The giant accounting firm Arthur Andersen made headlines for covering up the Enron corporation's financial house of cards. But the Baptists, not Enron, may bring down the Big Five firm.
Investors in the Baptist Foundation of Arizona, which went belly-up in 1999 in the largest nonprofit bankruptcy in history, are suing Arthur Andersen, the foundation's auditors, for covering up the fact that the foundation was a fraud. Some 13,000 investors lost $570 million, mainly elderly Baptists, some of whom lost their entire life's savings.
The trial, which began on April 29 and is expected to last for three months, may cost the accounting firm hundreds of millions of dollars, which may finish it off before it has to answer charges that it did something very similar for Enron.
The Baptist Foundation of Arizona was the largest of several "Christian" financial enterprises that promised church members and ministry groups big returns on their money-which would supposedly be used for church work-only to collapse as an elaborate scam.
The BFA began as a legitimate organization in 1948, founded by the Arizona Southern Baptist Convention, one of many similar denominational foundations in which churches and members of the denomination can invest their money, which can then be used to build new churches and other worthy projects.
In the 1980s, the BFA started investing heavily in Arizona real estate. When property values plummeted in 1988, the BFA should have posted its losses. Instead, it sold the assets for far more than they were worth to dummy corporations, controlled by BFA executives, which paid for them with IOUs.
This meant that, on paper, the BFA had plenty of money and assets. The losses were transferred to these phony corporations. In reality, BFA was broke. (This is essentially what it appears Enron did.)
But the BFA had to pay out its investors' dividends and withdrawals. The organization had to secure new investments to pay off its ongoing obligations. Since those new investments, instead of going to long-term assets, were long gone, BFA had to attract still more investments to pay them off.
This is what is termed a "Ponzi scheme," a common but illegal shell-game, which robs Peter to pay Paul, then robs Andrew to pay Peter, until they eventually run out of apostles.
As BFA was falling deeper into its hole, executives had to intensify their marketing to draw in new clients, preying on Baptists' denominational loyalty, even though they knew that any money these good folks could be persuaded to invest would just go down the drain. At one point, BFA encouraged elderly Baptists to borrow out the equity of their homes and deposit it with the foundation.
In the meantime, whistleblowers within the foundation saw what was happening and contacted BFA's auditors, the Arthur Andersen company. According to a series of articles by Jonathan Weil in The Wall Street Journal, from which this information is taken, an honest accountant who worked for the foundation told what she knew to the auditors in 1996. Nevertheless, in 1996, Arthur Andersen gave the foundation a clean bill of health.
Then in 1997, more people who caught on to the Ponzi scheme-including investors' lawyers and CPAs-told the auditors what was going on. Again, Arthur Andersen certified the foundation's books.
In 1998, the scam broke out into the media. The Arizona New Times reported a series of stories on fraud and corruption inside BFA, naming names and giving evidence. Amazingly, Arthur Andersen did nothing. Again, that year the foundation received another clean audit.
In 1999, the whole house of cards came tumbling down. Not only was the Baptist Foundation of Arizona the biggest bankruptcy of a nonprofit in history-to the tune of losing $570 million of church members' hard-earned money-but the directors were indicted for theft, fraud, and racketeering.
The Arthur Andersen principals, as in the Enron fiasco, took the Fifth Amendment. Faced with a civil lawsuit by representatives of bilked investors, the firm at first agreed to settle for $217 million. Regrettably, its insurance company-also owned by Arthur Andersen, in that same habit of creating companies to do business with itself-was unable to pay. Now, it is in court facing a judgment of hundreds of millions more in compensatory and punitive damages.
Its reputation in shreds from the Enron debacle, its clients fleeing in droves, and its best CPAs escaping like rats from a sinking ship, Arthur Andersen may not be able to survive if it loses this case. But at least 13,000 Baptists would get some of their money back.