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Washington state is suing Ernst & Young LLP for negligence for its role as auditor for bankrupt Metropolitan Mortgage & Securities Co. Washington Insurance Commissioner Mike Kreidler alleges in the suit that E&Y falsely claimed that Met Mortgage’s financial statements were fair and accurate. Filed on Oct. 14, in Spokane County Superior Court, the 66-page civil suit seeks unspecified damages from E&Y that are estimated to run into the millions of dollars. Kreidler filed the suit in his capacity as court-appointed receiver of Met Mortgage’s nonbankrupt affiliate, Western United Life Assurance Co. E&Y resigned as auditor for Met Mortgage in January, and Western United was ordered into receivership two months later. “Ernst & Young failed to do its job, so it’s my duty as receiver to pursue legal action to protect Western United and its policyholders,” Kreidler said in a statement. Western United suffered severe damages due to E&Y’s violation of standard accounting and auditing standards in a breach of contract with both the company and Washington’s Office of the Insurance Commissioner, the suit alleges. The OIC relied on those reports for determining Western United’s compliance with the financial requirements for conducting insurance business under Washington law, the suit said. E&Y declined comment. Met Mortgage and affiliate, Summit Securities Inc., filed for Chapter 11 on Feb. 4 in the U.S. Bankruptcy Court for the Eastern District of Washington in Spokane. Judge Patricia Williams is hearing the case. “The audits conducted by Ernst & Young were not performed in accordance with industry standards or the duties that Ernst & Young owed Western United and the OIC,” the suit claims. “Among other failings, the Ernst & Young audits failed to disclose significant and material accounting abuses and internal control deficiencies at Western United and affiliate companies,” the suit says. The suit cites a June 8 court-appointed examiner’s report in the Met Mortgage bankruptcy case that blasted the debtor’s former CEO, C. Paul Sandifur Jr. The 252-page report maintains that Sandifur created “an atmosphere of intense pressure on the staff to pull ever larger rabbits out of their hats to keep the family-run business operating profitably.” Examiner Samuel Maizel, a Los Angeles attorney at Pachulski, Stang, Ziehl, Young, Jones & Weintraub, ripped Spokane, Wash.-based Met Mortgage for allegedly relying on overvalued appraisals to run the company. Sandifur, his relatives and his management team have since been replaced by new directors and managers at Met Mortgage. “The examiner concluded that Ernst & Young was confronted with ‘overwhelming evidence’ showing that ‘an audit client had few, if any, effective internal controls,’” the suit says. “Ernst & Young repeatedly ignored or negligently failed to discover these material practices … despite a multitude of red flags highlighting serious problems at Metropolitan and its affiliated companies,” court papers said. The commissioner’s lawsuit is the latest in the Met Mortgage fiasco. On Jan. 20, a group of elderly investors filed a class action against Met Mortgage and some of its officers, alleging the company fraudulently marketed to them certain securities as a safe retirement investment. This suit was filed in the U.S. District Court for the Eastern District of Washington in Spokane, on behalf of those who bought the securities between Jan. 1, 2001, and Nov. 3, 2003. Met Mortgage and Summit owed about $583 million after cash flow declined and appraisals were overvalued once the pressure to increase profit intensified, filings show. Met Mortgage funded about $20 million a month in commercial and residential loans in 2001 but failed to meet company goals that were 5 times higher. Howard Schiffman and Steven Roman represent Kreidler in Washington at Dickstein Shapiro Morin & Oshinsky. Copyright �2004 TDD, LLC. All rights reserved.

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