News Articles

Former president, legal counsel of Ariz. foundation on trial

PHOENIX (BP)–Nearly a decade after financial irregularities first surfaced, the Baptist Foundation of Arizona’s former president and legal counsel are on trial for fraud and theft.

However, the trial of former BFA President William Crotts and legal counsel Thomas Grabinski that began in late September may last through next March, according to news reports.

Crotts and Grabinski are charged with three counts of fraud, 27 counts of theft and two counts of illegally conducting an enterprise in connection with the foundation’s 1999 collapse. The BFA’s board of directors terminated their employment in August of that year, a month after the state’s corporation commission accused the foundation of violating the Arizona Securities Act.

Facing obligations of $590 million to nearly 13,000 investors, the foundation filed for bankruptcy in November 1999, the largest Chapter 11 filing by a nonprofit organization in U.S. history. Directors later formed a new corporation to sell off assets, repay debts and cease operations.

In addition, the accounting firm of Arthur Andersen completed a $217 million payment as part of its settlement with former BFA investors in May 2002.

It was the second-largest settlement ever paid by a “Big Five” accounting firm to settle litigation not associated with the savings and loan crisis.

The foundation’s problems go back to April 1996, when then-BFA attorney L. Kyle Trausch resigned, warning officials they had placed themselves in a position of civil and criminal liability.

However, it wasn’t until Aug. 7, 1999, that the foundation sent a letter to all investors revealing it had placed a temporary freeze on accepting new investments or redeeming old ones. Three days later the state ordered the foundation to stop violating Arizona’s securities act.

Although former BFA treasurer Donald Deardoff and two other officers pleaded guilty in May 2001 and agreed to cooperate in prosecutions of others, Crotts and Grabinski proceeded to trial.

By the time it ends, the state will have spent more than $1.6 million on the trial, just for experts, accountants and outside attorneys, according to a report in The Arizona Republic.

“We’ve been stretched to the utmost to be competitive in court with some very sophisticated trial procedures,” Attorney General Terry Goddard told the newspaper. “I think you’ll find on both sides: This is one of the most exhaustively researched cases.”

It is also a case that Crotts and Grabinski’s attorney plan to press to the limit, the Republic reported. During opening statements in September, they told the jury that neither defendant appeared to personally profit from the alleged fraud.

“If you … follow the money, the people who benefited most were the accountants, the professionals and the people who bought [the foundation’s] property,” Crotts’ attorney, Michael Piccaretta, said.

The Republic reported that Grabinski’s attorney, Daryl Williams, blamed the crisis on six disgruntled employees who tried to persuade Crotts that he should do business differently. When Crotts refused, Williams said they took their complaints to a reporter from the Phoenix New Times, the newspaper that first broke the story.

“They continue to tell it with missionary zeal, looking for converts,” Williams was quoted as saying. “Mr. Grabinksi did not get one penny. He lost his life savings. He was a victim, too, of the close-down of BFA.”

Former BFA investors remained unconvinced. The Republic noted that retirees Earnest and Betty Campbell, for example, have recovered only a third of the $650,000 they had invested with the foundation.

“We want the truth to come out so we can have closure,” Betty Campbell told the newspaper.

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.

The BFA was a separate corporate subsidiary of the Arizona Southern Baptist Convention, and as such, BFA officers and directors were empowered to make all of the subsidiary’s operational decisions. As is usually the case with subsidiaries, all of the foundation’s financial reports, audited by Arthur Anderson, were sent to its parent corporation, the ASBC, which had itself invested, losing $1.2 million in the foundation’s collapse. The ASBC waived its claim to its loss in the bankruptcy in order to increase the recovery of losses by other investors.

The ASBC, though having no formal legal relationship with the Southern Baptist Convention, is a voluntary affiliate, being supportive of the national convention’s purposes and works.

As recounted by The Wall Street Journal in 2002, 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 Journal recounted that 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.”

    About the Author

  • Staff