PHOENIX (BP)–The Enron collapse has reared its head in an Arthur Andersen announcement that the accounting firm is backing out of a $217 million settlement with victims of the Baptist Foundation of Arizona’s 1999 collapse.
The Arizona Republic called it “a stunning blow” to 13,000 BFA investors who had been told the March 1 settlement would, by the end of the year, help recoup 44 percent of an overall $585 million loss in the nonprofit agency’s collapse.
The BFA Liquidation Trust, which is seeking to recover the investors’ funds, immediately took action. In a March 29 statement, the day after receiving notice from Andersen, the trust said “one of the first steps will be to ask the mediator who presided over the settlement negotiations, retired federal judge Layn Phillips, to rule that Andersen has breached the agreement and to order Andersen to pay the $217 million as promised.”
Also on March 29, the trust gained a judge’s order to reschedule a key trial for April 29 – “the earliest date permitted by law,” the trust’s statement noted. “Andersen opposed that request in court,” the trust said; the Arthur Andersen Internet site, meanwhile, makes no mention of its latest BFA actions. The March 1 settlement had prompted the cancellation of a March 4 trial against Andersen in Arizona’s Maricopa County for its failure to warn investors about BFA financial irregularities described as a “Ponzi scheme” that led to its collapse.
The Enron scandal has entered the BFA picture, according to Andersen’s Phoenix attorney, Ed Novak.
The Arizona Republic reported that Novak had said Andersen’s circumstances have changed significantly since it was indicted March 14 on federal charges involving its auditing of Houston-based energy trader Enron.
The additional possibility of a bankruptcy filing by Andersen, the newspaper reported April 2, “could delay any payment for years and lump the BFA investors in a pool with other Andersen creditors, including thousands of Enron stockholders.”
Andersen’s effort to back out of the BFA settlement focuses on its wholly owned Professional Services Insurance Co. in Hamilton, Bermuda. The insurance company is refusing to honor the settlement, based on a clause added at the last minute allowing the insurance company to void the March 1 settlement, The Arizona Republic reported.
The clause was depicted as a housekeeping measure, Arizona Attorney General Janet Napolitano said, according to the paper, which quoted her as declaring, “Arthur Andersen lied.”
Napolitano, according to a news release from her office, will be seeking “severe penalties against Andersen LLP (formerly Arthur Andersen) and others.”
“This is an absolute outrage,” Napolitano said. “… Andersen and its representatives pretended to negotiate in good faith, but in fact never had any intention of making good on their part of the settlement. Here we see that Andersen chose to victimize BFA’s victims yet again.”
Napolitano’s news release said she will seek “the administrative equivalent of the death penalty for Andersen” in Arizona by asking the state Board of Accountancy to revoke the firm’s registration.
The news release said the attorney general also will:
— seek “the sequestering of insurance proceeds and other Andersen assets to insure money is available for BFA victims.”
— seek an expedited trial in the BFA lawsuit and a declaration by the BFA of Andersen’s actions as having been “in bad faith.”
— send a letter “to victims outlining the legal steps the state will take.”
— seek “the revocation of the licenses of the Certified Public Accountants involved in the BFA at Andersen.”
Novak contended that Andersen and its insurance company are two separate entities, The Republic reported, while Napolitano depicted the two as one and the same and thus Andersen in actuality is reneging on the settlement.
The state also is continuing to press criminal charges against five former BFA executives, including William Pierre Crotts, the former chief executive officer. Three former BFA officials have pleaded guilty to felonies in the case while Crotts and four others face fraud and racketeering charges.
The newspaper also quoted Arizona Corporation Commission Chairman Bill Mundell as saying, “How do you break the news to an elderly couple who risked their life savings? The only thing I can confidently tell investors is this: The commission will pursue every possible avenue to ensure that Arthur Andersen pays for their egregious errors.”
The size of the settlement, The Wall Street Journal had reported March 4, was “remarkably large compared with the losses suffered by investors.”
The BFA case involves the largest Chapter 11 bankruptcy filing by a nonprofit organization in U.S. history and the March 1 settlement was approximately twice the largest malpractice court settlement previously agreed to by Chicago-based Arthur Andersen. The settlement also would have been the second largest ever paid by a “Big Five” accounting firm to settle litigation not associated with the savings & loan crisis.
Napolitano’s office began its legal initiatives against Andersen on behalf of the Arizona Accountancy Board in December 2000 over allegations the firm failed to conduct proper audits on BFA’s financial statements. Napolitano and the Arizona Corporation Commission then filed a civil lawsuit against Andersen in January 2001, seeking civil remedies for violations of the Arizona Securities and Consumer Fraud Act.
Founded in 1948 to raise money for Southern Baptist causes, BFA and its subsidiaries and affiliates had marketed securities throughout the United States as retirement vehicles for investors and served as a custodian for tax-deferred Individual Retirement Accounts. At the time BFA filed for bankruptcy in November 1999, it had total liabilities of approximately $650 million and listed assets of approximately $290 million. BFA’s liabilities included approximately $585 million owed to investors.
As recounted by The Wall Street Journal March 4, many of the foundation’s investors were elderly churchgoers “attracted by the foundation’s offer of above-market returns on promissory notes and other investment products, and by its mission of using earnings for good works, such as building churches and nursing homes for the poor. The suits against Andersen alleged that the foundation had become a Ponzi scheme, needing to raise tens of millions of dollars to pay the high returns it had promised to earlier investors.”
The Journal noted that, according to the lawsuits, a key reason why the scheme lasted “as long as it did … was that Andersen continued to certify the foundation’s financial statements and dismissed multiple warnings by individuals that the foundation was defrauding investors.”