Directors of Metropolitan Mortgage & Securities Co. have sued their former accounting firm, PricewaterhouseCoopers LLC, over audits performed in 1999 and 2000 they contend failed to warn them that the Spokane company was headed for bankruptcy.
SPOKANE, Wash. – Directors of Metropolitan Mortgage & Securities Co. have sued their former accounting firm, PricewaterhouseCoopers LLC, over audits performed in 1999 and 2000 they contend failed to warn them that the Spokane company was headed for bankruptcy.
The lawsuit, filed Wednesday in U.S. District Court in Spokane, seeks unspecified damages from PricewaterhouseCoopers.
Also listed as plaintiff was Summit Securities Inc., a sister company of Metropolitan. Both companies have filed for bankruptcy protection and are awaiting approval of a liquidation plan submitted to U.S. Bankruptcy Court.
Officials for PricewaterhouseCoopers did not immediately respond to a request for comment Friday.
Met Mortgage, once a $2.7 billion financial conglomerate, filed for Chapter 11 bankruptcy protection in February 2004. The company and its affiliates owe an estimated $583 million, mostly to 16,000 small investors in the Pacific Northwest who bought notes and preferred stock.
The companies are also subject of numerous ongoing investigations by state and federal regulators, including the U.S. Securities and Exchange Commission.
The lawsuit contends PricewaterhouseCoopers failed to perform its duty as an independent auditor.
“Through negligence and in breach of contract, PricewaterhouseCoopers’ dereliction in the performance of its audits and misrepresentations in its audit reports enabled and concealed a foreseeable and preventable chain of events that pushed Met and Summit deeply into bankruptcy,” the lawsuit said.
Some money from a successful lawsuit against PricewaterhouseCoopers would go to Metropolitan creditors.
The lawsuit also alleges the accounting firm failed to perform its role of an independent auditor.
Specifically, the accounting firm allegedly created a flawed tax shelter plan for Metropolitan for which it received a substantial fee at the same time it was charged with reviewing and certifying the company’s books.
That tax shelter, undertaken in 1998, was used by Met Mortgage to create a web of offshore deals and stock holdings in foreign banks, the lawsuit said. The result left Metropolitan with a tax benefit of $28 million.
PricewaterhouseCoopers not only charged Metropolitan for setting up the shelter, it also performed an audit approving the deal. The IRS later disallowed most of those tax benefits.
The lawsuit contends the company’s financial status veered toward disaster under former Chairman and CEO C. Paul Sandifur, and that the accounting firm failed to blow the whistle on questionable bookkeeping.
Before its bankruptcy, Metropolitan depended on selling debentures, or unsecured bonds, to investors. Unable to generate adequate cash due to poor commercial real-estate investments, Metropolitan continued to issue debentures despite the company’s poor performance, the lawsuit says.
Seattle attorney Parker C. Folse III, who filed the suit against PricewaterhouseCoopers, said Sandifur’s actions were not challenged by the accounting firm and caused the company to crumble.
“Had PricewaterhouseCoopers done its job properly, some former company directors and state regulators would have done something to stop that from occurring,” Folse said Thursday.
Maggie Lyons, the acting CEO of Metropolitan, declined to say whether the company would also sue Ernst & Young, the auditing firm that took over in 2001 and 2002. Some creditors and bankruptcy lawyers now blame Ernst & Young for letting former Metropolitan executives allegedly perpetrate securities and accounting fraud.
A state lawsuit filed by another Metropolitan affiliate, Western United Life Assurance Co., against Ernst & Young, has gone to mandatory arbitration.
Lyons said the company is also considering separate actions against Sandifur for alleged “fraudulent transfers” that the former president engineered as the company was facing bankruptcy.