First trial of Arizona Baptist
Foundation case starts this week
___PHOENIX--Investors in the bankrupt Baptist Foundation of Arizona go to court this week in an effort to collect at least $300 million from the accounting firm Arthur Andersen.
___The trial, set to begin March 4, will be one of the first public venues for airing the dirty laundry of the foundation, which filed for Chapter 11 bankruptcy in late 1999 after the state of Arizona ordered it to stop selling securities.
___About 13,000 investors, mostly elderly Baptists from the Southwestern United States, lost an estimated $590 million. The foundation had promised them high returns on their investments and support for Baptist missions causes at the same time.
___Legal papers filed with the court are beginning to paint a clearer picture of the accusations against Arthur Andersen, according to a Feb. 19 story in the Wall Street Journal.
___That article, written by Jonathan Weil, compares the allegations against Andersen to what is purported to have happened in the failed audits of the Enron Corp. in Houston.
___The Arizona attorney general charges the foundation ran a Ponzi scheme that required tens of millions of dollars in new income to pay the high returns it promised earlier investors. Three former foundation officials have pleaded guilty to felonies in the case, and five others face fraud and racketeering charges.
___All this was made possible, the jilted investors claim, by Andersen's accountants, who continued to give the foundation clean audits despite allegations of impropriety.
___The suit in Maricopa County superior court charges Andersen "turned a blind eye when it performed audit testing" of the Baptist foundation and that auditors "ignored glaring red flags that, if investigated as required by professional standards and Arizona law, would have revealed the truth."
___Andersen claims its auditors did nothing wrong and were in fact duped by foundation officials.
___Warnings Andersen received about the foundation were "vague and general" and could not be followed-up, officials with the auditing firm counter.
___ Like Enron, the foundation allegedly hid its losses in subsidiary corporations.
___The Wall Street Journal article detailed a series of warnings Andersen officials reportedly were given about the Baptist foundation prior to its collapse, including one warning from a Texas Baptist.
___In spring 1996, the Journal reports, several foundation employees confronted management over what they said were losses hidden at a company called ALO Inc. Unsatisfied with the response, a staff attorney quit in April. "He warned in a resignation letter that the foundation couldn't expect ALO to cover its debts and wasn't fully disclosing the problem to its auditor," the paper explained.
___"Four months later, an in-house accountant also quit the foundation. His resignation letter described ALO and another entity related to the foundation as 'bad banks' used to take losses to make the foundation look like a 'good bank.'"
___By the end of 1996, five professional staff members had resigned in protest, according to the newspaper. One of those, accountant Karen Paetz, expressed her concerns to Andersen in February 1996.
___"Ms. Paetz had lunch at a T.G.I. Friday's with Ann McGrath, an Andersen auditor," the paper reported. "In depositions, Ms. Paetz says she warned Ms. McGrath that ALO had a $100 million deficit, was losing $2.5 million a month and could make the interest payments it owed the foundation only if it obtained the money from the foundation itself. She said she provided the names of former employees who could corroborate this and urged the Andersen auditor to obtain copies of ALO's financial statements."
___According to Andersen officials, Paetz's information was too vague and could not be documented. Also, when the auditors asked foundation officials for financial statements of the corporations in question, they were refused.
___"The auditors should have demanded the documents be produced, and when they were not, they should have withdrawn from the engagement and warned that their prior opinions were not reliable," counters the bankruptcy trust.
___From this point, the case takes a detour into Texas, according to the Journal.
___"A former foundation chief operating officer, David Jakes, sought a position at Buckner Baptist Benevolences in Dallas. According to that group's chief financial officer, Allen Jordan, Mr. Jakes in a May 1997 job interview expressed serious concerns about the foundation. He said it had hidden $68 million of real-estate losses in a 'bad bank' and needed to raise about $10 million a month just to meet the interest payments owed to existing investors, according to Mr. Jordan."
___At the time, Buckner was audited by Andersen also. So Jordan raised the issue with Buckner's auditor from Andersen's Dallas office in June 1997, the newspaper reports.
___Based on that tip, Roger Pickett, a senior partner in Andersen's Dallas office, contacted the firm's Chicago headquarters, according to the Journal. This allegedly resulted in internal inquiries from Andersen officials in Chicago to Andersen auditors in Phoenix but produced no results.
___The issue reportedly was raised again during Andersen's 1998 audit of the Arizona Baptist Foundation and again dismissed as only a vague suspicion.
___That audit of the foundation's 1997 fiscal year proceeded without concern, even though a Phoenix newspaper launched a series of articles alleging fraud and insider dealings at the foundation. The first of those articles ran just 11 days before Andersen gave the foundation a clean audit, the Journal documents.
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