The Money Changers
A New Times Investigation
Phoenix New Times, April 16, 1998
By Terry Greene Sterling
Chartered to raise funds for religious charities, the Baptist Foundation of Arizona and its web of subsidiaries have neglected good works in favor of financing real-estate empires for insiders, investing in highly speculative land deals and lavishing generous salaries, offices and automobiles on staff.
While giving a pittance in philanthropic donations to Southern Baptist causes, the Baptist Foundation of Arizona loaned companies controlled by one sitting director and two former directors nearly $140 million, which the insiders plowed into real estate.
BFA records are clouded by a complex web of 63 interlocking companies‹a maze that allowed BFA to insulate the transactions even from members of its own board of directors.
Despite the veil of secrecy, records examined by New Times during the past six months show that BFA ledgers have been inflated by improbable stock transactions and blue-sky real-estate appraisals.
While BFA claims it has never missed a payment to its religious investors, its current liabilities suggest a day of reckoning is at hand.
We are a ministry dedicated to serving the Lord and furthering Southern Baptist and other Christian causes. We re-invest your money and the profit we earn goes to further such ministries as Christian education, care for children and senior adults, missions and new church starts. Your investment actually touches the lives of countless numbers while you earn a very attractive interest rate. -- From a Baptist Foundation of Arizona brochure
The $368 Million Real-Estate Machine
Sixteen years ago, when a young Phoenix attorney named William Pierre Crotts succeeded his father as president of the Baptist Foundation of Arizona, few members of the Southern Baptist community complained about nepotism.
Southern Baptists simply trusted that Bill Crotts, then 36, was the best man for the job -- even if he happened to be the son of the retiring president, Pastor Glen Crotts.
In 1962, Glen Crotts had given up the pulpit to become the first full-time president of the Baptist Foundation of Arizona [BFA]. Under his guidance, BFA was a typical religious foundation -- a benevolent institution that raised and invested money and returned the proceeds to charitable causes of Arizona's largest Baptist denomination. At the time, BFA's articles of incorporation demanded that directors uphold strict Southern Baptist morals and abstain from both alcohol and gambling.
But under Bill Crotts, BFA has engaged in a different kind of gambling.
A six-month New Times investigation reveals that companies controlled by one sitting BFA director and two former directors have received nearly $140 million worth of loans in complicated real estate and stock transactions with BFA.
Public records in several states indicate that for at least 10 years, BFA has served as a seemingly bottomless pool of capital for this cadre of insiders.
BFA's managers appear to have gone to great lengths to disguise the insider loans -- creating a labyrinth of 63 for-profit and non-profit companies. And until 1996, when auditors fully disclosed all the insider deals, Bill Crotts kept the majority of the trusting 21-member BFA board in the dark, several former directors say.
BFA has borrowed more than $265 million from "investors" -- church treasuries, individual church members and the general public. BFA does not guarantee repayment of the loans (which are not federally insured), but relies instead on its position of trust in the Southern Baptist community. The foundation pays interest rates several points above those offered by federally insured certificates of deposit.
In pronouncements from its $6.5 million headquarters at 1313 East Osborn, BFA claims to be a financially sound $368 million company that re-invests the money it borrows in real estate and real-estate-related notes, with profits returned to Southern Baptist causes.
Yet the true financial condition of BFA remains a mystery.
BFA's own audited statements -- the most recent is for 1996 -- don't disclose enough detail about its real estate holdings to reveal how well the company is doing, according to a financial expert retained by New Times to analyze BFA's financial statements. (See related story on page 31.)
Although BFA has not been investigated by any law enforcement agency, and has not been accused of any crime, the paper trail raises questions about whether all of the insider real-estate transactions were legal. When some of BFA's activities were generically described to law enforcement officials, they declined to comment for the record but suggested such practices warrant investigation. (The newspaper did not identify BFA during any interviews with law enforcers and industry observers.)
The key question is whether insiders broke the law by "self-dealing" -- conducting transactions to their benefit at BFA's expense.
Self-dealing violates the Internal Revenue Code. It violates state and common law regarding fiduciary duty. It violates fraud statutes.
Marcus Owens, director of the Exempt Organizations Division of the Internal Revenue Service in Washington, D.C., says penalties for self-dealing range from revocation of tax-exempt status to prosecution of individuals.
Self-dealing can render a corporation vulnerable to civil liabilities -- and on occasion open its directors to criminal liability, says Michael Manning, the Phoenix attorney who represented banking regulators in a successful 1993 civil lawsuit against Charles Keating and who today represents union pension funds in the bankruptcy case of former governor J. Fife Symington III.
Paul Nelson, director of the Evangelical Council for Financial Accountability -- a Washington, D.C., self-policing group that monitors religious foundations and charities -- was told generically about the insider loans. Nelson says that if New Times' "facts are right," such large insider loans should arouse suspicion.
"State regulators will always be looking for self-dealing transactions -- those are the kinds of things that they prosecute," Nelson says, adding that self-dealing is grounds for expulsion from the council he directs. BFA has not joined the council, and has little or no oversight from any other body -- not even any state or national Southern Baptist agency.
And because BFA is a religious, tax-exempt corporation, it is not required to file an annual IRS tax form -- although some of its subsidiaries do. (Non-religious foundations must file Form 990, which are open to public inspection.)
In Arizona, a new state law releases many BFA companies from filing annual financial reports with the Arizona Corporation Commission.
With little oversight, BFA has been accountable only to its directors. And for years, directors permitted BFA to transform itself into a real-estate investing machine that loaned millions to insiders while charities scrambled for funds.
BFA executives and insiders refused repeated requests for interviews. New Times submitted 61 written questions, which BFA officials said were discussed with the entire BFA board. BFA then wrote a letter to New Times, answering most questions but leaving a few unaddressed. (See related story on page 30.) The letter claims that BFA has not favored insiders, that BFA has benefited from the insider deals, and that nothing is amiss with the foundation.
But the New Times investigation reveals that BFA used millions of dollars of investors' money to fund insider real-estate deals that provided only a trickle of support for hurting Southern Baptist charities. Among the findings:
Insider deals
• As of March, non-profit and for-profit companies controlled by former BFA board member Jalma Hunsinger owed BFA at least $124.8 million -- about one-third of the foundation's reported assets. BFA itself says that Hunsinger's for-profit companies owed BFA $66.6 million at the end of 1997. But Hunsinger told the Corporation Commission that his for-profit umbrella corporation had a net worth of negative $116 million in documents filed in 1997 (for the year ending 1996). Hunsinger's non-profits, meanwhile, owed BFA $58.2 million as of December 1997, according to BFA. Those non-profits reported a net worth of $11 million in documents filed with the state in 1996.
• Many of Hunsinger's Arizona corporations are managed by BFA, share its Phoenix address and designate a BFA staff attorney as statutory agent. That attorney has represented Hunsinger on real-estate transactions involving both BFA and Hunsinger.
• Current board member L. Dwain Hoover bought into several BFA real-estate projects and owed the foundation $11.8 million as of December 1996. State law prohibits directors from borrowing from non-profit corporations. In its letter, BFA asserted that no laws were violated because Hoover did the deals with BFA's for-profit subsidiary companies. This assertion appears to be contradicted by BFA's own financial statement, which discloses the debt.
• Former board member Harold Friend has borrowed at least $2 million from BFA.
• Other Southern Baptist foundations interviewed for this article say they avoid investing in real estate because it is too risky. They claim they do not lend money to insiders for legal and ethical reasons.
Results of insider deals
• BFA acts like a bank, borrowing money from the faithful and then re-lending those funds to the insiders and others. But according to BFA's most recent audited statement, BFA has interest payments going out much faster than coming in: In 1996 interest-bearing liabilities totaled $335 million, while interest-bearing assets totaled $173 million.
• Insiders paid off some multimillion-dollar loans with stock in their own companies and with real estate. BFA has then re-sold some of the so-called "non-cash" assets to other insiders for huge paper profits. Those paper profits would offset losses on financial statements sent to investors.
• The value of some insider real estate recorded by BFA in documents is wildly inflated when compared to actual property-tax records. BFA denies inflating the value of real estate -- a technique that would camouflage BFA's losses on financial statements handed to potential investors.
Charities get little
• Despite claims of frugality and pious statements about helping the less fortunate, BFA's administrative costs are staggering. About half of the $69 million BFA spent in 1996 paid for salaries and administrative expenses. BFA's financial statements don't say how many people it employs.
• Charities can get money from two BFA sources -- income from profits BFA earns and money dedicated from charitable trusts BFA manages.
In 50 years, BFA itself has given only about $1.3 million to the Southern Baptist community -- for new churches and other good works. This may be because its expenses are high. In 1995 alone, BFA spent about $329,000 on staff automobiles. It spent $16 million on staff salaries in 1996. High-profile causes such as Arizona Baptist Children's Services, which cares for children in crises, and Rio Vista Mission, which helps feed the hungry, have struggled financially and suffered cutbacks in services. BFA has not provided either any direct aid, although it has loaned about $150,000 to the children's agency.
BFA boasts that charitable trust funds it manages returned $1.7 million to Southern Baptist causes in 1997. However, BFA will not disclose how much of that $1.7 million it returned to itself, since BFA designates itself as a charitable cause.
Although BFA insists all is well with its finances, it appears that the BFA board is demanding more details about the foundation's business deals.
BFA's board chairman, Berry Norwood, a Prescott pastor, won't answer specific questions, but tells New Times, "Nothing has been hidden in the eight years I've been on the board."
Yet Norwood implies that procedures have changed, saying, "There is total disclosure on the board now in terms of deals, and that disclosure is constantly increasing."
A March 23 BFA letter responding to New Times' written queries denies that officers violated fiduciary duty laws or engaged in any self-dealing, saying instead that loans to directors and former directors -- "related parties" in the parlance of high finance -- were for BFA's benefit.
"There is no favoritism or excess profit made by related parties at the expense of BFA," the letter, signed by Norwood and Crotts, says.
"Since the board consists of outside directors, their independence prevents it. The accountability and procedures in place, and the many checks and balances of BFA would not allow such to occur. Not only is there no favoritism, the benefit is to BFA in all related party transactions."
And that is the $368 million question.
Who benefits?
If the insiders benefited at BFA's expense, then state conflict-of-interest laws may have been violated and fraud may have occurred, says Paul Nelson of the ECFA.
"I don't know what's in the heart of these people," Nelson says. "Whether they set out to do something right and have done it the wrong way, or whether this really is something they set out to do so they could perpetrate a fraud on the public.
"God alone knows their hearts."
Pecuniary profit is not the object of this corporation and it shall have
no capital stock and it shall not pay any dividends or make any division of
its earnings, income or property to its members and shall not be operated for
the financial or pecuniary benefit of any individual. . . ."-- Articles
of Incorporation,
Baptist Foundation of Arizona
Bill Crotts quietly allowed insiders to write IOUs to BFA for tens of millions of dollars with little oversight from the BFA board of directors and virtually no scrutiny from the Arizona Southern Baptist Convention, a community of about 125,000 believers who attend 400 churches and missions.
Even though BFA is an official agency of the Arizona Southern Baptist Convention, no supervisory body within the convention oversees it -- other than to nominate BFA board members. The Arizona convention, in turn, does not answer to the national Southern Baptist Convention in Nashville, Tennessee.
Southern Baptists abhor big government -- even among themselves. With 16 million believers, the nation's largest Protestant denomination is staunchly independent -- a trait rooted in a theological tenet called the "priesthood of the believer," which encourages each individual to build his or her own relationship with God and interpret the Bible individually.
This explains why in Arizona, Southern Baptists chose to entrust BFA solely to a board made up of 21 men and women. Fourteen board members are "sophisticated business men and women -- business owners, attorneys, CPAs, and public company executives and board members -- whose experience includes risk-reward issues common to investing resources to achieve conservative but consistent returns," according to BFA's letter.
The remaining seven board members are Southern Baptist pastors. And those pastors, most of whom are financially unsophisticated, are loyal to Bill Crotts.
Even the spouses of directors expressed fierce loyalty to BFA -- an attitude shared by all but a few Arizona Southern Baptists interviewed for this story.
"I heard my husband take your call in the kitchen," one former director's wife told a New Times reporter recently.
"I don't think he'll want to talk to you again. My husband didn't find anything illegal going on [when on the board.] Bill Crotts is a man of God and our friend. Why would my husband want to stir up trouble?"
Before hanging up, she said: "People should know better than to make investments that aren't secured by anything. They're just greedy and want those high interest rates. My goodness, everyone wants the government to take care of things for them."
Such loyalties might have faded if investors had known that the BFA board knew little about where those dollars went.
Three former board members say that BFA directors who questioned unusual business deals were not invited to sit on the board again. The former directors, who agreed to interviews only if they were not identified, say they had no idea that BFA had so many subsidiaries.
Such conditions should serve as a red flag for a religious foundation, the ECFA's Paul Nelson says. Unnecessarily complicated transactions and corporate structures could mean someone is trying to hide something from the board, and outsiders.
"Board governance usually is the first thing to break down, which allows transactions to go undetected," Nelson says.
"If they have done something wrong with a good motive, that's one set of things. Or did they sit around a table and try to figure out how to perpetrate a con?
"That's when you deliberately try to make something complex so it will be difficult to trace."
Free from institutional oversight, answering only to a trusting board that gave him free rein, Bill Crotts for years built a web of Arizona for-profit real-estate corporations beneath the BFA umbrella. BFA's corporate tree resembles a circuit board (see chart on page 32) and links with corporations controlled by related parties. As of 1996, the last year for which corporate financial records are available, Crotts was president of each corporation. BFA's staff attorney, Tom Grabinski, was also an officer in the corporations.
It was through this maze of BFA's for-profit corporations that real-estate deals were made with insiders -- and hidden from outsiders and board members alike.
The deals had several effects.
They benefited insiders.
They made BFA's financial statement look good to investors because multimillion-dollar IOU's were recorded as "assets" that offset BFA's liabilities. This is a normal accounting procedure. But in BFA's case, public records show, some insider debts appear to have been collateralized with real estate that has a lower value than the value of the note itself. They could put BFA at risk because more than one third of its assets were loaned to insider companies. If an insider with a substantial loan happened to default, BFA might not be able to pay its investors.
The former board members say Crotts approved millions of dollars of loans without notifying the full board until 1996, when Arthur Andersen accountants auditing BFA insisted that all such loans be fully disclosed. The accounting firm had audited BFA for 13 years, but it was not until 1996 that all the insider deals were detailed.
One ex-director says that, when the full BFA board was called into executive session to learn of Crotts' secretive loan approvals, "the full board wasn't upset."
Most directors figured Crotts had made the loans in BFA's best interest, even though he wasn't "necessarily being right or pure," the ex-director says.
Following the full disclosure of insider debts, BFA directors ordered Crotts to work with a committee to approve investments, ex-directors say.
Asked about Crotts' decisions to lend Hunsinger's companies millions without the full board's approval, BFA wrote: "Mr. Crotts was not required to report to the BFA board on these specific loans. All loans were made by a duly-constituted separate board whose members were elected by the BFA Board. The Board sees no breach of fiduciary duty by staff to BFA and the Board."
The letter did not name the "separate board," or identify who sat on it.
Of the insider deals, BFA said in its letter: "BFA has benefited from partnerships and relationships with successful Christian business leaders who have provided intellectual and financial resources. . . . The Foundation would not be here today without these people."
Even today, BFA will not disclose the names of the insiders. In audited financial statements, insiders are referred to only as "Benefactor B," "Benefactor A" and "Director A."
New Times determined the identity of the insiders by cross-checking public records with BFA's audited financial figures and by interviewing former board members.
Benefactor B
By far the most indebted insider is 61-year-old Tempe real-estate investor Jalma Hunsinger, who controls non-profit and for-profit companies that owe BFA more than $124.8 million. The non-profit group owes $58.2 million; the for-profit group owes $66.6 million. BFA says all loans are current, but public records show that several have been re-negotiated.
Hunsinger is the sole owner of ALO Inc., a real estate corporation started by statutory agent Bill Crotts in 1988. ALO is the parent of several smaller real-estate companies. According to financial statements filed by Hunsinger himself at the Arizona Corporation Commission, ALO's 1996 net worth was negative $116.5 million. Nevertheless, BFA continues to loan more money to Hunsinger's real-estate companies every year. By the end of 1997, Hunsinger's for-profit companies owed BFA "approximately $66.6 million" and additional loans were made in 1998, according to BFA's letter to New Times.
Hunsinger-controlled non-profit corporations also borrow heavily from BFA. Hunsinger is president of Arizona Southern Baptist New Church Ventures, a non-profit he started in 1984 to raise money for new churches. By 1997, he had created a slew of money-hungry subsidiaries beneath the parent corporation.
As of December 31, 1997, New Church Ventures companies owed BFA $58.2 million, BFA says in its letter to New Times.
Arizona Southern Baptist New Church Ventures advertises its attractive interest rates to potential lenders on the Internet.
People lend money thinking it will help fund new churches. But neither BFA nor Hunsinger would release any figures on how many new churches Arizona Southern Baptist New Church Ventures has funded. Likewise, Don Cartwright, director of the Arizona State Mission Board, the Southern Baptist agency overseeing new churches, refused to disclose to New Times how many new churches have been funded by Hunsinger's non-profits.
The relationship between Hunsinger and BFA is further complicated by the fact that BFA manages several Hunsinger companies and Hunsinger's family trust.
BFA also has conducted real-estate transactions with the Hunsinger companies, records show. In some transactions, BFA borrowed money from Hunsinger's Tempe mortgage company, First Mortgage, to finance real-estate transactions with Hunsinger. BFA claims no conflict of interest occurred with these complicated transactions.
Hunsinger lives in a modest Tempe condo. His office is in an unpretentious building on South Kyrene Road in Tempe.
Hunsinger is regarded in the Southern Baptist community and by BFA directors as a savvy businessman -- Chairman of the Board Norwood says Hunsinger is "a great friend of the foundation" who is "in touch with us a lot." Hunsinger's image as an astute real-estate investor may explain why BFA chose to lend his companies tens of millions of dollars.
Outside of the Southern Baptist world, Hunsinger keeps a low profile.
He declined to be interviewed for this story.
Director A
Current BFA board director L. Dwain Hoover is a 62-year-old former butane-company owner turned real-estate investor. He has served several three-year terms on the board.
In what appears to be a case of blatant inflation of real-estate values, BFA in 1996 recorded a $3.1 million gift of "Colorado Real Estate" from "Director A" in its audited statement.
BFA refused to provide the appraisal to New Times, and would say only that the land was near a "major ski resort." So New Times checked property records in all Colorado counties, and found that BFA got title to land only in Mesa County, Colorado, near the Powder Horn ski resort.
From Dwain Hoover.
Today, the "market value" of the land is $151,990, according to Mesa County Assessor documents. Paul Jensen, an appraisor with the Mesa County Assessor's Office, says the assessor tries to accurately appraise land at its actual market value based on comparable land sales in the area. In the Hoover land appraisals, comparable sales for all of 1995 and the first six months of 1996 were considered.
Hoover himself valued "Mesa County Land" at only $295,576.41 in a 1995 financial statement filed with the Arizona Corporation Commission. Public records do not say whether Hoover took a $3.1 million income tax deduction for the land in 1996.
Hoover engaged in at least four other real-estate transactions with BFA. BFA's audited statements say that by December 1996, BFA held "notes receivable totalling $11,892,744 from Director A."
Translation: Hoover wrote IOU's to BFA for more than $11.8 million.
Asked to explain why the board allowed a sitting director to borrow the money, BFA wrote New Times: "Director A did not borrow from BFA, but rather purchased assets for approximately $11.8 million in 1996. He paid $2,974,937 as a cash down payment and gave a carryback note of $8,825,063. That note has been paid down to $3,259,310 as scheduled under the terms of the note. This produced to BFA a profit of $4.4 million."
BFA provided no documentation to support the claim, did not say what the "purchased assets" were and did not say whether Hoover paid down his note with cash, stock or land.
In 1996, Hoover also borrowed $6.5 million from New Church Ventures Credit Corporation, a company controlled by Hunsinger and managed by BFA. The loan is secured by land in Maricopa County. Hoover is not personally liable for the loan.
The records do not disclose other terms of the loan, and do not say whether the debt is part of the $11.8 million Hoover owes to BFA.
Hoover lives in a $1.4 million house in Paradise Valley. A member of the North Phoenix Baptist Church, he is regarded by church members as an exemplary Christian who is an excellent "steward" of the millions God has blessed him with.
"I have known Dwain all my life," says LaVerne Pippett, a member of North Phoenix Baptist Church. "He is a super neat man and has a lovely wife.
"I don't know how he makes his money. All I know is that he and his wife have always been very active in the church."
Benefactor A
Harold Friend is a 64-year-old Paradise Valley resident who has dealt extensively with Hunsinger and BFA, public records show. Friend is an officer in several of Hunsinger's privately held corporations, and has signed documents for the companies in real-estate deals with BFA.
Friend's own business dealings with BFA and Hunsinger have been intricate, according to BFA's financial statements.
For example, in 1995, a Hunsinger non-profit paid a debt to BFA with land valued at $1.6 million. Then Friend bought the land from BFA for $3.2 million. He paid only $800,000 down, then wrote an IOU for $2.4 million.
In what may or may not be a related transaction, during the same month in 1995, BFA paid $793,000 in cash to Friend for stock in one of his corporations.
BFA then sold the Friend stock to Hunsinger for $1.2 million in cash and an IOU for $3.7 million.
That same year, Friend pledged $2 million to BFA -- a pledge he paid off with stock from MCF, his private real-estate corporation. At the time of the pledge, state Corporation Commission records show, MCF, then a nine-year-old company, was worth only about $5,000. Shortly before the pledge was paid to BFA, Friend filed a 1996 financial statement with the Corporation Commission, listing the assets of his company at more than $2 million.
These financial gyrations would have had the effect of bolstering the bottom line in BFA's financial statements with paper profits.
Friend and his wife Stevie are members of North Phoenix Baptist Church, where Stevie sings in the choir. At a choir party given by the Friends at their $1.68 million home in Paradise Valley, choir members were impressed by the elegant antiques and knickknacks and Stevie's flair for interior design.
Friend declined to be interviewed for this story.
The BFA executives
Vice President and General Counsel Thomas D. Grabinski, 38, joined BFA in 1988. Even though he is BFA's staff attorney, Grabinski also is agent for numerous Hunsinger corporations which list the BFA mailing address. Grabinski has signed documents for both BFA and Hunsinger corporations in multimillion-dollar transactions between those same companies. Asked if a conflict of interest existed, BFA claimed both Hunsinger and BFA had waived any conflicts of interest.
Grabinski, who lives in Tempe, is politically active. In 1996, he was president of the Arizona Christian Coalition -- a spin-off of the national Christian Coalition chaired for years by activist Ralph Reed. He also is a registered lobbyist for BFA.
Grabinski refused to be interviewed for this story.
BFA will not disclose staffers' benefits or salaries. And because it is a religious institution, BFA does not have to file public tax documents reporting those salaries.
A 1996 corporate record reveals that BFA tucked away $70,575 in post-retirement benefits "to be paid in the future" to former BFA presidents. In the future, Bill Crotts will be a former BFA president. The only other former BFA president is his father, Glen, who retired in Phoenix.
Also in 1996, Crotts personally borrowed $177,000 against his home in north central Phoenix from a Hunsinger company.
But BFA claims there was no conflict of interest. The reason: Hunsinger's company, First Mortgage, later sold the Crotts mortgage to an outside company.
In BFA's letter to New Times, the foundation claimed neither Crotts nor Grabinski had any significant social relationship with the insiders. They did not golf or travel with any of the insiders, except for a trip Crotts took with Hunsinger prior to 1982.
In its letter, BFA claims no commissions, perquisites or fees have been given by insiders or their companies to Crotts and Grabinski or any companies they might be involved in.
You don't have to be a Southern Baptist and you don't have to live in Arizona
to take advantage of our outstanding interest rates and unique "Stewardship
Investing" opportunities. Nearly one fourth of our clients are not Southern
Baptists.
-- From a Baptist Foundation of Arizona brochure
The Faithful
Using its position of trust in the Christian community, the Baptist Foundation of Arizona has borrowed more than $265 million from the faithful, its own churches and the general public. BFA also solicits management of Individual Retirement Accounts and trust funds from "Christian Wills."
BFA has actively advertised the loans -- called "Investment Agreements" and "Mortgage Backed Notes" -- on the Internet, in churches and in BFA-owned retirement communities. BFA promises to "re-invest" the dollars prudently, promises to pay the investors back and return all profits to its Christian causes.
Unlike insured certificates of deposit, the $265 million BFA has borrowed from the public does not carry a guarantee of repayment.
Instead, "the loans are an absolute liability of BFA," BFA wrote in its March 23 letter to New Times.
"The full faith and credit of BFA stands behind all investment products. This is clearly stated in all offering documents. There is no representation that loans are insured, which is why offering circulars are given to investors before they invest. The offering documents make it clear that there is no guarantee of repayment; however, the Foundation has never failed to make a payment due to investors in its 50-year history, and not one BFA client has ever lost one penny of their investment or interest earned. BFA maintains large cash reserves, relative to its short term obligations, as reflected in audited financial statements."
But BFA's claims of a sterling record do not address current liabilities.
The "large cash reserves" -- $14 million in the most recent audited statement -- won't cover the $137.4 million in "Investment Agreements" BFA would have to pay out if all investors demanded payment at once. Banks also keep low cash reserves, but they are backed by the FDIC.
Investment Agreements, according to BFA's brochure, can be called in at any time, with penalties in some cases.
"Mortgage Backed Notes," which account for about $127.8 million of the $265 million BFA owes the public, cannot be called in until they come due, the brochures say. More than half of the mortgage backed notes are linked to insiders, according to BFA's letter.
BFA does not guarantee repayment of either type of loan.
But investors are so confident in BFA that 94 percent of the loans are re-invested with BFA when they mature.
One elderly investor who requested anonymity says his accountant recently questioned him about the safety of the BFA investment agreements.
Yet, the investor says, "I said I'm not worried about it. It's for the glory of the Lord. I have faith in the organization and especially in the Good Lord. To me it's as safe as if it's Bank One."
Most of BFA's assets are tied up in real-estate holdings -- raw land, real-estate-related notes (about half are linked to insiders) and a few cash-generating properties -- golf and retirement communities, mostly in Arizona.
Because of their riskiness and illiquidity, real-estate investments are avoided by most charitable foundations.
Executives of Southern Baptist foundations in Texas, Tennessee and California all tell New Times they eschew real-estate investments, concentrating instead on stocks and bonds managed by reputable Wall Street fund managers.
They also don't lend money to directors or benefactors.
Like Arizona, "Texas law prohibits lending money to directors," says Jim Herod, senior vice president and general counsel of the $1.5 billion Baptist Foundation of Texas. "We don't do a lot of investing in real estate. We invest 99 percent of our funds in stocks and bonds."
The reason: Stocks and bonds managed by reputable firms are safe, can be sold in a day and have increased in value.
The national Southern Baptist Foundation in Tennessee has seen assets grow 75 percent in three years, says its president, Hollis Johnson III. The national foundation, which raises money mostly for seminaries, also shies away from real estate, because, Johnson says, "it's too costly and too risky to manage."
BFA reports owning only one stock, New Century Financial, a California company that sells real-estate mortgages. BFA claims its share is worth about $28 million, up from a book value of $7.1 million.
New Century appears to be one of BFA's most successful investments.
It's unclear from financial statements whether BFA's real-estate empire has benefited from the five-year real-estate boom in Arizona. While claiming to own about $147.5 million in real estate, most of it in Arizona, the foundation's equity remains low, about $9.9 million.
In explaining why it favors real-estate investments, BFA said it "invests in arenas in which our staff, and particularly our Board, has experience and expertise. . . . The Board is unwilling to invest large sums of money in the stock market because of the potential for extreme losses in short periods of time . . ."
We are very prudent in our investments and closely watch our expenditures.
All this adds up to a low-cost operation which provides higher yields for you.
-- From a Baptist Foundation of Arizona brochure
Bankruptcies, "Land Flips"
A complicated bankruptcy case that has dragged on in U.S. Bankruptcy Court in Phoenix for seven years provides insight into BFA's investment strategies. The bankruptcy case belongs to a real-estate investor named Tom Church. Several BFA and Hunsinger companies claim Church owes them $20 million.
So far, the companies have gotten less than $1 million from Church's bankruptcy estate.
That is not the sort of prudent investing most foundations engage in.
In a recent hearing, Randolph Haines, attorney for bankruptcy trustee Orme Lewis, explained how Church and BFA overvalued real estate in deals done from 1986 through 1991.
Haines uses disturbing terms such as "flipping," and "carryback debt." Both terms involve a type of sale that can be rigged. The 1998 Association of Certified Fraud Examiners Manual defines "flipping" as "the practice of buying and selling real estate very quickly -- often several times a day or at least within a few months." The manual says related parties and shell corporations often transact the flips.
The purpose of illegal land flips is to artificially change the value of the land -- either for income tax purposes or to make land appear more valuable than it actually is. In a hypothetical example, a company might sell a $10 million piece of land to an affiliated company for $20 million, allowing the affiliated company to pay $500,000 down and write an IOU, or "carryback note," for the remaining $19.5 million. The net effect of this hypothetical deal is that the IOU makes the books look good.
"The Baptists lent a lot of money to Mr. Church to invest in these properties," Haines said. "There's no question that they lent a lot of money. Now all of their $20 million isn't money that they actually parted with.
"A lot of that was carryback debt. They bought properties. They made their own investments in properties and then they flipped them to Mr. Church at an inflated price. This is what a lot of people were doing in the 1980s.
"That's what was going on. In fact, Church was involved in that. He would bring them [BFA] a property to invest in. They'd decide to invest in it. And a year later they decided it's time to unload it and they unloaded it on Mr. Church -- at a very inflated price, large carryback debt. So that's the origin of their debt."
BFA attorney Phil Mitchell responded:
"You know, comparing this sort of inflammatory speech -- inflated prices, flipping, going back on [one's] word, impeachment, that kind of stuff, you know it's easy in hindsight to say who the bad guys are in the real-estate market going bust. But there were a lot of victims, not the least of which was my client . . ."
Last year, Church also filed a Maricopa County Superior Court lawsuit against Crotts, BFA companies and a number of Hunsinger companies over the soured real-estate deals, claiming they all breached business agreements.
BFA has yet to respond to the Church's complaint in court, and would not comment on the suit for this story.
Church declined an interview, as did his attorney, Dick Treon.
Our message is simple and biblical. The psalmist tells us everything belongs
to God. Tithes and offerings belong to Him, but our investment resources belong
to Him as well.
-- Bill Crotts, on the Baptist Foundation Web page in late 1997
The Poor Get Poorer
Southern Baptist causes are getting shorted.
They don't even know it.
As BFA has invested in its insider real-estate machine, it has portrayed itself to Southern Baptist causes as a gatherer of funds for the future -- not as a provider of funds today.
BFA has two pots from which it apportions dollars to causes -- charitable trust funds managed by BFA comprise one pot. BFA's own profits make up the other.
The profits have not been great.
The fact that it has given only $1.3 million to causes since 1948 makes that point clear. That figure represents only .03 percent of the gross assets BFA claimed for 1996 alone.
If BFA has been parsimonious with charities, it has been more than generous with itself, public records show.
Foundation Administrative Services [FAS], a BFA subsidiary run by Crotts, spent about $329,000 on automobiles in 1995. When asked what kind of cars were purchased or leased, and who drove them, BFA replied in its letter: "FAS owns and leases automobiles, all of which are used by BFA staff."
In its letter, BFA also claims that it has returned about $2.7 million a year to causes -- not in cash, but in "time" and "expertise" provided by BFA staff to the causes. The financial statements don't say what hourly rate BFA ascribed to staff members.
BFA makes other claims that are difficult for most people to understand.
For instance, BFA claims it has assembled $450 million in "deferred gifts" -- pledges by the living to will money to BFA when they die. But the majority of those pledges don't show up in audited statements because they are pie in the sky -- they can be retracted if the living decide to change their wills.
In actual dollars, BFA manages only about $28 million in trusts benefiting Southern Baptist causes.
Those trust funds generated $1.7 million for causes in 1997. Of course, BFA considers itself a Southern Baptist cause. It did not answer New Times' question about how much of that $1.7 million it returned to itself.
In fact, audited statements show that half of the cash (about $69 million in 1996) that BFA spends is spent on its own bureaucracy -- in administrative expenses.
Causes do not rely on BFA.
The children
In 1960, 12 children walked through the doors of Arizona Baptist Children's Home at 3100 West Missouri in Phoenix. The Southern Baptists who started the non-profit agency had sacrificed for years to scrape up the funds to build a place where troubled kids would feel safe and loved and, perhaps, find salvation.
Arizona Baptist Children's Services has always been a beloved cause in the Southern Baptist community, one BFA claims to be helping out.
The agency has for decades served children of all denominations. For decades, the state has referred troubled children for residential treatment, foster care or counseling.
In 1989, Arizona Baptist Children's Services took care of 1,101 children and still had a small cash surplus.
Then the 1990s came. Kids and families sought treatment in record numbers -- in 1996 the agency took care of nearly 2,000 kids and parents. But children referred by the state for residential treatment were more abused, more neglected, more violent and more expensive to care for. Still, the state wouldn't pay the full cost of caring for the kids referred, says C. Truett Baker, who has been president of the agency since 1984. For each child in residential care whose bills were being paid by the state, Arizona Baptist Children's Services lost $140 weekly.
In 1996, ComCare, the agency hired by the state to administer its behavioral health program in Maricopa County, fell into disarray and stopped referring as many clients. Eventually, ComCare went bankrupt.
In 1996, Arizona Baptist Children's Services closed two group homes.
Even with the closures and a fundamental change of focus -- from primarily residential to home-based services -- Arizona Baptist Children's Services ended 1996 with a deficit exceeding $385,000, the agency's own records show.
Still, Baker has not relied on BFA to rescue the agency. Baker says BFA was not intended to provide cash to Southern Baptist causes, but rather to set up wills to benefit his agency in the future. So far, BFA has built up an actual endowment for the children's services of about $1.5 million, he says, which generates an annual income of about $70,000. That's a pittance in the annual budget of about $6 million. (Actually, the government pays for most of the care given to children by Arizona Baptist Children's Services.)
"The problems we have have got nothing to do with the Baptist Foundation of Arizona," says Baker, who invests his own savings with BFA.
"I trust them implicitly," he says. "And I have never experienced anything or heard anything that would diminish that trust."
Baker's loyalty is unshaken when he's told that at the very time his agency was $385,389 in the hole, BFA chose to lend a Hunsinger company more than $400,000 from a charitable trust fund.
On January 15, 1997, Foundation Asset Management, a BFA subsidiary (acting as trustee for the Wilma Anne Rimsek Charitable Remainder Trust and the Melvin Neil Fleming Charitable Remainder Trust) lent $425,000 to Wesco Realty Corporation.
Wesco Realty is owned by Select Trading Group Inc., which is owned by ALO, which is owned by Jalma Hunsinger.
Harold Friend, as president of Wesco, signed the document securing the loan with land.
The terms of the loan were not disclosed in public records.
"I can't respond to that," says Baker. "I understand children and I understand social services, but I'm not an accountant, so I can't comment on that."
Housing for the needy
In 1994, BFA incorporated Foundation Housing Corporation, a non-profit subsidiary intended to provide "relief of the poor and distressed or underprivileged through the provision of low income housing."
FHC actually does provide some low-income housing. It used a HUD grant to build apartments for elderly poor people near a Southern Baptist church on West Fillmore Street. It also purchased a retirement community in north Phoenix.
But one inner-city neighborhood has seen its hopes dashed.
In 1995, neighbors in the Oakland University Park neighborhood (bounded by Seventh and 19th Avenues, Roosevelt and Van Buren Streets) helped FHC and other volunteers clean up trash in the area.
FHC promised to build seven low-income houses for poor people in a blighted area bordering a city park at 11th Avenue and McKinley. FHC said it would sell the houses for less than $50,000 apiece, with 100 percent financing and no interest, to qualified parties, a grant application to the City of Phoenix says.
In a neighborhood where the median annual income is $15,000, people clung to the hope that maybe they would qualify for a house.
But so far, the houses haven't been built.
The reason: In 1996, FHC had applied for a $216,000 block grant from the City of Phoenix. In 1997, the grant was denied because FHC claimed it did not have the necessary $108,000 in matching funds, says Jerome Miller, acting grants administrator for the city's Neighborhood Services Department.
With net assets of more than $1 million, FHC couldn't come up with matching funds.
"We haven't been officially notified that it's kaput," says Harold Fox, president of Oakland-University Park Neighborhood Association. "They're still working on the funding. My impression (of FHC) is that they are wonderful people but this being their first major project, they jumped into the deep end. I have a hunch that with their good intentions they've gotten in over their head."
That same year, FHC told the IRS that Crotts received compensation of $154,772 in 1996. But Crotts only worked two hours per week for Foundation Housing, according to the tax form 990. BFA says in its letter that the money Crotts received came from BFA, not FHC.
The same form shows that FHC extracted an unusually large fee for a house at 1343 West Sack Drive: $35,074 in "sales expenses" when it sold the $70,740 house to a Phoenix couple in 1996, according to tax records.
In its letter to New Times, BFA says its accountant made a mistake on the tax form, that the actual fees were $6,000.
The 1996 tax form, which was signed by FHC treasurer Donald Deardorff under penalty of perjury, was prepared by the Phoenix accounting firm Tull, Foresberg and Olson. Lynn Olson, a principal in the company, said the accounting firm had made a "mistake" about the fees and had amended FHC's tax form last week. When asked how the accounting firm could make such a large error, Olson replied: "What can I say? We made a mistake."
Rio Vista
During the decade that BFA has built up its real-estate empire, the Rio Vista mission in South Phoenix has struggled to feed the poor. Yet missionaries never expected aid from BFA, the agency specifically set up to help such good causes.
Like most of the Southern Baptist missionaries who staff the Rio Vista mission, Olivia Gonzales was called to dedicate her life to the Lord after she retired.
Now the former schoolteacher is a full-time urban missionary, an unpaid director of a down-and-out mission at 16th Street and Southern, the leader of a staff of about a dozen elderly volunteers who risk living in the violent inner city in order to feed, clothe and pray for the poor people who make their way through Rio Vista's doors.
Dedicating one's life to the Lord has its own financial challenges. Gonzales says Rio Vista mission has no budget. Rio Vista is almost as destitute as the Latino immigrants, homeless and disabled people who seek its help.
To keep the mission's doors open, Gonzales relies on donations from local Southern Baptist churches and Valley food banks. But donations from money-strapped Southern Baptist churches have declined in the past two years, Gonzales says. And donations from local food banks are also down.
The lack of donations is taking its toll. Two years ago, clients could count on receiving a box of nourishing food -- legumes, peanut butter, powdered milk, canned tuna fish and other staples -- once a month.
Today, the poor receive only four boxes of food annually from Rio Vista missionaries.
The retiree-missionaries who have to turn away the hungry are heartbroken.
"If I had a million dollars, I'd buy food for these people," says Kenneth Jackman, who lives with his wife, Jewell, in an old recreational vehicle parked on the mission grounds. Jackman ticks off the other necessities he'd buy for the poor if only he had a million bucks: utilities, rent, transportation money, toys for the children.
But Kenneth Jackman is not a millionaire, only a missionary with a willing heart. Among other duties, Jackman works in the mission's "intake room," where donated food is received and sorted. On a recent day, the only food donation comes from the U.S. Postal Service, which has dropped off about 100 advertising samples that could not be delivered. There are packets of Breath Asure, envelopes of Healthy Choice dried soup, small green bottles of Pert shampoo.
Not enough to feed Rio Vista's hungry.
A few feet away from the intake room is the Iglesia Nuevo Nacimiento -- the Church of New Birth, a clean but dilapidated chapel with folded chairs.
Pastor Jose Gonzales (no relation to Olivia) is a man who saves souls prodigiously, even though the baptismal tub in the chapel is so deteriorated that it leaks on the floor. Neither Pastor Jose nor the missionaries have been able to save enough cash to fix the tub.
God will provide, says Pastor Jose.
