Judge Rules E&Y Papers Should Remain Private in Bankruptcy Case

Documents related to Ernst & Young LLP's audit of now-defunct Metropolitan Mortgage & Securities will remain private, a bankruptcy judge in Washington state has ruled.

U.S. Bankruptcy Judge Patricia Williams, in Spokane, Wash., had ordered an examiner to collect the accounting firm's documents from the Securities and Exchange Commission, but she ruled last week that many of them will not become public, the Spokesman-Review newspaper reported.

Ernst & Young is accused of negligence in its audit of Met Mortgage, which owes roughly $580 million to about 16,000 individuals who purchased unsecured bonds and preferred stock.

Creditors sought the accounting firm's documents in an attempt to show that Ernst & Young knew about Metropolitan's questionable accounting practices and business transactions. Jim Clanton, who heads the Metropolitan creditors' committee, contends that investors were promised the documents.

"It would be fundamentally inequitable, unfair and wasteful to have spent all of this money on examination ... and not receive the benefit of access to this documentary evidence," court papers said.

The examiner, Samuel Maizel, collected the documents and produced a report that pointed blame for the firm's collapse on chief executive officer C. Paul Sandifur Jr. The examination cost $2 million, which came out of the pool of funds available for repaying creditors.

"Unfortunately, this means more time being spent and more money being spent to get these documents," said P.J. Grabicki, an attorney representing creditors.

Ernst & Young argued that the papers were part of a broad investigation by the SEC and were not intended to be given to the company or creditors. The firm said the creditors should use traditional discovery processes to obtain the documents.

Williams ruled that even though the examination was ordered to benefit the creditors, turning over the documents would have had a "chilling effect" on future bankruptcy examinations and SEC investigations.

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