A special examiner issued a public report earlier this week that paints the clearest picture yet about how and why Metropolitan Mortgage and its related companies were forced into bankruptcy earlier this year. Hired by the Securities Exchange Commission under federal law, independent examiner Samuel Maizel wrote (with two associates) what appears to be a fairly blistering appraisal of the corporate culture that got Met into so much trouble -- and left so many investors apparently high and dry.
"Metropolitan Mortgage & amp; Securities, Inc. was founded in 1953 by the Sandifur family as a small family-owned business which focused on buying contracts and high-risk mortgages," is how the 17-page executive summary starts. "Unfortunately, even as the value of its assets, together with the assets of its affiliated companies grew to more than $2 billion, it never shed the 'family-owned' approach to its business operation."
While such hands-on management was often lauded as a strength for Met -- especially as it related to the company's good works in the community -- the Examiner's Report finds this to be a fatal flaw. Paul Sandifur ran the company as a "virtual fiefdom," the report states, and a lack of professionalism was the result. The various Met companies shared in deals that never should have been allowed, and the company's need for cash flow pushed through more and more suspicious deals, from big real estate transactions to simple commercial loans.
"For example," the report states, "in 1991, the Metropolitan Group was funding approximately $10 million per month in commercial and residential loans. By 2001 the amount of lending was $20 million per month. But in 2002 it was announced that the goal of the loan originators for the Metropolitan Group was to be $100 million per month!"
Exclamation points, it should be pointed our, are a rarity in legal briefs.
But what is the significance of this new document? Its own authors call it incomplete and have asked the court for another 75 days to present a final version. They say they have just started to scratch the surface of the documents and witnesses.
"This may be a viable tool in assessing third-party claims and inter-company transactions," says Kevin O'Rourke, a Spokane attorney representing some of the unsecured creditors.
O'Rourke had only scanned the document on Tuesday, and while it's not evidence, it should prove a powerful map for any attorney working up a case to recover lost investments.
Actual blame will have to be assigned in court, but the report does have some thoughts on the subject. Yes, it says, the buck does stop to a degree at the top: "Sandifur clearly exerted significant control and influence on the Metropolitan Group as a whole and promulgated a number of the Metropolitan Group's important goals."
But the report also seems to break new ground in that it pins a target on the backs of the auditing firms, too. The massive accounting firm of Ernst & amp; Young resigned its job as company auditor when Met's problems started to surface late in 2003. The Examiner's Report blames them for lack of oversight (similar to the kind of charge that wound up killing the firm of Arthur Anderson in the Enron saga), stating they were "likely negligent in the performance of their duties and may have liability."
(PricewaterhouseCoopers is named, too, since they oversaw Met's books in fiscal year 2000.)
The Examiner's Report states that there is no evidence that senior management ever intentionally misled or lied to outside auditors, however.
The document is harshest when discussing Met's commercial loan operation, calling it "a house of cards," and "a deal house" in which loans were pumped through the system with "no process" in place to make sure they were secured. It was all about the image of financial stability, and in fact, the report states, many "highly questionable" transactions were conducted at the end of every year to pump up the bottom line -- deals often cut with other companies under the Met umbrella. Such deals are detailed in the meat of the report, which runs another 240 pages after the summary.
The document does have some suggestions about untangling the web of creditors. It suggests that since the various companies were so closely aligned, they should be reunited under the Metropolitan Group as the proceedings continue. Creating one big pot of money is likely to be a controversial opinion, and will be debated. The examiners also claim confidence in the people who are running the Met firms today.
On the question of whether Paul Sandifur is personally capable of paying back investors, the document does shed some light, stating "it appears that Sandifur (who dominated and controlled the Metropolitan Group) received substantial dividends in the last several years (many of which may themselves be recoverable as fraudulent transfers or illegal dividends)."
Of course that would all depend on a successful legal action against him; he has been named personally in lawsuits related to Met's demise.
But for those who don't have a personal financial stake in the outcome, the Examiner's Report a small window on what went on behind the walls of that white tower in downtown Spokane. It's by no means the last word, but in Maizel's opinion at least, bad things started happening when "leadership created an atmosphere of intense pressure on the staff to pull ever larger rabbits out of their hats to keep the family business appearing profitable."