PHOENIX (BP)–For a second time, Arthur Anderson has reached a $217 million settlement with investors who lost $570 million in the Baptist Foundation of Arizona’s 1999 collapse.
The agreement was announced May 6, on the sixth day of a civil trial against Andersen in a state court in Phoenix.
After attorneys’ fees, 13,000 former BFA investors are expected to recoup about $175 million in losses.
Andersen provided an $11.32 million check to the Arizona attorney general May 6; the agreement calls for an insurance company owned by Andersen and its worldwide affiliates to make a $205.68 million payment by June 4.
If, however, the insurance obligation cannot be met, Andersen itself agreed to a non-appealable payment schedule of $10 million on June 14, June 15, Aug. 15, Sept. 13 and Oct. 15 and $155.68 million on Oct. 25.
The lead attorney for the investors, Sean Coffey, said the worst-case scenario for former BFA investors would be a bankruptcy filing by Andersen spurred by its involvement in energy giant Enron’s collapse in Houston and federal obstruction of justice charges filed against the firm, The Arizona Republic reported.
Coffey, in a statement issued through Business Wire, said, “Getting the settlement back on track, with significant added protections for the investors, is a far better result than we could have achieved at trial. Although we were delighted with how well our evidence has been going at trial, the fact is that even in the `best case’ scenario a judgment would be months away. This settlement represents as firm and positive an outcome as we could hope for given Andersen’s situation, one that is better than we could achieve if we were to prevail at trial, and we have that result now.”
The Andersen settlement will provide BFA investors 30 cents on each dollar lost, The Arizona Republic reported; it is possible investors ultimately could recoup 72 cents on the dollar from the Andersen settlement as well as sales of BFA assets and a settlement with the BFA’s former law firm.
The settlement was depicted as a strengthened version of a March 1 settlement that Andersen canceled March 28. Andersen at the time said its insurance company, Bermuda-based Professional Services Insurance Company Ltd., had refused to cover the agreement. The delay in reaching the second settlement cost investors an additional $14 million in attorneys fees after the case went to trial.
The $217 million 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 $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 & loan crisis.
The agreement, in addition to ending the civil trial in Maricopa County Superior Court, also closes a class action suit against Andersen by former BFA investors, an Arizona Corporation Commission civil action and Arizona Board of Accountancy disciplinary proceedings against Andersen and three of its employees.
Andersen, in a May 6 statement, said it agreed to the settlement “without admitting or denying any fault, in a way consistent with our firm’s plan to resolve this matter for the benefit of all parties.”
“It is important to underscore that investors were the victims of a massive fraud perpetrated by Baptist Foundation of Arizona leadership,” Andersen stated. “In addition to the controller, Donald Deardoff and two associates of BFA who have already plead guilty to criminal offenses, five members of BFA’s senior management, including William Crotts, the President and Chief Executive Officer, and the General Counsel, Thomas Grabinski have been indicted on multiple counts of criminal fraud. There is clear evidence that all members of BFA’s senior management and majority of the Board of Director’s engaged in a conspiracy of silence to deny essential information about BFA’s financial condition to the Arthur Andersen auditors.”
The Andersen statement acknowledged, however, “We believe this resolution is fair and reasonable to investors and to our firm and recognizes the responsibility of a number of parties in failing to stop this tragedy.”
At trial, according to Business Wire, BFA attorneys were alleging that Andersen had breached its fiduciary duties after various whistleblowers had alerted Andersen to grave BFA irregularities. A weekly Phoenix newspaper, New Times, for example, published exposes about the BFA fraud in early 1998, yet Andersen subsequently signed off on another of its audits of the foundation.
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.
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.”