U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19394 / September 26, 2005
Accounting and Auditing Enforcement
Release No. 2320 / September 26, 2005
Securities and Exchange Commission v. C. Paul Sandifur, Jr., et al., United States District Court for the Western District of Washington, Civil Action No. CV 5 1631 C
SEC BRINGS FRAUD CHARGES AGAINST FORMER EXECUTIVES AND BUSINESS ASSOCIATES OF WASHINGTON'S METROPOLITAN MORTGAGE
The Securities and Exchange Commission announced today the filing of civil fraud charges against former executives and third party business associates of Metropolitan Mortgage and Securities Co., Inc., a long-standing Spokane, Washington finance and real estate company that collapsed in 2004. Metropolitan filed for bankruptcy in February 2004, devastating nearly 10,000 investors throughout the Pacific Northwest who had invested approximately $450 million in the once high-flying real estate company.
The SEC's civil complaint, filed in the Western District of Washington (Seattle), alleges that Metropolitan's management falsified the company's 2002 financial results by reporting profits from circular real estate sales where Metropolitan purported to sell property to buyers who, in fact, received all of the money to pay for the purchase from Metropolitan or its affiliates. The fraud made Metropolitan appear profitable - facilitating further sales of its bonds and preferred stock to investors - when in reality the company was encountering its third straight year of mounting losses and verging on financial collapse. Named in the complaint are former Chief Executive Officer C. Paul Sandifur, Jr., 63, of El Centro, California; former executive Thomas G. Turner, 54, of Sparks, Nevada; and former Controller Robert Ness, 41, of Bellevue, Washington; as well as former Vice President Thomas R. Masters, 54, of Spokane, Washington, who is alleged to have participated in one of the fraudulent transactions.
According to the Commission's complaint, the bogus deals - known internally as "rabbits" (as in, pulling a rabbit out of a hat) - all materialized in the final days of Metropolitan's fiscal year 2002, allowing the company to report a profit rather than the loss it had anticipated. In the largest of these deals, Metropolitan reported a $10 million gain by completely financing the purchase of property by customer Trillium Corporation, a private company based in Bellingham, Washington. In order to evade accounting principles prohibiting companies from reporting profits from such sales, Metropolitan and Trillium agreed to make it appear that the property was being purchased by an unrelated third party, Jeff Properties - in reality a shell company set up by an eighteen year old high school student, the son of a Trillium creditor, in exchange for a motorcycle. In addition to charges against Metropolitan's officers, the Commission's complaint levels fraud charges against Trillium, its President and CEO David Syre, 64, of Bellingham, Washington, and Trillium creditor Dan Sandy, 50, of Rochester, Washington.
Among other claims, the Commission's complaint alleges that by engaging in the conduct described above, each of the defendants committed or aided and abetted violations of the antifraud provisions of the federal securities laws and aided and abetted Metropolitan's violations of reporting requirements. Specifically, the complaint alleges that Sandifur, Turner, Ness and Masters directly violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The complaint also alleges that Sandy, Syre, Trillium, Turner, Ness and Masters aided and abetted Metropolitan's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. All of the defendants are alleged to have aided and abetted Metropolitan's violations of the reporting requirements of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder, and Sandifur, Turner and Ness are also alleged to have aided and abetted Metropolitan's violations of Rule 13a-13 under the Exchange Act. Further, Sandifur, Turner, Masters and Ness are alleged to have violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and aided and abetted Metropolitan's violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. The complaint alleges that Sandifur, Turner and Ness violated Exchange Act Rule 13b2-2, and that through their certifications of Metropolitan's 2002 year-end false financial statements, Sandifur and Ness violated Exchange Act Rule 13a-14. Finally, the complaint charges Sandifur as a control person for Metropolitan's violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder.
The Commission's action seeks civil monetary penalties and injunctive relief from all defendants, as well as disgorgement from Sandifur, Turner, Ness and Masters, and orders barring Sandifur, Turner and Ness from serving as officers or directors of public companies.
In a separate action, the Criminal Division of the United States Department of Justice and the Spokane Office of the Federal Bureau of Investigation announced the filing of criminal charges against Thomas Turner.
The Commission acknowledges the assistance of the Securities Division of the Washington Department of Financial Institutions and the Washington State Attorney General's Division of Consumer Protection in this matter.
SEC Complaint in this matter
http://www.sec.gov/litigation/litreleases/lr19394.htm
