31 March 2010

On the Skids in Carbon Canyon #4239

Thankfully, it had been a long while since a major traffic incident in Carbon Canyon, at least ones I knew about or of which I could see evidence.  There was a road closure at the S-curve on the Chino Hills side on a late morning back in February, but, otherwise, a quiet year since the first days of January.

Today, however, at about 5:30 a.m., the highway was closed at the lower part of eastbound section of the same S-curve when a car plowed through the guardrail and tumbled down the slope below.  There were no skidmarks on the road, so the vehicle, which must have been traveling at a high rate of speed for that curvy area, wound up quite a distance from the road and debris was scattered throughout.

Meanwhile, enough cannot be said about the rapid response of CalTrans District 8.  I went through and took the photographs seen here at about 8:45 a.m.  By the end of the day, the guardrail was already replaced and it looked like nothing had ever happened. 

30 March 2010

Canyon Crest: New Owner, Old Questions, Part 8

There is one more legal matter to highlight in this series of posts connected to Old Standard Life Insurance Company, the new owner of the Canyon Crest property on the Brea side of Carbon Canyon and which is now in liquidation.  Old Standard's parent company, Summit and the latter's sister firm, Metropolitan, were fomenters of a massive scheme of selling unsecured stock and other products totaling $450 million and involving thousands of investors, many of them elderly and "unsophisticated" in the ways of the complex world of investing, that collapsed in 2004.

Not long after the failure of Metro/Summit, the Washington state Department of Financial Institution's Securities Division launched an investigation into the activities of fifteen salespersons working for the firms who were alleged to have made "unsuitable recommendations" and to have misled about the risks" of the securities they were selling.   The intent of the investigation was to seek a cease and desist ruling, revoke or suspend the registration of these salespeople, to censure them, and to impose fines and costs upon them.

In the period in question, January 2001 through December 2003, "as the financial condition of Metropolitan and Summit deteriorated, the risk of the proprietary products increased."  These products included preferred stock and unsecured debentures and, because the principal and interest accured on earlier investments by the companies was becoming overwhelming, the pressure was on the salespersons named in the complaint to ramp up their sales of products to try and keep pace.  Indeed, in that three year period, $162 million of products were sold, often to people who "had limited assets that were highly concentrated in the proprietary products."

Of the fifteen, some were long-time associates of the Metro/Summit empire.  Husband and wife team Gordon and Suzanne Adams had 19 and 20 years put in.  Ross Bruner was a 21-year veteran of Metro.  Gary Hundeby and Ronald Mayfield logged 19 years each.  Ryan Saccomanno had a 13-year history.  Yet, of the fifteen, only one had any experience in the securities industry before joining Metro/Summit and that person's experience was ten months.  Gordon Adams, for example, was an pilot in the armed forces and worked for his family's tractor business and his wife was a part-time sewing teacher.  Bruner was a realtor and sold construction equipment.  Mayfield was a labor union rep and mechanic.  Saccomanno was a cashier and produce clerk at Safeway supermarkets.

As noted before, Metro/Summit was bleeding money at precisely the time these salespeople were making sales to investors who were not, it was claimed, properly informed of the nature of the products they were buying nor of the crumbling condition of the companies.  Examples:

The Adamses made, in 2001 and 2002, sales of seven products totaling $94,000 to a couple in their early 60s.  This doubled the buyers' holdings in Metro/Summit investments, which were intended for a retirement cushion.  Yet, the Adamses allegedly overstated the couple's net worth by including future retirement benefits on the subscription agreement.  Moreover, the $185,000 total investment in company products represented 65% of the buyer's total net worth.  Another couple, in their late eighties, purchased $85,000 of products as a "safe investment" for the husband's health care costs.  Their net worth was almost entirely based on investments lacking liquidity.

Bruner sold a product to a couple in their seventies, who had almost their entire net worth in Metro/Summit products, excluding their home.  In April 2003, less than a year before the collapse of the firms, he sold a $30,000 product to a couple in their late seventies, with the wife having cancer, partial blindness, and dementia.  They thought they were buying an annuity when they weren't and Bruner overstated their net worth by double on the subscription agreement.  25% of the net worth, almost all illiquid, were tied up in unsecured Metro/Summit products.

Mayfield sold an 85-year old woman living in a retirement home a $12,000 product that she thought was to assist in the preservation of capital, absent of heavy risk and she had only invested in CDs previously.  Her income was mainly Social Security payments, but she had over a quarter of her net worth in Metro products, again unsecured.

The list goes on and on.  Common features?  Older people, mainly retired, with limited knowledge of investing, duped into believing they were buying safe investments and often having their net worth inflated by the sales agents (not unlike falsifying income for bad mortgages in scandals of more recent vintage?) and who were tying up proportions of their assets in unsecured Metro/Summit products.  At a time when the company was losing money and the salespeople knew this and went ahead and sold the products under false representation, so the investigation stated.

It is also important to state that company guidelines prohibited sales in which an investor already had 20% or more of their net worth tied up in Metro/Summit preferred stock; 30% in either Metro or Summit products; or 40% in both.  Time and again, these policies were flagrantly violated, as asserted in the complaint.  Naturaly, by overstating wealth, agents could evade these inconvenient barriers to badly-needed sales.

Well, as noted earlier, the department sought various means to punish the fifteen salespeople, but as with the case of, say, Lt. William Calley in the My Lai massacre or the soldiers tried and/or convicted in the Abu Ghraib incident or any other number of business examples, it is one thing to go after the scapegoats who were taking "marching orders" from the superiors.  C. Paul Sandifur, Jr. was the controlling interest in Metro/Summit and his executives, only one of which, Thomas Turner, has been convicted of any crime, were those giving the orders.  The fines and the revocation of registration and what have you for these salespeople may have been an appropriate measure of redress, but the greater issue is the actions of those who (mis)guided the (mis)direction of the Metro/Summit empire.

Next: what happened to Sandifur fils and others in the Metro/Summit debacle and what does any of this mean for the future of Canyon Crest?

29 March 2010

Canyon Crest: New Owner, Old Questions, Part 7

The Sandifur Saga continues!  We left off with the matter of the class action lawsuit against Metropolitan/Summit's head honcho C. Paul Sandifur, Jr. and officers and directors of several of the companies he controlled in a scheme to sell investments to try and cover principal and interest on other investments that the companies in question were no longer able to handle.  The claim by plaintiffs, some 16,000 of which held $470 million in unsecured bonds and notes, was that the defendants violated federal and Washington state securities law.  The suit was filed in 2004 and dragged on through years with plaintiff's complaints challenged on procedural grounds by the defense and two amended complaints filed. 

In early 2008, federal judge Fred Van Sickel reversed earlier tentative rulings that indicated that the auditing firm of PriceWaterhouseCoopers would be released from the case and instead allowed the matter to proceed, though, "he encouraged the sides to rekindle settlement talks" and forego the pending trial, according to AllBusiness.com's synopsis.  There had, to that date, been some small recovery by investors ranging from 4 to 7 cents on the dollar.  As AllBusiness.com expressed it, "the arguments boiled down to speculation about what Metropolitan's board of directors would have done differently if the auditors had uncovered what in hindsight seem to be obvious problems."  Indeed, an expert witness testified that, had Metropolitan sold off assets and cut overhead, it could have raised $300 million in cash before 2002, "soothed a looming cash crunch and enabled Metropolitan to avoid bankruptcy."

If the parties did engage in settlement talks in 2008, they went nowhere.  By the end of the year, it appeared as if a trial was likely within 15 months, which would bring us to now, March 2010.  By that date, December 2008, Judge Van Sickel had certified most of the plaintiffs and was then hearing arguments about another 100 investors and their potential inclusion as plaintiffs in the litigation.  It turned out that PriceWaterhouseCoopers had already settled a malpractice suit for $30 million for its role in the Metro/Summit debacle. 

So, too, had C. Paul Sandifur, Jr, except that the grand total of his settlement was, brace yourselves, $150,000 "to refund investors and settle allegations that he improperly paid himself dividends as the company failed."  According to the terms of this deal, as reported in the Spokane Spokesman-Review, Sandifur was to pay $100K in January 2009 to the Metropolitan Creditors' Trust and the remaining sum, with interest, was due January 2010.  This was in addition to a $151,000 settlement of fraud allegations made by the SEC, half of that going to investors and the rest to the federal treasury.

It was generally acknowledged that "Sandifur controlled most of the common stock and tried to keep a tight rein on its sprawling business operations," yet he was settling for pocket change compared to the $450 million investors lost.  The paper noted that, despite improper dealings and poor financial reporting with his companies, Sandifur was never charged with a criminal offense.  Thomas Turner, however, an executive with both Metro and Summit was convicted in federal court for lying and misleading auditors—thus becoming the sole individual (read: scapegoat) to be convicted of criminal charges in the entire debacle.

Sandifur's ex-wife (more on her later) and other family members also paid back a little less than $500,000 received from the Metro/Summit companies in those years when the entities were collapsing.  Meantime, as of December 2008, Sandifur was still facing a trial for this month, March 2010, on a class action suit.

That leads us to the most recent item: a 24 February 2010 article in the Spokesman-Review reporting that a $38 million settlement agreement was reached in the class-action lawsuit covered last post and which was scheduled to come to trial this month.  The amounts were $14.25 mllion from Ernst and Young; $13.9 million from PriceWaterhouseCoopers; $5 million from underwriter Roth Capital; and $5 million from an insurance policy for former Metro/Summit officers and were to go to investors who bought bonds and stock in Metro and Summit after February 2002.  Of course, the tentative agreement meant that "the settlement will not pin wrongdoing on any party."  There are, however, outstanding claims against Sandifur and other individuals, although a lead attorney for the plaintiffs stated that there was not expected to be a large settlement from these persons.

At that date, Judge Van Sickel had yet to give his approval to the agreement, but it was expected and plaintiff counsel expected that the deal could be finished by the end of 2010.  After legal fees, the total of somewhere in the range of $24 million would leave 16 to 20 cents on the dollar for the investors, although, as noted previously here, there were three previous payments (all small) made to investors.

Crucial to the understanding of why the settlement was reached after six years is the fact that, as the paper put it, "most of Metropolitan's roughly 16,000 investors were older residents . . . [who] had invested their life's savings in a company that once claimed its unsecured corporate bonds were as safe as certifies deposits from banks."  Metropolitan trustee, Maggie Lyons, who holds the same position for Canyon Crest's owner, Old Standard Life Insurance Company, "acknowledged that each month she receives notices that at least 15 investors have died."  A lead attorney stated that this pushed the urgency for a settlement and that it "is the best way to avoid appeals and delays."

As of this writing, it does not appear that the judge has approved the settlement. 

28 March 2010

So Near and Yet Sofa Away

I'm probably spoiled living over on the San Bernardino County side of Carbon Canyon when it comes to CalTrans responsiveness.  I've made a few (four?) requests for service from District 8, which handles the SBCO side, for trash pickup and graffiti over the six years I've lived here and have, each time, seen a quick and decisive response.  On top of this, there has been repaving, new guardrails, new signage added to this side in greater profusion than on the Orange County side, handled by District 12.  Much of this may be attributable to the fact that San Bernardino County's Measure I provides additional sales tax revenue wholly dedicated to CalTrans transportation projects; some of it may be about how the districts are managed.

At any rate (and, of course, it's only a piece of furniture), a sofa was unceremoniously dumped at a turnout at the 5.5 mile marker along the eastbound side of Carbon Canyon Road (SR 142) just past the old La Vida Mineral Springs property several months back.  After allowing a cushion in case it was removed promptly, I waited for a time (as well as forgot) before making a District 12 website service request at the beginning of this month to remove the item.  Alas, nothing.

Then, earlier in the week, a passel (yes, a passel) of CalTrans vehicles and workers were gathered in that very turnout—obviously for another project—but I thought there'd be a residual removal of the poor tattered piece of furniture.  Yet, there is still reclines, like a lot of homes, upside down.

Of course, the accompanying photos show that, by summer, the weeds may completely cover the poor thing and it'll be forgotten in its obscurity.  I can't couch this in more polite terms, so here's the most direct way to frame it: I'm just not sure why District 12 can't get the sofa out of there after three or four months and almost a month after my humble service request.  Guess my request got stuffed somewhere.

If they do retrieve it, they might want to grab the tire (the other two were salvaged by others) that's been sitting for the last several weeks or so at the westbound side (mile marker 4.8?) just before Olinda Village while they're at it.

27 March 2010

Canyon Crest: New Owners, Old Questions, Part 6

The last post discussed a class-action lawsuit filed by investors against Metropolitan Mortgage and Securities Company and Summit Securities, Inc., and fifteen officers and directors, including president and controlling stockholder C. Paul Sandifur, Jr., charging violations of federal securities law.  There was a subsequent court hearing that is of bearing and interest and which has to do with an amended complaint filed by the plaintiffs and four separate motions by the defendants to dismiss the case; not on matters of fact, but purely about procedure.

The order that was given by federal district judge Fred Van Sickle as a result of this hearing was dated 5 November 2007 and essentially ordered the plaintiffs to come back with another amended complaint to address deficiencies in the previous one.  There are some items of interest, however, aside from the complexity of what constitutes a judicially acceptable plaintiffs' complaint.

One is that the case, known as Cauvel, et. al. v. Metropolitan Investment Securities Company, Inc. was a consolidation of the Cauvel matter with that of another one, Hall v. Metropolitan Mortgage and Securities Company, Inc.  The melding of the two cases occurred in August 2004.

Consequently, there was a first amended complaint, the one discussed in the last post on this blog, filed that December.  The grounds for the complaint were based from sections of two 1930s securities acts passed by a Democratic Party-controlled Congress in the aftermath of the debacle of the 1929 crash of the stock market and the ensuing Great Depression (which is, actually, very relevant for us now in 2010, isn't it?)

In the complaint, the plaintiffs dropped a claim predicated on one of the 1930s securities acts and replaced it with a securities law from Washington state.  It also added new defendants to the case, including the accounting firm, Price Waterhouse Coopers, and Roth Capital Partners, underwriters to the Metro/Summit empire.  October 2006 brought a settlement allowing for the dismissal of some of the defendants and, as a result, the court allowed the defendants to file a second amended complaint, which was done that month.

There is some history worth bringing up again here.  First, as said previous, Metropolitan (founded in 1953) had been primarily in the residential mortgage and receivables areas (as well as insurance, like Old Standard, current owner of Canyon Crest) and Summit (created by Metro in 1990) dealt with commercial lending and property development.  As Metro, however, could not keep its earnings in line with its rapid growth, it turned, in 2000, toward those areas on which Summit focused.

From that point, 2000, Metro and Summit were "a single enterprise focused on commercial lending."  As such, the two wrote some $20-30 million in loans each month in 2001 and 2002, which happened to be a period of economic downturn.  The goal, however, was a whopping $100 million per month and to meet this target, the judge's order statement continued, "the companies engaged in increasingly risky ventures." 

As little return was realized from Metro/Summit's commercial real estate business, the companies were unable to pay the rate of return promised investors who purchased their securities.  To raise cash, the companies simply issued more securities and sold them to people who were not informed of the risk or the condition of the Metro/Summit conglomerate.  Moreover, financial reporting was "tailored" to make the companies seem more profitable (or losing less money) than was really the case.  As the judge's order expressed it, "the Met group thus became wholly dependant [sic] on cash acquired from the sale of securities."

As early as 1995, Washington state regulators noticed violations, poor business practice and blatant interest conflicts.  A memorandum of understanding (MOU) was signed between the state and Metro, but, within three years, the latter was disregarding the terms of that document.  The company then hit on a clever strategy: it listed its debentures and preferred stock as "covered securities" on the Pacific Stock Exchange to evade regulatory restrictions from the state of Washington.

This allowed Metro/Summit to sell risky securities to more "unsophisticated" investors, but in late 2002 and early 2003, the SEC denied the companies' request to issue new securities.  This, and only this, led the companies' auditor and underwriter to review their roles with the companies and the latter abandoned its approval of the pricing and yield determinations of Metro/Summit securities.  By summer 2003, the National Association of Securities Dealers fined Metro/Summit $500,000 and prohibited further securities sales.  In November, the companies suspended dividend payments to shareholder investors and faced a $10 million cash need with only $7 million in the coffers.

In late January 2004, the auditor, Ernst and Young, rescinded its approval of the 2001 and 2002 financial reports of Metro/Summit (where was the auditor in 2001 and 2002?) and this was followed within two weeks or so with a filing of bankruptcy.  The class action suit originally sought to make Ernst and Young (which started auditing the books in June 2001--starting with the 2001 report) and its predecessor, Price Waterhouse Coopers, defendants in the case.  This was also true with Roth Capital Partners, the underwriter, which had underwriter obligations, as defined by the 1930s federal securities statute, to verifying Metro/Summit's accuracy in stock registration statements and prospectuses.

Judge Van Sickel, in his order, noted that "although the SCAC [second amended complaint] is deficient in a number of respects, it would be inappropriate to dismiss an action of this complexity prior to granting the opportunity to correct the deficiencies. . . "  Consequently, Van Sickel allowed the plaintiffs to follow a third amended complaint, though he also dismissed Roth and Price Waterhouse Coopers as defendants and also dismissed the part of the complaint dealing with Washington state securities law because Metro/Summit was able to skirt its authority in getting an exemption by listing their securities on the Pacific Stock Exchange, which was subject to federal regulation.

Ernst and Young's lawyers argued that the plaintiff's complaint was deficient in a procedural sense because it did not meet the criteria of a "short and plain statement," which, given the 78-page length of the judge's order, much less the "legalese" that all judicial documents seem to have, seems like an oxymoron generally!  Still, the judge ruled that this was a legitimate argument because there was no need in the complaint for the plaintiffs to cite great detail as to the defendants' actions.  As Van Sickel stated, "the proper time for such revelation is discovery," at trial, rather than in the complaint.  The judge did commend the plaintiffs' attorneys for putting in a great deal of work and acknowledged that they were "blessed with the wealth of facts" available to them.  Ernst and Young and Roth both were able to persuade the judge that there was a lack of "particularity" in the plaintiff's assertions about misrepresentations in securities registration statements made by Metro/Summit.

The defense challenges to assertions by the plaintiffs in the complaint go on for mind-numbing page after page and hardly constitute a "short and plain" list of exceptions.  While the defendants secured some minor victories or, at the very least, persuaded the judge to make the plaintiffs go back and give more detail in the third complaint, most of the plaintiff's positions were held to be reasonable and admissible to trial.

Within two months, the plaintiffs filed their third amended complaint.  Naturally, the defendants filed more dismissal motions.  In March 2008, Van Sickel allowed dismissal of certain claims against an individual defendant.  More legal processes followed concerning certification of the plaintiffs' claims under federal securities law, which were granted, while claims under state law were denied.  Nothing then happened between January 2009 and February 2010, when the court received a "preliminary approving settlement between the class and defendant Roth Capital Partners, LLC." 

So, at the moment, it appears that case still continues against all defendants, excepting Roth, with some dismissal of charges against others.  At this point, from the time the first complaint was filed in 2003, the case has dragged along, as is so often the case, for seven years.

As will be seen from the next post, the painfully slow wheels of our judicial system, thanks for numerous exceptions and motions from defense attorneys particularly, can bring about a conclusion of the case that bodes better for the defendants than for the plaintiffs, especially when the latter were already elderly when the case was first filed.

25 March 2010

Canyon Crest: New Owner, Old Questions, Part 5

In 2003, a class action lawsuit was filed by five investors (on behalf of all investors) against a slew of defendants: Metropolitan Mortgage and Securities Company; Metropolitan Investment Securities; Summit Securities; C. Paul Sandifur, Jr.; Reuel Swanson; Gary Brajcich; Harold Erfurth; Irv Marcus; Robert Ness; William Snider; John Trimble; Eric Skaggs; Tom Turner; Philip Sandifur; Gregory Strate; James Hawkins; and Ernst and Young, LLP.  All of the individual defendants were officers and directors in one or more of the three Sandifur-controlled companies, excepting Turner, who served as President, Executive Officer and Financial Officer of Summit.  Old Standard Life Insurance Company, owner of the Canyon Crest property proposed for 166 homes on 367 acres on the Brea side of Carbon Canyon, was a subsidiary of the larger Summit Holding Company and was purchased by it from Metropolitan, but it was all controlled by C. Paul Sandifur, who held the majority of the stock in Metropolitan and the other companies.

The basis for the lawsuit was that Metropolitan and its subsidiaries engaged in deceptive and illegal practices in selling investments (debentures, preferred stock and securities) to investors between 2000 and 2003 for the purposes of raising capital to pay the principal and interest owned to other investors, knowing full well that the second grouping of investors would never see the returns that were promised them.  This, in effect, was a classic Ponzi scheme.  The reason Ernst and Young were included in the suit was because that firm was to provide the unbiased accounting to verify the accuracy of information provided in financial reporting and filings made by the Metropolitan/Summit group of companies.  PriceWaterhouse, another of the "Big Four" accounting firms, also provided accounting and auditing services to the Metropolitan empire, but did not appear as a defendant in the suit because that company was replaced by Ernst and Young after 2000.  Still, both Ernst and Young and PriceWaterhouse were said to have "cooked the books" for the Metropolitan companies, which, in effect, gave a false sense of stability and security for investors like the plaintiffs and those they represented.

One particular example was cited in the suit:  Metropolitan's financing, in 2000, of the purchase of land in Hawaii that was purported to be prime logging property for much-prized koa wood.  Specifically, there were 16,000 acres of land near Hilo on the Big Island (Hawaii) that was being purchased by attorney and investor Kyle Dong for $10.3 million.  Metropolitan and Summit developed a financing package for the acquisition of the land and the start-up costs for the logging. 

The lending agency for $5.85 million to Dong?  None other than Old Standard Life Insurance Company, the owner of Canyon Crest. 

Summit came in with a $3.5 million loan, while Metropolitan, meanwhile, advanced $2.5 million for Dong's purported logging operation "provided that Dong agree to execute a timber harvesting agreement obligating him to pay back to Metropolitan $18 million over the ensuing five years regardless of whether any koa wood was ever harvested."

The suit noted that, while this deal was arranged, there were no property appraisals, inspection reports, logging feasibility study, cash flow report or other documents that would demonstrate that there was a viable project.  Moreover, Dong had not applied for a logging permit in 2000 and still had not received one in 2006.  As a matter of fact, Hawaii newspapers documented continuing problems with Dong's attempt to secure a permit and, at one point, a logging company hired by Dong was charged with illegal harvesting of the protected koa wood on the Big Island. 

And, who was providing the funds for this scheme?  Investors like the plaintiffs and those they represented.

Now, here's the "cooking the books" part.  Just after Metropolitan and Summit completed their loan and financing for Dong, the former sold to the latter, for a little over $13 million, the timber harvesting agreement that was to bring $18 million over five years, but which Metropolitan obtained for the $2.5 million advance to Dong.  In so doing, Metropolitan, with the auditing of PriceWaterhouse confirming the reporting, claimed a nearly $11 million profit on its books for the fiscal year ending 30 September 2000. 

The problem?  Dong defaulted on this loan and made one $250,000 payment.   Yet, Metropolitan claimed the $10.7 or 10.8 million profit in its financial reporting, never revealing (via PriceWaterhouse) that it obtained that timber harvesting agreement for $2.5 million nor that the timber land in question did not have a legal operating permit. 

Why this is at issue is because the company used that paper profit to claim a fiscal year net loss of $7.6 million, significant enough in itself.  But, the actual net loss was really over $18 million.  Could investors have assumed the company was in better (or at least, not as bad) shape because of the accounting "cookery"?

Indeed, in 2002, Dong's attorney notified Ernst and Young, Metropolitan/Summit's new accounting firm, of the irregularities involved in the koa land transactions.  Yet, the lawsuit claimed, Ernst and Young did not investigate the claim, revise the financial reporting that was made for the 1999-2000 fiscal year or subsequent years, or inform investors and the market of the questionable nature of the deal.

The suit outlined more accusations of inflated property values claimed by Metropolitan/Summit and cited examples of collusion with a company called Trillium, which "would then acquire the property at the over-inflated price by borrowing the majority of the purchase price from Metropolitan, Summit, or their affiliated entities."  In turn, the suit claimed, the latter would buy back from Trillium parts of these parcels, "in order to generate revenues for Trillium that could be used to both make payments on the loans made by Metropolitan or Summit and for Trillium to acquire additional properties from Metropolitan and Summit."  Resulting from these maneuvers, the plaintiffs claimed that Trillium owned Metropolitan/Summit some $70 million.

With balance sheets showing grossly overinflated values of property and assets, Metropolitan/Summit faced greater difficulties in raising the capital required to service the mounting debt that existed.  Still, investment instruments were sold to customers on the promise of healthy returns when those funds were instead used to try and pay down principal and interest owed on prior poor investments.

In June 2003, Metropolitan/Summit made a last ditch effort to secure capital from investment banking firms in New York and yet still sold securities that were asserted to be safe and conservative investments for customers.  Ernst and Young resigned as the companies' accounting firm on 22 January 2004, citing irregularities with 2002 financial reports and warning investors (uh, a little late) to ignore statements made in reports from 2001-2003.  Meantime, the SEC, ahead of the curve as always, launched a (shall we say it?) belated investigation.  In February 2004, Metropolitan/Summit declared bankruptcy and went into the receivership mentioned in earlier posts, the two creditors' trusts now managed by Maggie Lyons.

Note the following from the suit:

A significant volume of Metropolitan's and Summit's commercial real estate loans during the Class Period [period in the lawsuit, 2000-2003] involved raw, undeveloped land.  Many of these loans involved a significant degree of risk because the real estate asset securing the loan did not generate an income stream.  A large percentage of these loans went into default.

Remove the word "commercial" from this statement and it would appear that Canyon Crest fits the bill, except that the first priority deed of trust on Canyon Crest was issued to MRF Carbon Canyon II, L. P. (a Shopoff Group company created for the purchase and development of the land) in October 2005, a year and a half after Metropolitan/Summit/Old Standard went into bankruptcy and reorganization.  It would seem, then, that the issuance by Old Standard of the deed of trust for Canyon Crest was made in an attempt to obtain a favorable financial outcome for the purposes of getting creditors of Metropolitan/Summit something beyond what could be salvaged from the liquidation of those companies' existing assets.  Of course, MRF Canyon Crest (a.k.a. Shopoff Group) defaulted on its loan and Old Standard took over Canyon Crest in October 2009.

Well, this suit charged Metropolitan/Summit with violations of exchange and securities laws on six counts and sought compensatory damages, fees and costs, and applicable injunctions against the defendants.  It is believed that this case is still pending in the courts and has not gone to trial.

The next post will detail more on this case and provide what is known about it currently.  This will be followed by discussion of another class-action suit filed against brokers affiliated with Metropolitan/Summit, an action that has just within the last few weeks been settled.

19 March 2010

Canyon Crest: New Owner, Old Questions, Part 4

Old Standard Life Insurance Company, the new owner of the Canyon Crest site on the Brea side of Carbon Canyon, was owned by Summit Group Holding, Inc., which was owned by National Summit Corporation.  The Summit companies, in turn, were owned by Metropolitan Mortgage and Securities.  The dominant figure in these businesses was C. Paul Sandifur, Jr., who parlayed his role in Metropolitan into a highly complex network of companies that, by the late 1990s, had moved, generally, from residential mortgage loan origination to commercial lending and property development.  At the same time, these companies and their subsidiaries engaged in increasingly risky schemes to attract elderly, middle-class, and "unsophisticated" investors to products that promised incredible returns, but actually evaporated most of the savings of the vasy majority of these investors.  Because of bankruptcy proceedings, which were finalized in early 2004, there are now the Summit Creditors' Trust and the Metropolitan Creditors' Trust, which were formed to collect whatever was possible of the assets of the Summit and Metropolitan firms.  It appears that creditors will not receive anything more than between 5 and 15 CENTS on the dollar from whatever is salvaged from the liquidation of these assets.  One of those holdings?  Canyon Crest.

As was stated previously, Metropolitan was the original company, created in 1953 by Sandifur's father and uncle.  The company had a relatively provincial operation in the Spokane, Washington area for almost thirty years before Sandifur pere recruited Sandifur fils to join the organization in the late 1970s.  Business boomed during the Reagan years.  As the 1990s dawned, the younger Sandifur assumed control of the company, taking three-quarters of the stock, and creating a dizzying array of companies to expand his empire.  As a class-action lawsuit later expressed it, this "byzantine labyrinth of corporations" was "a vertically integrated series of companies involving the issuance, marketing and sales of securities to the general public for the purpose of generating funds he could control."  The reason?  "To originate, acquire, hold and sell receivables consisting primarily of real estate loans, contracts, promissory notes, lottery prizes and structured securities."

Another class-action suit noted, however, that Sandifur's array of business entities needed new investments to pay the principal and interest owed to existing investors.  If this sounds like a Ponzi scheme, read on:  "The risk that investors could lose their principal was exacerbated by preemption of the Washington State Securities Division from regulation of Metro's securities officers."  In January 2000, the Pacific Stock Exchange began listing Metro's notes and the company's preferred stock was approved for sale on the American Stock Exchange the following year.

From September 1999 to December 2002, the company's issuance of debentures climed from $199 million to over $300 million.  A debenture is an unsecured corporate bond used for the purposes of raising capital.  As unsecured, however, the instrument does not have a line of income, a piece (or pieces) of property, or equipment to guarantee repayment when it reaches maturity.

In other words, the advantage for Metro and its subsidiaries and sister firms is that issuing debentures simply meant that there was no need to have assets or income to guarantee against default in paying back the principal.  The problem for investors was that there was nothing to guarantee paying them back in the case of defaulted debentures; that is, until the companies went into bankruptcy and the two creditors' trusts were created.  Even then, as noted above, the recovery of investors' monies have been and will be marginal at best.

As further expressed in one of the class actions against Metro and Summit:  they "had structurally inherent conflicts of interest that resulted in transactions between Metropolian and Summit that were not honest, fair or conducted in good faith, resulting in repeated and continuous breaches of fiduciary duties."

Next: some stellar and stunning examples of the shell game played by Sandifur fils, his company executives and salespersons in the defrauding of thousands of people, mainly elderly, of hundreds of millions of dollars.

16 March 2010

Canyon Crest: New Owner, Old Questions, Part 3

OK, so reference was made at the conclusion to the last post about investors of the new owner of Canyon Crest, Old Standard Life Insurance Company, and its parent, National Summit Corporation and its subsidiaries, Summit Securities, Inc. and Summit Group Holding, Inc., AND Summit's sister company, Metropolitan Mortgage and Securities, which also operated Western United Life Assurance Company.  Yes, it is all so unbelievably complex and convoluted and, yes, there were plenty of reasons why the one man who controlled it all, C. Paul Sandifur, Jr. set it up that way.

Specifically, the statement was that investors were $#%&ed by Summit and Metropolitan, which really means Sandifur and his "associates," including company executives, board members and sales staff.  This process began in the late 1990s and accelerated in the early 2000s, as the great tech stock-driven bubble of the end of the millenium gave way to a recession.  Ironically, just as the new mortgage and derivates-driven bubble ensued after 2002, the Sandifur Empire was well on its way to bankruptcy, scandal, government investigation, class-action lawsuits, criminal charges and trials and all of the accoutrements that accompany such.

The Metropolitan/Summit debacle actually came out of a small, if stable, well-managed company, Metropolitan, started by Sandifur's father and namesake and uncle Charles way back in 1953.  For years, Metropolitan was a pillar of the community in the eastern Washington city of Spokane.  Sandifur seemed, however, to have trouble living in his father's long shadow.  He studied psychology at a local liberal arts college and then, in 1965, went to San Francisco to make his own way in the world.  As his website biography expressed it, he grew his hair long, drove a taxi, and lived in the "happening" Haight-Ashbury neighborhood, the epicenter of the hippie movement.  According to the bio, Sandifur was expelled from graduate studies at San Francisco State University for protesting the Vietnam War.  In the post-hippie era, he traveled the country, sometimes living out of his car, doing factory work, and then, for a time, ran a crafts shop in Hawaii. 

Ah, but youthful idealism gives way to middle-age reality, don't it?  The malaise of the so-called "Me Decade" of the 70s (aren't all decades "me decades" when you get right down to it?) ended and Sandifur's father came calling in 1980, luring the prodigal son, who was pushing 40, back to Spokane and the family business.  The website bio notes that, as 20% interest rates were the norm, Sandifur's return to Spokane was followed by a 250% increase in company business--IN JUST ONE YEAR.  The unspoken intimation is that this was basically Sandifur's doing.  Following this statement is one that, in 24 years with Metropolitan, assets grew from $60 million to $2.7 billion.  Even adjusting for inflation (which, of course, was not factored in to the bio), this was a remarkable burst of business.  Then again, it was the Age of Reagan, of deregulation, of supply-side economics, of libertarian economic philosophy realized vis a vis the manifold benefits of corporations acting in enlightened self-interest, of removing limitations on the range of products and services banks, insurance companies, and savings and loans (remember those?) could offer.  For a bright, creative, driven man like C. Paul Sandifur, Jr., in the prime of business life during his forties and fifties, this was a veritable golden age!

It is notable that, in this website bio, most of the attention is paid to Sandifur's young years of wandering and soul-searching and then a general leapfrogging to his mature years, mainly covering his many charitable endeavors in Spokane, including support of avant-garde classical music, the restoration of a historic theater, and his selfless devotion to the poor and the needy. 

Given relatively little attention is what constituted the core of the Metropolitan business under Sandifur's leadership, which included his assumption of the roles of CEO, President and Chairman of the Board after 1991 and during which he amassed over 75% of the stock of the broader empire he was building, including 30 (count 'em, 30) companies. 

Almost as a sidenote is that statement that Metropolian "became the leading purchaser of seller financed real estate notes in the United States."  Another mark of distinction was that Metropolitan "was also the first company to securitize these notes and sell them on Wall Street."  As if these glories were not enough, the firm also was "the leading purchaser of lottery winnings at one time in the United States."

Further, the bio continues, "at it's high point the group had over 750 employees and invested over $100 million per month.  The company was profitable in all but three of its fifty-year history." 

Therein lies the crux of the matter:  who were the company's core investors and what happened to the profitability after the year 2000?  Stay tuned for more . . .

11 March 2010

Canyon Crest: New Owner, Old Questions, Part 2

The new owner of the Canyon Crest property on the Brea side of Carbon Canyon, proposed for 166 luxury homes on 367 acres, is the Old Standard Life Insurance Company (OSL.)  What exactly is OSL and what are its plans for Canyon Crest?

Courtesy of the Idaho Department of Insurance in a statement issued on 16 April 2009 is this:

Old Standard Life Insurance Company (OSL) was organized and incorporated as a stock life insurance company on November 7, 1988, and was domiciled in the State of Idaho . . .

OSL was a wholly owned subsidiary of Summit Group Holding, Inc., which was a wholly owned subsidiary of Summit Securities, Inc., which was a wholly owned subsidiary [doesn't this read like an Old Testament genealogy--So-and-so begat such-and-such, who lived 930 years, and who begat this-and-that, who lived 423 years, etc.?] of National Summit Corporation (collectively referred to as "Summit").  Both Summit and a sister company, Metropolitan Mortgage and Securities, which owned a sister insurer [a wholly owned subsidiary?], Western United Life Assurance Company, are now operating under confirmed bankruptcy plans resulting in the formation of creditors' trusts.  The Summit Creditors' Trust holds the majority of the beneficial interest in the stock of OSL, with Metropolitan Creditors' Trust holding a minority itnerest.  The creditor's trusts are both managed by Maggie Lyons.

The status statement goes on to indicate that, in March 2004, the Idaho Department of Insurance petitioned the federal district court for "an order of rehabilitation, which was granted by the court and which "was to help protect OSL's assets during the pendency of the Summit and Metropolitan bankruptcy proceedings, and to the give the OSL Rehabilitator an opportunity to evaluate OSL's financial stability and business operations."  That December, an amended order was issued, but the statement did not offer what constituted the changes brought about by that amendment.

The statement continued: "After extensive efforts by appointed deputy receivers disposing of assets and settling creditor claism, at the Director's request the court entered an order placing the company into liquidation on April 15, 2009."

As for what remained of this "life insurance company" a full five years after "rehabilitation" was ordered, here's what the statement offered:

OSL continues to be operated by its Special Deputy and Assistant Special Deputy, both retained by the Idaho Director of Insurance and appointed by the court.  OSL has no employees.  OSL reduced its support personnel to two part-time support persons and retained independent tax accounting, real estate and loan account servicing and asset disposition specialists.  Also, the Special Deputies personally handle the disposition of certain of the OSL assets.

It is also noted that "since the sale of its subsidiary Old West Annuity and Life (OWAL) along with OSL's insurance business, OSL has no policy-servicing needs."  Finally, the statement closes by noting that the company maintained the same Spokane, Washington office building it used when it went into receivership "but with a greatly reduced office size."

So, the new owner of Canyon Crest went into "rehabilitation" in 2004 and was subject to a court order of liquidation in April 2009 (looks like someone has a special anniversary coming up!)  The goal is to satisfy the needs and demands of the creditors' trusts set up for both Metropolitan Mortgage and Securities and for "Summit," the umbrella company for all of those wholly owned subsidiaries that it "begat."

It was reported to the City of Brea Planning Commission in December 2009 that OSL is going to pay the $138,000 in arrears left behind by The Shopoff Group/MRF Carbon Canyon, L.P. in its quest to "develop" Canyon Crest.  An obvious question is:  where is that $138,000 coming from when the company has been in a five-year bankruptcy proceeding and has been ordered into liquidation?

The bigger question is:  what does OSL hope to gain by restarting the Canyon Crest application process?

Answer in the form of an equation:  Approved application + tentative tract map that is good indefinitely = higher value of the land.  Higher value of the land = theoretically more viable possibility of sale = more $ for creditors who were #$%@!ed by OSL and Summit and Metropolitan.

Coming soon: the shocking tale of Metropolitan Mortgage and Securities, which will involve the SEC and the Department of Justice.  Hmmmm . . . .

09 March 2010

Canyon Crest: New Owner, Old Questions

Thanks to Hills for Everyone and its latest newsletter for the information that the Canyon Crest housing development project, a 165-unit executive tract slated for 367 acres of the hills at the north edge of Carbon Canyon, has entered a new phase in its long, convoluted history.  And, that history will only become more complex and labyrinthine!

The new owner is Old Standard Life Insurance, hereinafter referred to as OSL, which foreclosed on a note it held from previous owner, The Shopoff Group.  Shopoff had come quite close to getting approval on its application for Canyon Crest back in Fall 2008 before the devastation caused by the Freeway Complex Fire that November scorched the site and just after the financial meltdown that erupted in September and sounded the death knell to Shopoff's financial solvency. 

Now, get ready to try to follow along the twisted tale of real estate investment schemes!

Consequently, Shopoff's subsidiary, MRF Carbon Canyon, L.P., was served, in June 2009, a notice of default by OSL "due to non-payment of principal and interest . . . under the Plan of Reorganization approved . . . on February 27, 2008."  This comes from a October 2009 suppplement to the the August 2009 prospectus of The Shopoff Properties Trust, Inc., which also noted that

MRF Carbon Canyon, L. P. has attempted to negotiate with Old Standard to restructure the existing note extension . . . Negotiations between MRF Carbon Canyon, L.P. and Old Standard to date have not been successful and Old Standard has elected to accelerate the payments due under the promissory note and has commenced foreclosure proceedings under its first priority deed of trust on the property acquired by MRF Carbon Canyon II, L. P. in October 2005, and pledged to Old Standard as part of the Plan of Reorganization.  The trustee sale is currently scheduled for October 13, 2009.

Simply put, Shopoff bought the Canyon Crest property in Fall 2005 when the real estate boom was in full flower and there seemed to be no limits to where values could go.  As was the case in so many examples, Shopoff didn't have the financial wherewithal to actually carry out its plans for the property on its own, so OSL held a note that was taken out under Shopoff's Plan of Reorganization, which was finalized in February 2008.  By then, of course, the great real estate bubble was bursting and the debacle of the following September was looming.  Shopoff, which owned the City of Brea $138,000 in fees related to Canyon Crest, was slapped with the notice of default leading to foreclosure.

The trustee sale of 13 October 2009 formally transferred the Canyon Crest property to OSL.  At the 8 December 2009 meeting of the Brea Planning Commission under the "Informational" portion at the end of the session, Development Services Director View reported that "Old Standard Life Insurance Company, who recently acquired the Canyon Crest property, has contacted the City indicating they intend to pay the outstanding balance of approximately $138,000 by December 15th and move forward with application."

Yes, folks, OSL is planning, evidently, to keep the Canyon Crest project going, but to what end? 

It should be recalled that Shopoff almost certainly never intended to develop Canyon Crest, but spent lots of time and moolah in presenting a development proposal for the purposes of getting approval and that all-important tentative tract map, because . . . Shopoff had essentially been in the business, since its 2004 founding, of securing appreciation of its real estate assets for investors.

In the meantime, it would be worthwhile to know whether OSL did, indeed, pony up the $138,000 due to the City of Brea and when, if so, it plans to reinvigorate the Canyon Crest application.

It can be safely assumed that OSL is doing much the same with its plans.  Why?  More on that later (and the story only gets more mind-numbingly complex and bizarre)!