PHOENIX (BP)–The Arizona Southern Baptist Convention has filed an objection to the proposed settlement of court cases related to Arthur Andersen’s auditing of the former Baptist Foundation of Arizona. While favoring the May 6 settlement in principle, the convention’s attorneys have asked for a modification of the terms so that important legal rights of the convention will not be abused.
A joint hearing was held July 12, 2002, before both the bankruptcy court judge and the state court judge who preside over the bankruptcy and state court cases involving claims made by the BFA against Arthur Andersen. The purpose of the hearing, in part, was to have the bankruptcy court tentatively approve the settlement that had been negotiated between the BFA Liquidating Trust and Arthur Andersen.
Legal counsel for the Arizona Southern Baptist Convention appeared at the hearing on behalf of the convention and let the respective courts know that the convention was in favor of the settlement agreement but that there was a provision in the agreement that could seriously harm the convention if left without some modification.
Jeff Schneck, legal counsel for the Arizona convention, indicated that the reason for this harm is simple, although there are complex areas of the law involved. Simply stated, the settlement agreement would prevent the convention from bringing a claim against Arthur Andersen if someone sues the convention.
“The Liquidation Trust continues to threaten to sue the convention, contending the convention was responsible for the losses suffered by the investors,” Schneck said. “Of course, such a contention is ironic in light of the settlement of the litigation with Arthur Andersen wherein the Liquidation Trust contended that the losses were suffered because of inaccurate financial reporting done by Arthur Andersen.”
The convention, also a substantial investor in BFA, was relying upon the financial reporting prepared by Arthur Andersen just like other investors were, Schneck noted.
“The Arizona Southern Baptist Convention had no control over any actions taken or decisions made by the BFA,” Schneck said. The operational decisions of BFA were made by its officers and directors. The Convention merely received the BFA’s audited financial reports as prepared by Arthur Andersen.
“Since the Liquidation Trust continues to threaten litigation against the convention, the convention must anticipate that such litigation will in fact be forthcoming,” Schneck said.
“The settlement agreement, as presently worded, goes too far,” he said. “The settlement seeks to prevent the convention from asking the court, in any future litigation against the convention, to require Arthur Andersen to reimburse the convention or to require Arthur Andersen to pay its share of any judgment against the convention. Such provision is not supported by the law.”
Because of the situation that the BFA Liquidation Trust has put the convention in, attorneys for the convention felt that it was necessary to point this out to the bankruptcy court.
“In general, the convention is not opposed to the Arthur Andersen settlement,” Schneck said. “However, the convention needed to make the judge aware of the rights that would be unlawfully taken from the convention if the settlement was approved by the bankruptcy court in its present form.”
The bankruptcy court judge acknowledged the convention’s concerns and made it clear that his tentative approval of the settlement agreement should not be interpreted as an acceptance of the portion to which the convention had objected.
Presently it appears that the judge presiding over the state court litigation will make the decision regarding the rights of the convention when he decides on the issues related to the settlement agreement.
“Hopefully the BFA Liquidating Trust and Arthur Andersen will reconsider and remove the portion of the settlement agreement that unlawfully takes away the rights of the convention before the next hearing … in September,” Schneck said.
Andersen completed its $217 million payment June 5 in the settlement with 13,000 former investors of the foundation who lost $570 million in the its 1999 collapse.
After attorneys’ fees, former BFA investors are expected to recoup about $175 million in losses from the Andersen settlement. According to The Arizona Republic, investors possibly could recoup 72 cents on the dollar from the Andersen settlement as well as sales of BFA assets and a $21 million settlement with the BFA’s former law firm May 14.
Andersen provided an $11.32 million check to the Arizona attorney general at the May 6 settlement. The final payment of $205.68 million avoided a worst-case scenario for BFA investors of a possible bankruptcy filing by Andersen spurred by its involvement in energy giant Enron’s collapse in Houston.
The BFA case involves the largest Chapter 11 bankruptcy filing by a nonprofit organization in U.S. history and the $217 million settlement is approximately twice the largest malpractice court settlement previously agreed to by Chicago-based Arthur Andersen. The settlement also is the second largest ever paid by a “Big Five” accounting firm to settle litigation not associated with the savings and loan crisis.
The Baptist Foundation of Arizona was founded in 1948 to raise money for Southern Baptist causes. The foundation and its subsidiaries and affiliates 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.
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. [S]uits 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.”