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We are very prudent in our investments and closely watch our expenditures. All this adds up to a low-cost operation which provides higher yields to you.
-- From Answers to Your Questions About Investing with BFA, a Baptist Foundation of Arizona brochure
On November 5, the Baptist Foundation of Arizona announced that it would file for Chapter 11 bankruptcy in federal court in Phoenix this week.
Once the bankruptcy proceedings are over, BFA will no longer exist, according to a November 5 letter BFA sent to 13,000 investors.
It will be replaced by a new Southern Baptist foundation expressly prohibited from borrowing from investors. The November 5 letter proposes to create a new for-profit company to try to recoup some investor losses. It also announced plans for a $5 million trust fund to underwrite proposed lawsuits against "certain professional firms and third parties previously employed or doing business with BFA" in an attempt to recover more money for the investors.
A BFA spokesman says the foundation has $640 million in liabilities -- including $590 million owed to investors -- and assets of between $160 million and $200 million.
To make matters worse, most of BFA's assets are actually illiquid real estate, and much of the real estate is tied to insider deals in which BFA officers funneled millions of dollars of investors' money through a maze of companies to privately held corporations associated with a handful of insiders, including former BFA board members Jalma Hunsinger, Dwain Hoover and Harold Friend.
While BFA purported to be a sophisticated, profitable enterprise that supported Southern Baptist and Christian ministries, its investment strategy turned out to be a Ponzi scheme reliant on frantic, perpetual recruitment of new investors to pay interest on an avalanche of debt.
BFA's downfall is now attributed to the management of former president William P. Crotts, a crony of insiders Friend, Hoover and Hunsinger. Crotts operated with carte blanche approval of the board of directors, which rubber-stamped the insider real estate deals. The deals were risky and often didn't pay off, and were made even less profitable by the huge fees exacted by insiders.
To feed BFA's mounting debt, new investors were vigorously recruited anywhere BFA could find them -- in Bible-study groups, in nursing homes, on the Internet. BFA hid its huge losses in so-called "bad banks," insider companies that the investors didn't even know about.
When the Arizona Corporation Commission ordered BFA to stop borrowing money from investors in August, the flow of money was cut off and the Ponzi collapsed. The Corporation Commission is assisting the Arizona Attorney General's Office in an ongoing criminal investigation of BFA and certain insiders. The state is also investigating Arthur Andersen LLP, the Big Five accounting firm that prepared BFA's financial statements that were sent out to investors.
It is illegal to hide losses from investors.
In a November 5 letter to investors, BFA acknowledges that it did just that. It says it "effectively shielded" money-losing real estate assets "from scrutiny by transferring them to affiliated companies in a complicated series of transactions."
BFA also acknowledged that "numerous transactions with certain third parties [insiders] were more costly to BFA than terms that could have been obtained in arms-length transactions."
Once it files for bankruptcy, BFA proposes to pay investors in one of two ways. Both are subject to final approval by investors and the bankruptcy judge. Both are bleak:
The Cash-Out Option: BFA will place $40 million in a pool to pay investors 20 cents for each dollar invested. The money will be paid upon completion of the bankruptcy, which BFA predicts will be in "early 2000."
The New Company Option: Investors trade in their now-worthless promissory notes from BFA for stock worth about 40 percent to 50 percent of their original investments in a "New Company" to be formed to take over BFA's assets. It will have eight subsidiaries, will be regulated by the Securities and Exchange Commission, will be publicly traded. After two years, it will pay a "dividend" of 6 percent.
In the November 5 letter, BFA announced the formation of a $5 million "litigation trust" to pay unnamed attorneys to sue "professional organizations" that once served BFA -- most likely Arthur Andersen LLP, BFA's former accountants, and Jennings, Strouss and Salmon, BFA's former law firm. The trust might also sue unnamed former employees and insiders who did business with the foundation.
The purpose of the litigation trust, according to the letter: to recover more money for investors.
BFA has, in the meantime, protected itselffrom two class-action investor lawsuits and several individual fraud lawsuits already filed in Maricopa County Superior Court, by retreating beneath the cloak of bankruptcy. Once BFA declares bankruptcy, the lawsuits are legally frozen, or stayed, until the termination of the bankruptcy.
And since BFA intends to dissolve itself during the bankruptcy, no entity will remain to be sued.
Of course, the investors who have already filed lawsuits might also ultimately sue the same defendants that the litigation trust might sue.
So litigious investors must choose between the class actions and the litigation trust.
"We will go forward until we find out more about litigation trust," says Phoenix attorney Lawrence Wilk, who represents a Tucson investor in a class-action lawsuit.