Andersen backs out of BFA settlement
April 4 2002 by Bob Allen , Associated Baptist Press

Andersen backs out of BFA settlement | Friday, April 5, 2002

Friday, April 5, 2002

Andersen backs out of BFA settlement

By Bob Allen Associated Baptist Press

PHOENIX - Nearly 13,000 investors in the failed Baptist Foundation of Arizona got some bad news March 28 when Arthur Andersen said it was backing out of a $217 million out-of-court settlement reached March 1.

In a stunning setback for investors, Andersen said its wholly owned insurance company is "unable to approve or pay claims at this time due to its financial position."

Investor Tom Kennedy called Andersen's decision to renege on the settlement agreement "treachery in the highest order."

"I am just crushed by the Arthur Andersen announcement that they will not stand by the agreement their representatives negotiated," said Kennedy, a member of Mountain View Baptist Church in Phoenix. "The breakdown in the settlement translates into further suffering by investors who need their funds returned so life can be sustained and we can put this unpleasant experience behind us."

Lawyers for the foundation's liquidation trust quickly asked a retired federal judge who presided over the settlement negotiations to enforce the agreement.

Meanwhile, Judge Edward Burke of Maricopa County Superior Court rescheduled a jury trial for April 29.

The trial, originally scheduled for March 4, was averted when Andersen, accused of negligence in its audits of BFA accounts, agreed to pay investors the equivalent of about 32 cents on the dollar of their original investments.

In light of Andersen's decision to renege on that deal, Arizona Attorney General Janet Napolitano, called on the state's board of accountancy to impose "the administrative equivalent of a death penalty" by revoking the accounting firm's registration.

"This is an absolute outrage," Napolitano said in a statement. "This shows that Andersen and its representatives pretended to negotiate in good faith, but in fact never had any intention of making good on their part of the settlement."

But, according to a report in the Arizona Republic, Andersen's Phoenix attorney, Ed Novak, said Napolitano is wrong. He said the insurer, Professional Services Insurance Company Limited, is a separate entity that had to approve the claim.

Meanwhile, the Wall Street Journal reported April 1, that the insurer had been rendered technically insolvent because Andersen failed to make a $100 million premium payment.

Novak told the Arizona newspaper that Andersen's situation had changed dramatically since March 1, when the firm had no way of knowing it would be indicted by the federal government March 14 for its auditing of Houston-based energy company Enron.

The BFA trust is hoping that Andersen can still be forced to honor the agreement. That could give BFA investors an important edge in the event that Andersen files bankruptcy.

But Kennedy said investors, many of whom lost 65 percent to 70 percent of their life's savings, believe any recovery from Andersen is now remote. He termed the decision "just another act of betrayal."

In another development, the Arizona Republic on April 2 quoted Clifton Jessup, the trustee overseeing liquidation of Baptist Foundation assets, as saying his group's lawyers would take a more aggressive approach in seeking restitution from the Arizona Southern Baptist Convention.

The state convention, which started the Foundation in 1948 to raise funds for Baptist causes, has expressed sympathy and raised funds for victims but says it isn't legally responsible for actions of BFA officers, who are accused of defrauding investors out of $550 million.

Arizona's Attorney General's Office announced last May that a grand jury had indicted five individuals on charges of fraud and illegally conducting an enterprise. No trial dates have been set for the five. Three other former Foundation officials pleaded guilty to lesser charges in exchange for cooperating with prosecutors.

According to prosecutors, beginning in the early 1990s, BFA sold different types of investments and savings accounts, saying they were backed by collateral.

Investors were promised high returns and told their investments would help Southern Baptist causes and were safer than if in a bank.

Unlike most Baptist foundations, which invest church funds but don't offer individual investment products, the BFA invested heavily in Arizona's booming real estate market. But that strategy resulted in losses when property values collapsed.

Instead of reporting those losses, BFA officials allegedly hid them in "bad banks" through a web of subsidiaries. For example, the BFA allegedly loaned ALO, Inc., a real estate corporation controlled by a former BFA trustee, more than $124 million. While that debt showed up as an asset on Foundation books, investors weren't told that ALO's net worth was negative $116 million.

Values of real estate holdings used as collateral for such loans allegedly were inflated to help cover up the losses. For example, one gift of Colorado real estate valued at $3.1 million in Foundation records turned out to have an actual market value of less than $152,000, according to a series of investigative news stories that first brought the allegations to light in 1998.

That didn't stop BFA representatives from continuing to solicit investments, however, often in churches. They allegedly used funds belonging to new investors to pay off old ones, an illegal practice popularly known as a Ponzi scheme.

After a yearlong investigation, Arizona officials ordered the Foundation to stop selling investment products in the summer of 1999. The BFA went bankrupt that November, owing investors $640 million.

A liquidating trust established in the bankruptcy says investors should expect to recover between 39 percent and 44 percent of their original investment from litigation and sale of BFA assets over three to five years.

In addition to criminal charges, the state sued Andersen for $600 million last April, alleging negligence and breach of fiduciary responsibility in issuing clean audits for the BFA - while ignoring red flags, including warnings from whistleblowers - that helped Foundation officials to continue to defraud investors.

In the March 1 settlement, Andersen had denied any wrongdoing but said paying investors $217 million would help rehabilitate the company's image. In exchange, all three pending lawsuits against Andersen - a class-action suit, a suit by the liquidating trust and an action by the Attorney General - were to be dropped.

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4/4/2002 11:00:00 PM by Bob Allen , Associated Baptist Press | with 0 comments
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