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?
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