All eyes are on Houston this week, as jury selection gets underway for the long-awaited criminal trials of former Enron leaders Kenneth Lay and Jeffrey Skilling on charges of corporate fraud. Meanwhile in Phoenix, another trial with many similarities quietly entered its 17th week.
The first in a string of corporate scandals, Enron came to symbolize corporate excess of the 1990s and is America’s best-known white collar crime. Its bankruptcy late in 2001 caused about 4,000 employees to lose their jobs, while stock losses wiped out their retirement savings and prompted many business reforms.
Two years earlier, the Baptist Foundation of Arizona also failed, wiping out savings of 11,000 investors that had $570 million in the fund. The largest bankruptcy of a non-profit in history, the BFA, like Enron, allegedly hid losses. Along with companies like Enron and Worldcom, it was audited by accounting firm Arthur Andersen, giving investors a false sense of security. Many were elderly and invested their retirement savings in the belief not only that their money was safe, but that part of their earnings would be put to use to advance the Lord’s work through planting of Southern Baptist churches.
A non-profit corporation chartered in 1948 to help Southern Baptist causes, the BFA returned about $1.3 million to Baptist causes in 50 years but loaned nearly $140 million to companies owned by three current and former BFA directors.
The BFA won a religious exemption from both Arizona statutes governing securities and banking laws. Still it functioned much like a financial institution, raising funds through sale of investment agreements and mortgage-backed notes, which in turned were invested in real estate.
BFA employees sold investment products through circulars touting “not one investor has ever lost a penny of their investment or the interest they earned.” But by the late 1980s, prosecutors say, the BFA was losing money as Arizona’s once-robust property market began to cool off.
Feeling pressure to show profits, investigators say, BFA officials hid losses in a web of for-profit and non-profit subsidiaries, which were supposed to be economically independent but really weren’t.
One BFA subsidiary, Arizona Southern Baptist New Church Ventures, had a stated purpose of financing new Southern Baptist churches in Arizona. Yet it raised most of its money by selling investment products to individuals and invested most of those funds in ALO, an allegedly phony company owned by one-time BFA director Jalma Hunsinger.
Hunsinger is one of eight former BFA officials indicted in 2001. He pleaded guilty to six felonies and agreed to testify against other defendants, which include former CEO William Crotts and General Counsel Thomas Grabinksi.
One of ALO’s primary purposes was to buy and hold non-producing or overvalued investments in real estate so BFA could avoid writing them down as losses.
For example, Select Trading Group, a subsidiary of ALO, created its own subsidiary, Santa Fe Trails Ranch II. Its only significant asset was 1,357 acres of undeveloped land in San Miguel County, New Mexico.
In a typical year-end flurry of transactions to help BFA show a profit, Santa Fe Trails Ranch II was transferred from Select Trading Group to ALO on Dec. 26, 1995. ALO in turn sold the stock to New Church Ventures, in exchange for a $1.6 million reduction in ALO’s credit line owed to New Church Ventures.
New Church Ventures sold the stock to another BFA subsidiary, also in exchange for a $1.6 million reduction in a credit line, which turned around and sold for $3.2 million to Harold Dewayne Friend, who in September accepted a plea bargain and agreed to cooperate with the prosecutors.
By 1996, ALO was more than $100 million in debt. Several accountants and one attorney became concerned enough to approach senior management about ALO’s deficit. Perceiving a lack of response, most resigned.
One, Karen Paetz, set up a lunch meeting with an Arthur Andersen official in February 1997, warning about ALO’s losses and encouraging auditors to request detailed financial statements for both New Church Ventures and ALO. Anderson asked for the documents and BFA officials refused to provide them.
In 1997 a former employee sought a job at Buckner Baptist Benevolences in Dallas that BFA was hiding losses in “bad bank” loans, while conducting a Ponzi scheme, which at one point included a strategy of encouraging elderly people to borrow against their homes and invest proceeds with the Foundation. Buckner also used Anderson and turned the information over to the firm.
In 1998 Deeann Greibel, a financial planner and CPA in Mesa, Ariz., looked into BFA finances on behalf of a client and found it was heavily underwritten with IOUs. Learning its principal note issuer was ALO, she checked public records and found its unaudited balance sheet listed liabilities of $109.7 million and assets at minus $6.9 million.
Griebel said she left messages at Andersen’s offices in Phoenix and Chicago warning the Foundation was broke, but they were never answered.
Also in 1998, an alternative Phoenix newspaper, the New Times, ran a series of 13 investigative reports alleging fraud and insider deals.
Through it all, Andersen continued to give BFA clean audits, until the Arizona Corporation Commission forced the foundation to stop selling securities in August 1999. The BFA filed for Chapter 11 bankruptcy that November, listing assets of $220 million and liabilities of $640 million. A BFA liquidation trust was set up to sell off assets to allow investors to recover part of their money.
Andersen settled a class-action lawsuit with BFA investors for $217 million, without admitting any wrongdoing. With Enron’s collapse, Andersen earned the distinction of having been auditor for both the largest corporate bankruptcy and largest bankruptcy of a non-profit in U.S. history. In 2002 Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron. The U.S. Supreme Court overturned Andersen’s conviction in 2005, but it is unlikely the nearly defunct company will ever recover as a respected business.
A grand jury in April 2001 returned indictments charging former BFA officials with 32 counts of fraud, theft and racketeering. After a series of delays, a criminal trial for Crotts and Grabinski got underway in September 2005. It is expected to last until at least March, with an estimated cost of $1.6 million to Arizona taxpayers.
Crotts, one of three remaining defendants pleading innocent, says he was an innocent victim who himself lost $800,000. His lawyer has said there was no fraud but rather a disagreement on the value of property.
Bob Allen is managing editor of EthicsDaily.com.