EDITORS’ NOTE: The following story updates the 8/10/99 (BP) story, “Arizona Baptist Foundation executives resign; investors sent ‘painful’ letter.
PHOENIX (BP)–The Arizona Corporation Commission issued a cease-and-desist order Aug. 10 to the Baptist Foundation of Arizona, accepting the proposal of the BFA to discontinue immediately the offering and selling of its investment products. According to the order, the foundation or its affiliates sold securities from Arizona through misrepresentations and omissions of fact and engaged in business practices in violation of state law.
BFA, an agency of the Arizona Southern Baptist Convention, told investors in a recent letter that it has been under investigation by the state regulatory commission and the Arizona Attorney General’s office for the past year. The three top executives of BFA also voluntarily stepped down from their responsibilities.
All three, William P. Crotts, president, Tom Grabinski, legal counsel, and Don Deardoff, controller, are on paid leave of absence, Baptist Press was told Aug. 11.
BFA officials were told in a July 14 meeting with regulatory officials that BFA had not provided its clients with information that adequately disclosed the foundation’s financial condition and, as a result, had violated the Arizona Securities Act. Focus of the investigation has been the BFA and its subsidiary/affiliated corporations: Arizona Southern Baptist New Church Ventures and Christian Financial Partners, Inc.
A spokesman for the securities division of the commission told Baptist Press the commissioners were pleased with the response of the BFA directors, including the proposed action submitted the morning of the commission meeting and approved by its three members. The commission will monitor the progress of the BFA board, the spokesman said. Options still open to state officials include criminal prosecution of individuals if evidenced by the ongoing probe, he said.
An Aug. 10 news release by the regulatory commission said the BFA and its two related corporations have sold more than $483 million in investment products, in the form of various types of promissory notes, to more than 13,000 investors. As well as selling its own investments, BFA is the custodian of IRA investments sold by the other two corporations.
The three corporations consented to the cease-and-desist order “without admitting or denying the findings of fact and conclusions of law,” the commission’s news release said.
The probe has revealed, the commission said, “the true financial condition of [the three corporations] has not been disclosed to the investing public.” The commission concluded securities were offered and sold “within or from Arizona through material misrepresentations and omissions of material fact.”
In the Aug. 10 commission hearing in Phoenix, about 50 investors packed the room and asked the commission to quickly conclude its investigation so they could regain access to their money, according to an Aug. 11 story in the Arizona Republic, a Phoenix daily newspaper. Foundation funds have been frozen as a result of the probe, with only IRA and interest payments being released.
Investors questioned the foundation’s credibility and ability to restructure the company, the newspaper reported. One, a certified public accountant and a friend to some investors, said he does not trust BFA officials and that the problem could have been stopped a year ago if anyone on the BFA board of directors had cared, the news story said.
The commission said investors could expect to begin receiving reports every 45 days outlining steps the foundation management is taking to shore up the company. Investigators were said to be sifting through 2 million documents.
Following the resignations of the three executives, the board created an “Executive Oversight Committee” of five people, including board chairman Berry Norwood, pastor of First Southern Baptist Church, Scottsdale; a retired state convention executive director, Dan Stringer of Phoenix; and three local businessmen. That committee is responsible for “overseeing and approving major initiatives.”
A second committee will provide day-to-day management of all aspects of the business,” directors said in their letter to investors.
“This was a soul-wrenching letter for us to write,” said Norwood of the Aug. 7 letter. “Our investors are also our friends, our family, BFA employees, board members — we are all affected. We pray for a successful resolution to this situation.”
Other action by the board included: no insiders, including board members and their families, should withdraw any funds from the three corporations; no checks “from our clients” would be cashed until the board knows more about the state investigation; a Phoenix law firm is being retained for counsel with the state investigation; and the accounting firm of Ernst & Young (not the BFA’s regular accounting firm) has been hired for an audit.
Directors said interest payments and IRA distributions will continue but cautioned investors that “this could change after further evaluation of the situation.”
In the three-page Aug. 7 letter, directors also cautioned “if we fail to satisfy the state, which is currently working closely with our committees and counsel in an attempt to protect all investors, the state may pursue a receivership. Also, if we cannot protect BFA and its constituency under current financial conditions, we may have to pursue restructuring alternatives, such as bankruptcy.”
The letter added “it does not appear either condition is imminent, but we know that you would not want us to gloss over the reality of this situation.”
Also, directors noted that “the current BFA subsidiary and affiliate board members and BFA’s employees have over $12.5 million invested” with BFA and its two subsidiary corporations.
“Likewise, our churches have invested approximately $22 million in our products,” directors said in the letter.
The BFA was formed by the Arizona Southern Baptist Convention to raise resources for Southern Baptist causes. Its primary means of fund-raising, according to a spokesperson, is by conducting two lines of business — estate planning and financial services — to individuals and organizations. The current problems affect only the financial services business, Lorri Paetz, director of public relations and communications for BFA, told Baptist Press.
BFA is known as one of the few state convention foundations which allows individual investors as well as investments by local churches.
What part the Arizona Southern Baptist Convention, which created BFA 50 years ago and elects the 21-member board of directors, will play in the BFA dilemma is unclear at this point, according to SBC financial observers.
BFA, known in Southern Baptist financial circles as very aggressive in its approach to potential investors, was first funded by the Arizona convention in 1962. William Crotts, a former attorney, has been president since 1982, succeeding his father, Glen Crotts, former pastor of First Southern Baptist Church, Tucson, who was the agency’s first president.
The state’s investigation, begun in August of last year, followed an earlier lengthy report in a Phoenix-area weekly newspaper which charged the foundation with seriously overestimating the value of some of its investment assets, especially property, and the close connections between foundation employees and property owners.
James R. Smith, president of the Missouri Baptist Foundation and program chairman of a loose-knit fellowship of Baptist state foundation executives, said he and other state executives are “very grieved” with the events in Arizona. Smith emphasized that each state convention foundation is separate and independent of each other, and any allegations coming from the Arizona foundation problems should not have any bearing on any other state foundation.
As an example, the Missouri foundation “is not an investment company,” Smith said, and “we do not offer investments to individuals.”
At the Southern Baptist Convention level, Hollis E. Johnson, president of the Southern Baptist Foundation, said the SBF “is not and never has been in the business of issuing securities.”
“The assets of all accounts in the [Southern Baptist] Foundation are invested in bonds that are A rated or better and stocks that are included in the S&P’s 500 Index except for those offensive to Southern Baptists,” Johnson said. “We are grieved by the recent events in Arizona and pray for a quick and equitable resolution.”