Auditor added to Saxton fraud lawsuit

Grace Leong

Friday, May 18, 2001 | 11 a.m.

Las Vegas real estate developer Saxton Inc.'s auditor has been added as a defendant to a lawsuit claiming Saxton shareholders were defrauded by the company.

A big shareholder alleges Saxton investors were conspired against and duped into buying Saxton stock at inflated prices -- and that shareholders suffered because the auditor failed to detect financial discrepancies at the development company.

Steven Komie of Chicago, who alleged he suffered damages of more than $1.4 million after acquiring 319,500 Saxton shares, named the Las Vegas office of Deloitte & Touche LLP as a defendant in an amended complaint against Saxton filed this week in U.S. District Court. The original complaint was filed in December.

Other defendants include James Saxton, the company's chairman and chief executive, Kirk Scherer, its former executive vice president of finance and Melody Sullivan, its former vice president and chief accounting officer.

Komie alleged the auditor had access to Saxton's private business records but "recklessly disregarded the true facts" regarding Saxton's financing and interest expenses in order to retain Saxton as its client and protect the alleged substantial fees it obtained.

Deloitte & Touche, which audited Saxton's financial results for the 1998 and 1999 calendar years, violated auditing standards when it allegedly failed to correct its opinion on Saxton's true financial condition, failed to understand the "material weakness in Saxton's internal control structure" and "didn't properly assess and reduce ... risk to an acceptable level," the suit alleged

Saxton stock, which hit a high of $7.56 a share during the period covered by the suit -- May 15, 1998 through June 14, 2000 -- at one point had a market value of $58.2 million but is now "delisted and worthless," the suit said.

The company was listed on the Nasdaq Stock Market until June 14, when it was removed for falling below the market's listed criteria and failing to file reports with the U.S. Securities and Exchange Commission.

The suit said Deloitte & Touche's 1998 and 1999 opinions "inappropriately represented that Saxton's financial statements complied with (accounting principles) when they didn't." Komie said the auditor failed to conduct its 1998 and 1999 audits with "an attitude of professional skepticism ... and ignored numerous 'red flags,' which would have led to the discovery of the fraud."

Komie had alleged in the earlier lawsuit the company defrauded investors and violated federal securities laws and financial reporting principles when it capitalized as assets "certain indirect construction costs that should have been charged to expense as incurred."

Komie said the auditor also "willfully blinded itself to Saxton's procedures for recording loans and interest expense" and failed to confirm the existence of two loans totalling $10.5 million, and more than $3.4 million in interest paid on these loans even after being told of their existence.

Saxton's reported net loss for fiscal 1999 was materially understated by $2.129 million because it failed to report receipt of a $2 million loan to its entity, Corte Madera LLC from JMK Investments Ltd. and an $8.5 million loan from U.S. Mortgage Corp. and interest payments made on these two loans, the suit said.

"Had Deloitte & Touche made even a cursory review of Saxton's checking account, it would have revealed that 24 checks totalling in excess of $2.1 million had been issued for interest payments on the Corte Madera and U.S. Mortgage loans," the suit said.

Deloitte & Touche officials could not be reached for comment.

But Ron Worley, Saxton's vice president of compliance, disputed the allegations against Saxton, saying: "The lawsuit is completely meritless and we are going to defend it vigorously to its ultimate dismissal."

Meanwhile, Saxton, which claims its contractor's license was unlawfully revoked in November by the Nevada State Board of Contractors, won an order Monday to continue its building operations so long as it retains a qualified contractor to perform work within the scope and monetary limit of that contractor's license.

Saxton sued in April to force the board to reinstate its license and lift a cease and desist order on construction on five Nevada residential projects, saying it feared the board intended to make detailed and prolonged inquiries into Saxton's financial situation and delay or deny its application for a new license.

Four of the five projects are located in the Las Vegas area, including two 20-unit single family home developments at Silver Springs Unit B and Unit C, a 12-unit single family home development called Sutter's Creek and a 24-unit condominium complex called Pelican Creek. One other project, a 90-unit town home development called Kendall Creek, is in Sparks.

The developer, which said it may have to seek bankruptcy protection if it's forced to stop building, said the board erroneously interpreted Nevada law when it refused to issue the new license because of complaints against predecessor companies.

Saxton's Worley said it has hired M.J. LeVan Construction Co. Inc., a managing general contractor, to complete the five projects that were shut down by the board for about a month. "The cease and desist order would apply only if Saxton tried to act as a general contractor by itself," he said.

"If M.J. wants to bid on a project that exceeds the monetary limit on its license, then there is a procedure where it can petition to the board for a one-time increase on the monetary limit so that it can bid on the project," Worley said.

"In order to get a release of the mechanic's liens filed by subcontractors against the projects so that we can sell the properties, we've set up a trust in which proceeds from the sale of the (residential) units are deposited. These funds are distributed on a pro-rata basis to subcontractors with claims against the projects," he said. "To date, the subcontractors' claims on Silver Springs Units B and C have been paid off."