The Reformation
BFA case may inspire legislative action; investors grapple with recovering their savings
Phoenix New Times, November 18, 1999
By Terry Greene Sterling
As 13,000 investors-turned-creditors of the bankrupt Baptist Foundation of Arizona try to figure out how to recover their $590 million, two state officials are researching ways to change state law to protect future investors in religious organizations.
With $640 million total liabilities and $160 million to $200 million in assets, the BFA bankruptcy appears to be the largest collapse of a religious foundation in the history of the United States. There are so many intercompany transactions that a reasonable person can't even do the logical math on the bankruptcy filings and come up with the numbers submitted in BFA's own legal pleadings. Elderly investors who entrusted their life savings to BFA are faced with financial ruin -- some have already sold their homes and moved in with adult children. Others are seeking minimum-wage jobs.
Why did authorities let the giant Ponzi scheme go on for so long?
They didn't know about it.
That's because religious financial organizations such as BFA are exempt from regulatory scrutiny in Arizona, unless they are suspected of committing fraud or otherwise violating state law. But because financial organizations are exempt from routine scrutiny, state regulators often don't learn about the fraud until long after innocent victims have been injured.
State Senator John Huppenthal and Corporation Commissioner Bill Mundell, both Republicans, say they are looking at "potential legislation" aimed at protecting investors from religious financial scams.
The duo says it also may seek to change a 1996 law sponsored by former state senator Carol Springer, currently the Arizona treasurer, that exempts corporations from filing annual financial statements with the state. The law effectively keeps members of the public from researching financial conditions of small privately held corporations -- BFA's many subsidiaries, for example.
Huppenthal says he was in favor of the Springer bill, but he may change his mind about the law in light of the BFA scandal. Mundell, a former state senator, says he had always opposed attempts to shield the public from financial information.
The duo also plans to draft "proposed legislation" that would allow state regulators more scrutiny of religious foundations. They emphasize that they will seek feedback from church representatives.
"Here's a big caveat," says Huppenthal. "I may decide after looking at this, that I don't want to do anything. . . . I may decide in the end, that the worst thing you can do is let people think we are protecting them when really it's [danger of fraud] still out there."
Any legislative remedies would be too little, too late for BFA investors, who struggle to understand a Chapter 11 bankruptcy that is as complicated as some of the Byzantine insider transactions that contributed to BFA's bankruptcy in the first place.
Attorneys whose investor clients have filed 10 separate fraud lawsuits against BFA (including two class-action lawsuits) have banded together to fight BFA's attempts to stave off litigation against those "deep pockets" who might bear some liability for BFA's financial collapse. Those "deep pockets" may include BFA's former accounting firm, Arthur Andersen LLP; BFA's former law firm, Jennings Strouss and Salmon; and Harold Friend, a former board member whose participation in multiple insider transactions is evident in the bankruptcy filings. Investors had hoped to recover some of their money from the "deep pockets" through lawsuits filed in the last three months.
In legal papers BFA enumerates why its accountant, law firm or Harold Friend should not face lawsuits at this time. The foundation says the litigation would be too distracting, and it would be costly for bankrupt BFA to provide documents to outside lawyers; BFA argues that it plans to set up a $5 million fund so it can sue other parties on behalf of investors; and that the lawsuits may prevent investors from recovering as much money as they otherwise might get from BFA. (Because BFA itself filed for bankruptcy protection, it cannot be sued until the bankruptcy is completed.)
"They are hoping to prevent suits against Arthur Andersen and their former lawyers," says Phoenix attorney Richard Himelrick, who has teamed up with other lawyers to oppose BFA's efforts to freeze their lawsuits.
"It slows down whole process of getting investors money," he says. "There is a lot of hypocrisy; BFA is so xenophobic in terms of anyone else participating in the process.
"Every indication I'm getting is that Arthur Andersen engaged in misconduct and should be sued. Yet BFA objected to our subpoenas of Andersen. They are still trying to control things. It's the same old secretiveness that we fought all along."
Bankruptcy Judge George Nielsen will hold a hearing on the proposed moratorium on lawsuits on December 17.
Four days later, on December 21 at 2 p.m., the judge plans on holding a meeting of BFA's creditors, including investors.
The judge must decide whether to accept BFA's complex plan to pay back investors some of their money.
In all, four related companies -- BFA, ALO, Arizona Southern Baptist New Church Ventures, and EVIG -- filed for bankruptcy on November 9. These four companies have about 150 subsidiaries, but only about 90 subsidiaries filed for bankruptcy. Nevertheless, according to BFA spokesman Lew Phelps, the nonbankrupt subsidiaries are listed as "assets" that would be used to pay off investors.
BFA has come up with a complicated plan to pay back some money to investors. It offers investors two choices: to "cash-out" for 20 cents on the dollar (up to an aggregate cap of $40 million) or to accept stock in a new company that will hold BFA's assets. They could also choose a combination of both.
If the judge approves the partial payback, investors will be asked to vote on the options in ballots that are expected to be mailed by the bankruptcy court early next year.
In Arizona some investors have organized a revolt, saying they can't trust any plan BFA puts forward.
In two separate meetings held last week at Southern Baptist churches, investors vowed to mark "NO" to both options on their ballots and push for a swift Chapter 7 bankruptcy plan, which would involve immediate liquidation of assets. They then vowed to pursue the "deep pockets" in Arizona courts. (Rebel investors even have a Web site: http://homepages.msn.com/TimesSquare/tr7fan/page5.html)
"Investors are starting to get organized," says Dee Griebel, a senior vice president of Prudential Securities and a longtime critic of BFA's investment practices.
"The generic conclusion at the meetings was that money had been stolen, and you can't let the thieves who stole it the first time stay in control the second time, and that both BFA proposals must be voted down," she says.
BFA is fighting hard to regain investors' trust.
Spokesman Lew Phelps says "every single person" involved in BFA's efforts to pay back investors, including former board members Joe Panter and Marty Ryan, "was very carefully screened" by a "leading white-collar criminal attorney" and BFA's new accountants and lawyers. He says no one in power at BFA today had any part in the schemes that lead to its demise.
In a November 9 letter to investors, BFA "acting" executives Joe Panter, Mark Roberts and Mark Dickerson wrote: "We are writing in an effort to begin to face some of the disappointment and loss that many of you are experiencing . . ."
The letter goes on to express sorrow and to explain, once again, the bankruptcy plan.
Ellen McCullar, 70, a Jacksonville, Florida, widow, says she has been facing "disappointment and loss" ever since BFA froze more than $100,000 she had invested for herself and her grandchildren.
"I may have to sell my house, and I am seriously thinking of going back to work," says McCullar, who owned an air-vent cleaning business.
"But I will probably get only minimum wage," she says. "I am not up to date with technology [computers], and I don't think anyone wants to hire old people anymore.
"What breaks my heart most is, I thought after I was dead and gone, my grandchildren's investments would mature at BFA, and my grandchildren would say: 'Boy, my grandmother really cared about me.'"
