner’s willingness to give sworn statements to the SEC, a special bankruptcy examiner and the FBI.
“None of this was a secret,” Marshall said. “Tom Turner is not a stupid man.”
The notion that Behrens didn’t know or couldn’t find out how the deal worked or that Trillium was involved with Dan Sandy and Jeff Properties “is hogwash,” Marshall said. “Everyone knew.”
Marshall said Turner knew auditors would delve deep into the Trillium deal. The deal closed within days of the end of Metropolitan’s reporting year and rewarded the troubled firm with a $10 million gain – reversing what would have been a third straight year of losses into a profitable 2002.
Federal prosecutor Joseph Capone told jurors that was exactly Turner’s motive: construct a bogus deal and keep the truth from auditors.
After failing for months to get a Trillium deal that would pass muster with Behrens, Metropolitan grew desperate and turned to its special dealmaker.
“Back in 2002, Mr. Turner needed to pull a rabbit out of a hat,” Capone said, borrowing the magician’s cliché from a file of questionable real estate dealings labeled “rabbits” kept on Sandifur’s desk. At stake was Metropolitan’s financial health.
The company had shifted its focus from seller-financed residential mortgages to sub-prime commercial real estate loans.
The strategy was failing and Metropolitan was facing a cash crunch. It had hoped to sell $150 million worth of new unsecured debenture bonds and preferred stock to fund new loans, but more importantly, meet its payment obligations on debentures that had been issued earlier.
With just two weeks left to sell two pieces of property for $24 million and then record a $10 million gain in time for inclusion on the 2002 books, Turner, the No. 2 executive in the Metropolitan group of companies, “would do anything to get the gain,” Capone said. “And it failed because the auditors found out about it.”