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. 

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