May 7, 2001

Arizona sues Arthur Andersen for
$600 million in Foundation case
___By Bob Allen
___Associated Baptist Press
___PHOENIX (ABP)--The state of Arizona has sued accounting giant Arthur Andersen for $600 million on behalf of 1,300 investors who two years ago lost money in the collapse of the Baptist Foundation of Arizona.
___The Wall Street Journal reported April 26 the joint lawsuit by the Arizona Corporate Commission's securities division and the state's attorney general, along with disciplinary action by another state agency.
___The cases follow an earlier complaint by foundation trustees that Arthur Andersen failed to properly audit the not-for-profit charity, while its officers allegedly misled investors by hiding losses and operating a "Ponzi scheme" in which money from new investors was used to pay off other investors. Those allegations are the latest turn in the largest fraud case involving a religious organization in U.S. history.
___Meanwhile, Baptist Foundation of Arizona officials were ordered to appear in court May 4 to face criminal charges.
___Due to secrecy rules governing grand juries, the Arizona attorney general's office declined to say who was being charged. Possible charges include fraudulent schemes, theft and illegally conducting an enterprise.
___The Arizona Republic reported May 1 that William Crotts, the Foundation's former chief executive, has been summoned and will not plead guilty. The paper also reported that up to eight former executives and board members are expected to be charged with crimes carrying penalties of two years to 24 years. At least one defendant reportedly has agreed to cooperate with the state in exchange for pleading guilty to lesser crimes.
___The suits against Arthur Andersen, whose parent company had more than $16 billion in revenue in 1999, could be good news for investors, who would be recipients of any award. Investors currently expect to receive either 31 percent or 44 percent of their investment over the next five years as part of a restructuring plan.
___The foundation reported about $640 million in debts and $240 million in assets when it filed for bankruptcy protection in November 1999.
___Investors received the first $20 million, 3.5 percent of their total claim, from a court-ordered plan to liquidate the foundation's assets in January. A second payment of an undisclosed amount was expected around the end of April.
___Arthur Andersen claims it has done nothing wrong. A spokesman told the Wall Street Journal the firm was neither negligent nor involved in fraud or a cover-up. He said Andersen is liable only for the estimated $175,000 a year in fees it has received since 1984 and not investor losses.
___"Any time senior management conspires to defraud investors, this kind of complicated fraud will be very difficult to detect," said Ed Novak, an outside attorney representing Arthur Andersen. Novak predicted the state would have a hard time proving its case.
___This is the second time in a decade Andersen has been in trouble in Arizona, according to a December article in the Arizona Republic. Without admitting any wrongdoing, the firm in 1992 agreed to pay up to $30 million to settle claims stemming from the collapse of Charles Keating's financial empire.
___According to pending court documents, Andersen did not, as it claimed, conduct annual audits of the Baptist Foundation of Arizona in accordance with generally accepted accounting standards. Because of that, lawsuits contend, foundation officers were able to continue to defraud investors by pointing to clean audits by the accounting firm.
___Documents also allege that Andersen ignored red flags, including specific information from a whistle-blower, an anonymous phone call and a series of newspaper articles in 1998 that brought to light many of the allegations that are now in litigation. Auditors continued to give the clean audits, it is alleged, relying on information provided by foundation officers.
___The Baptist Foundation of Arizona was founded in 1948 by the Arizona Southern Baptist Convention for the purpose of raising and managing endowment funds to further Southern Baptist causes.
___The agency allegedly ran into trouble in the early 1980s, when under leadership of Crotts it began offering individual Baptists high rates of return while promising that some of the money would be used to fund new churches and other programs.
___Crotts and other members of the Foundation's senior-management team resigned in August 1999 after the Arizona Corporation Commission froze Foundation investments, citing violation of disclosure policies in state regulations.
___The foundation invested funds heavily in property, unlike other state Baptist foundations that avoid speculative investments. When real-estate markets suffered during the late 1980s, foundation officers, feeling pressure to show profits, allegedly set up a web of subsidiary organizations to hide losses from investors through artificial paper transactions.

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