Controversy broke out on the 87th day of the Baptist Foundation of Arizona fraud trial, when a witness said he had previously lied under oath, an admission that by law should have been disclosed to defense lawyers but wasn’t, prompting them to ask for a mistrial.

Donald Deardoff, a witness who in 2001 pleaded guilty to two felony counts in a criminal trial involving former BFA officials, told a jury on April 5 that he lied under oath in depositions to attorneys for the Arthur Andersen accounting firm, which was being sued for its role in the 1999 collapse of the BFA, in which 11,000 investors lost more than $550 million.

Attorneys for defendants William Crotts, the former Foundation president, and former legal counsel Thomas Grabinski, asked Maricopa County Superior Court Judge Kenneth Fields to declare a mistrial or at least rule Deardoff’s testimony inadmissible. They claimed failure to disclose facts known since early in the trial hindered their ability to prepare for cross-examination.

The judge declared a week-long recess in the trial, which started in mid-September and is expected to last into June, to allow defense attorneys to interview Deardoff and for both sides to prepare arguments for a hearing this Monday.

Fields found that under a 1963 Supreme Court ruling, Brady v. Maryland, which says that suppression of a confession by prosecutors violates the Due Process Clause of the Fourteenth Amendment, the state’s attorneys should have disclosed the information.

While expressing concern that “the State does not recognize the significance of such information as a part of its Brady obligation,” Fields ruled that “any prejudice suffered by defendants from the non-disclosure is remedied,” and allowed the trial to move forward.

Deardoff, the former treasurer, vice president and controller of the BFA, pleaded guilty to two felony counts of fraud in May 2001, agreeing to pay just less than $551,000 in restitution and to testify in the criminal trial. He still faces sentencing, which could range from probation to 12 years in prison for each count.

Crotts and Grabinski face charges of three counts of fraud, 27 counts of theft and two counts of illegally conducting an enterprise. Five other defendants have pleaded guilty, and one more awaits trial.

The defendants were indicted in October 2002, after an earlier indictment was thrown out, on charges that they defrauded thousands of investors into putting money into BFA investments they believed were backed by collateral, but in reality were hiding losses in a web of subsidiary corporations in what prosecutors call a Ponzi scheme.

The Arizona Corporation Commission ordered the Foundation to stop selling securities in August 1999. The BFA filed bankruptcy in November 1999, causing an estimated 11,000 investors to lose $590 million.

The case is believed to be the largest affinity-fraud case in U.S. history, involving investors not only in Arizona but California, Texas and other states.

The defendants deny there was any fraud but only disagreement about the value of real estate. They insist they, too, were victims, because they also lost money they had invested when the BFA collapsed.

Most in upper-management at the Baptist Foundation of Arizona were paid six-figure salaries and received generous job benefits. Many investors, meanwhile, were elderly churchgoers, enticed into buying the securities by promises of high yields and the belief that most proceeds from their investments would be used to start Baptist churches. In fact, in 50 years, the BFA had returned $1.3 million of its money to the Southern Baptist community, while lending nearly $140 million to companies associated with current and former board members.

Arthur Andersen, later accused of auditing failures in the collapse of Enron, settled with Baptist Foundation of Arizona investors for $217 million in January 2003.

A trust formed by the bankruptcy court to liquidate assets of the BFA has paid $453 million to creditors and investors, returning investors, depending on type, either 55 percent or 69 percent of their original money back.

The trust recovered about $8 million from sale of assets in 2005 but did not send out a year-end check, according to a letter to investors, because there were insufficient funds to do so after maintaining adequate reserves. Costs of operating the trust for five years have totaled $18.8 million.

Bob Allen is managing editor of

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