PHOENIX (BP)–A state government agency in Arizona filed a complaint Sept. 27 against Arthur Andersen LLP seeking restitution for at least some of the funds lost by Baptist Foundation of Arizona investors.
The complaint filed by the Arizona Corporation Commission’s Securities Division alleges “Arthur Andersen either knew or should have known that its audit opinions and the financial statements of BFA were false and misleading.” Because the audits misled the BFA Board of Directors, who continued to offer securities to the public based on the audits, Arthur Andersen “facilitated the perpetuation of the financial fraud upon investors,” the complaint states.
In response, David Scullin, Arthur Andersen’s managing partner for Arizona, issued a statement saying the firm believes it acted appropriately and followed professional guidelines.
On Oct. 3, the accounting firm formally requested a hearing before the Corporation Commission to answer the charges. A date for the hearing — which must begin within 60 days, “unless otherwise provided by law, stipulated by the parties, or ordered by the Commission” — has not been set.
The Securities Division has requested an unspecified amount for restitution and administrative penalties. However, the complaint points out that following the favorable 1996 audit, BFA and its affiliates raised more than $200 million of new investor money.
The complaint alleges that Arthur Andersen ignored an “increasing number of significant warning signs” from 1991-94 that BFA senior management was “perpetuating a financial fraud.” The complaint lists “senior management” as William P. Crotts, BFA president; Donald D. Deardoff, senior vice president and treasurer/controller; and Thomas D. Grabinski, senior vice president, general counsel and secretary.
The complaint further alleges that during the 1996 audit, a former BFA employee provided to the lead audit manager “a detailed road map of the fraud,” which Arthur Andersen did not actively seek to confirm. In addition, during and after its 1997 audit, Arthur Andersen purposely modified its audit work papers or failed to include information that displayed knowledge of the fraud, the complaint continues.
Arthur Andersen’s audits were “seriously flawed” as far back as 1991, the complaint alleges. At that time, the accounting firm recognized that while BFA had operational losses most of the year, BFA ended the year with net income because of transactions with a handful of individuals and related entities.
During a real estate market downturn in the late ’80s and early ’90s, the complaint alleges, “Arthur Andersen never questioned, or ignored, how BFA’s real estate was unaffected … and instead appreciated in value.” The accounting firm “consistently relied on Senior Management’s representations to support the value of real estate and collateral for Notes Receivable when it should have been requiring third party verification,” the complaint states.
Meanwhile, in the BFA bankruptcy proceedings, investors have been mailed ballots to vote for or against the liquidating plan of reorganization. Along with the ballots, investors received the liquidating plan, a disclosure statement and letters from the Unsecured Creditors’ Committee and Collateralized Investors’ Committee, which both recommend the plan. Ballots must be cast by Nov. 1.
Confirmation hearings on the plan and a fairness hearing on the settlement between secured and unsecured investors are scheduled to begin Nov. 14.
In other news, an auction for Pleasant Point, BFA’s largest real estate holding, has been set for Oct. 30. Shea Homes has offered an opening bid of $85 million. At least three potential bidders have expressed an active interest in the auction.
To download the Securities Division’s complaint against Arthur Andersen, log on to www.ccsd.cc.state.az.us/hot_topics/bfa.asp and click on “Arthur Andersen L.L.P. Notice of Opportunity for Hearing.”