Week four of the Baptist Foundation of Arizona fraud trial begins Tuesday in Maricopa County Superior Court in Phoenix.
The state’s first witness contradicted defense attorneys, who attempted to distance former BFA executives William Crotts and Thomas Grabinski from the some of decisions blamed for a 1999 bankruptcy that cost 11,000 investors more than $550 million.
“Major decisions did not get made without the input of Mr. Crotts,” Kyle Tresch, an attorney at a BFA subsidiary for 17 months, who resigned in protest in 1996, said, according to the Arizona Republic.
Tresch, a graduate of Oklahoma Baptist University who now lives in Tulsa, was one of five BFA employees–an attorney and four certified public accountants–to resign after warning superiors that their business dealings were unethical and perhaps illegal.
In a resignation letter quoted in a 1998 article in the Phoenix New Times newspaper, Tresch said the BFA engaged in “actionable fraud” by underwriting debts with a “bad bank” subsidiary called ALO, Inc.
“To the extent that you consider your position regarding BFA and ALO moral and justified, I am convinced that you honestly fail to appreciate the moral, economic and legal gravity of your actions,” Tresch wrote.
Prosecutors argue that senior management, assisted by certain individuals, some of whom have plea bargained and are assisting with prosecution, operated a ponzi scheme to hide from board members and investors that the Foundation was losing money.
Court documents say that BFA and subsidiaries began offering and selling securities in the mid-1980s to investors located in Arizona, throughout the United States and in several foreign countries. The principal amount grew steadily, and at the time of the 1999 bankruptcy was about $590 million.
Each year from 1988 through 1997, the BFA reported that its revenue exceeded expenditures, showing a profit of $2.5 million in 1997 alone.
The BFA acted as custodian for Individual Retirement Accounts, sold through subsidiaries emphasizing “stewardship investing,” purported to allow individuals to invest both for themselves and Southern Baptist churches and Christian ministries.
By the mid-1980s, the BFA was investing heavily in real estate. The true market value of the BFA’s holdings declined significantly when the Phoenix real-estate market cooled off in the late 1980s, but instead of reporting losses, it is alleged that BFA “sold” overvalued real estate to “bad banks,” so they would not be required to write them down as assets showing a loss.
The transactions usually took place in December, times to show a year-end profit, and without them BFA would have lost money each year, prosecutors say.
In addition to bogus transactions, investigators claim, certain parties made “gifts” to BFA at year-end, typically involving real estate or stock in controlled corporations that was speculative and not supported by independent appraisals.
Meanwhile, subsidiaries with few liquid assets borrowed money from the Foundation or other subsidiaries, over the years mounting significant debt.
When the Arizona Attorney General’s office ordered the BFA to stop selling securities in August 1999, the Foundation had about $240 million in assets and $640 million in debts. The BFA filed for bankruptcy protection that November, in the largest collapse of a non-profit in state history.
Crotts, the BFA’s former CEO, and Grabinski, its chief counsel, who could face up to 34 years in prison if convicted, deny they are guilty of fraud. They claim assets would have regained value after real-estate values rebounded, and blame the collapse on disgruntled employees blowing the whistle to an alternative newspaper with an “anti-Christian” agenda.
Investors would not have lost any money, they claim, if the Attorney General had not prematurely shut down the operation following a series of investigative newspaper articles titled “The Money Changers” in the spring of 1998.
Investors have recovered a portion of their original investments through liquidation of BFA assets and legal settlements, including $217 million paid by now-defunct Arthur Andersen. The Foundation’s auditor, accused in a 2001 lawsuit of aiding in the fraud by issuing clean audits and ignoring red flags, denied wrongdoing while agreeing to pay the money.
The criminal trial is expected to last six months.
Bob Allen is managing editor of EthicsDaily.com.