Baptist Foundation of Arizona

The Baptist Foundation of Arizona (BFA) was a Southern Baptist charity whose fraudulent behavior led to the largest collapse of a religious financial institution in U.S. history.^[1] The BFA was associated with the Arizona Southern Baptist Convention, which was affiliated with the national organization. When the BFA filed for bankruptcy in 1999, it had $530 million in liabilities as compared to a reported $70 million in assets.^[2]

History

The BFA was founded in 1948 and initially sought to provide a financial revenue for participants while supporting Baptist-motivated causes. In 1962, Pastor Glen Crotts became the organization's first president. Under his leadership, the organization held strict moral values. Its officers were forbidden from gambling and drinking alcohol. Twenty years later, Glen Crotts' son, William Pierre Crotts, became the organization's second president.

The collapse of the BFA did not occur in a vacuum. In 1992, records indicated that the company had lost $3.2 million due to questionable transactions. The Reverend Ed Shaw suggested that the BFA "Explain the situation completely to investors; ask their forgiveness; let them know their gift of principal would help if they choose to give some or all of it."^[3] Instead the BFA decided to hide its debt and began a series of dubious activities. Under Bill Crotts, the organization diverted over $140 million to two former and one active (as of 1998) director. The organization did this through the use of over 63 different public and private organizations all directly affiliated with the BFA.^[4]

Each of these related companies had Bill Crotts and the BFA's chief attorney, Tom Grabinski, on their board.^[4] Grabinski signed documents as an officer for both BFA and a subsidiary. When asked if a conflict of interest existed, the BFA indicated that both parties "had waived any conflicts of interest."^[4] Since he was working for both companies, Grabinski was able to authorize questionable transactions. For example, on one day Grabinski attested to the value of a piece of property twice. The first time he attested to the value, he indicated that the property was worth $3.3 million. The second time, on the same day, he declared the same piece of property was valued at $960,000.^[5]

The Baptist Foundation of Arizona's mission statement

In response to the love God expressed in Jesus Christ, the Baptist Foundation of Arizona is a ministry which is committed to providing asset management services to Christians who desire to benefit worthy ministries while earning a market return on their investments.

We are further committed to protecting our investors through a growing fund balance which will enable us to provide resource and expertise for Arizona Southern Baptist ministries.

BFA's staff members offer professional services through an `up close and personal' client strategy.

The ministry of the Baptist Foundation of Arizona is born out of calling, commitment and sacrifice. Through excellence and commitment in their professional and spiritual lives, our board of directors and staff strive to be effective witnesses for Jesus Christ.^[2]

Fraudulent activities

• Good bank-bad bank - The BFA had issued millions of dollars in money losing loans. In order to remove those loans from its books, the BFA secretly funneled money to a subsidiary. The subsidiary then used that money to purchase the loans from the parent company. In a Good bank-bad bank scheme, the two companies manipulate transactions to favor the public institution while using the "bad bank" to hide the deficiencies.^[6]
• Maximum Value Performance Note - The BFA sold certificates of deposit that were non-refundable during the life of the CD. MVPNs were marketed with the notion that they received a higher than average yield and that part of the investment's return was used for God's mission. MVPNs were "fraudulently represented ... as one which could be redeemed at any time, although with an interest penalty."^[7] Elder law attorney Leas wondered why BFA would sell the elderly, "an investment that would tie up more than two-thirds of their non-residential assets in an investment that would be unavailable for five years!"^[7]
• Ponzi schemes - Mechanisms whereby the early investors make a profit by receiving the contributions of later investors. The BFA became dependent upon future investors to pay older investors and loan interest.^[1]
• Land flipping - A land flipping scheme is one where a person or company inflates the value of a piece of property to make more money. For example, the Phoenix New Times reported a case wherein an individual wanted to sell a US$1.9M (million) piece of asbestos-contaminated property to the BFA for US$1 as a tax write off. The BFA was not interested in making this purchase. Instead, they referred the individual to former BFA Director, Jalma Hunsinger, who then purchased the property for US$1. Hunsinger subsequently used the property as collateral to obtain a US$6.8M loan from the BFA. Essentially, in a transaction that favored a former director, the BFA accepted a piece of property (which the BFA itself declined to purchase) as collateral for a loan that amounted to US$4.9M more than the property's appraisal value.^[5]
• Condo properties - The BFA sold property to the elderly that was marketed as a retirement community with a nursing home. The person did not actually purchase the property, but purchased the right to occupy said property. Thus, when people tried to sell it they could not because they did not own anything.^[3]

Judgments

In early 2007, several former members of the BFA's executive management team were sentenced for the fraudulent activities associated with the BFA. Donald Dale Deardorff, Senior Vice President and Controller, was sentenced to four years in prison and a fine of $150,000,000. Jalma Hunsinger, President and Director of Church Ventures (a company whose stated purpose was to build churches), paid $150,000. BFA president, Crotts, was sentenced to eight years in prison. BFA chief attorney, Grabinski, was sentenced to six years and ordered to pay $159,000,000.^[8] Grabinski sued BFA's insurance carrier, National Union Fire Insurance Company of Pittsburgh, Pa. for coverage of his legal fees,^[9] and later for abuse of process, but the abuse of process claim was denied in a motion to dismiss.^[10]

Arthur Andersen, the Big Five accounting firm that audited Enron, paid former BFA investors $217 million for Andersen's failure to identify fraudulent activities at the BFA. When the settlement was originally released, in 2002, there were questions as to whether or not Arthur Andersen, which was at the time being charged for issues surrounding Enron, would be able to make that payment.^[11] Christianity Today reported that "the worst case scenario for Baptist Foundation investors would be if Andersen were convicted this month in the criminal case [over its audits of Enron], then quickly filed for bankruptcy-court protection."^[12] This settlement was the second largest settlement in the nation's history for a Big Five accounting firm that was not related to the Savings and Loan collapses.

References