Investor loses lawsuit against Saxton, auditor

Grace Leong

Thursday, April 11, 2002 | 9:11 a.m.

A federal judge has dismissed a lawsuit that claimed shareholders of Las Vegas real estate developer Saxton Inc. were defrauded by the company.

Steven Komie of Chicago, a Saxton shareholder, alleges Saxton investors were duped into buying the stock at inflated prices and that shareholders suffered because Saxton's auditor, Deloitte & Touche LLP, failed to detect financial discrepancies at the development company.

Komie, who claimed he suffered damages of more than $1.4 million after acquiring 319,500 Saxton shares, named the Las Vegas office of Deloitte & Touche as a defendant in an amended complaint against Saxton filed in May 2001 in U.S. District Court. The original complaint was filed in December 2000.

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 calender years, was accused of violating auditing standards when it allegedly failed to correct its opinions on Saxton's true financial condition, failed to understand the "material weakness in Saxton's internal control structure" and failed to "properly assess and reduce risk to an acceptable level."

Komie also alleged 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."

But U.S. District Judge James Mahan dismissed Komie's lawsuit on Monday, saying "the pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA) haven't been met because the complaint does not ... raise a strong inference that misleading statements were knowingly or with deliberate recklessness made to investors."

The PSLRA refers to federal legislation passed in 1995 that made significant changes to securities fraud litigation including creating new responsibilities for auditors to detect and report illegal activities.

"Despite ample opportunity and express invitation by the court, plaintiffs have failed to offer particular facts to support their claims or to identify additional facts of which they are aware that are not pled in the amended complaint," Mahan said in the ruling.

An involuntary Chapter 7 bankruptcy petition to liquidate Saxton's assets was filed against the company on Dec. 20 by two creditors, Wells Fargo Bank and Las Vegas sweeping services company A Total Sweep Inc., which said they are owed a total of $712,559.

The involuntary petition was filed to block attempts by its biggest creditor, Kansas City, Mo.-based Midland Loan -- which was owed $4.1 million -- from foreclosing on Saxton's corporate office at 5440 W. Sahara Ave. A foreclosure would likely prevent other creditors from being paid.

But Saxton, in a March 28 response to the petition, denied its creditors' allegations.

Timothy Cory, Saxton's attorney, said Saxton listed the office building for sale but isn't aware of any offer yet. He said a trial date on the involuntary petition is expected to be set shortly by U.S. Bankruptcy Court.

Saxton's financial difficulties -- and its battle to stay out of bankruptcy -- date back to late 1999, when the company said in reports with the Securities and Exchange Commission that it had to slow down its construction because of "cashflow problems and over-expansion."

Saxton blamed the cash flow crunch on several factors including a 1998 acquisition of an Arizona home builder, land purchases in Utah, an inability to find refinancing and the company's "failure to adequately monitor and manage its cash flow."