By Amy Silverman
By Olivia LaVecchia
By Monica Alonzo and Stephen Lemons
By Chris Parker
By Michael Lacey
By Weston Phippen
Many of the 13,000 investors left penniless in the contrail of the Baptist Foundation of Arizona's $640 million bankruptcy have long blamed Arthur Andersen LLP, a major multinational accounting firm with offices in Phoenix, for their troubles.
If the accounting firm had told the truth and had not given BFA falsely favorable audits, the investors claim in court documents, the foundation's mushrooming Ponzi scheme would not have gone undetected for 10 years.
Arthur Andersen accountants linked to the BFA fiasco are seasoned professionals: Jay Ozer, the former accountant for Charles Keating's failed American Continental Corporation; Jack Henry, retiring managing partner; and Ann McGrath, an auditing manager who was allegedly given a detailed road map to the fraud back in 1997.
BELOW: Jack Henry, Arthur Andersen's managing partner, opted for an early retirement.
Arthur Andersen, which audited BFA for 14 years during the heyday of the Ponzi scheme, is the target of an ongoing investigation by the Arizona Board of Accountancy in connection with its BFA audits.
The State of Arizona requires its Certified Public Accountants to follow rules set by the American Institute of Certified Public Accountants. Among other things, Arizona's CPAs are required to take extra steps to ensure that financial statements are not fraudulent. The national standards even name "risk factors for fraud" that were blatant in BFA's financial statements -- complicated insider deals designed to falsely bolster the bottom line, a clueless board of directors, a labyrinthine organizational structure with dozens and dozens of companies. CPAs who run into such risk factors are required to conduct an independent investigation. State law says that if an auditor finds illegalities, he must demand changes of the board, and if the board doesn't cooperate, the auditor must resign and notify regulatory authorities.
According to the investors, Arthur Andersen did not take necessary steps to protect them.
Arthur Andersen maintains it has done nothing wrong.
"Arthur Andersen did not participate in the marketing of any BFA securities and lacked full knowledge of the information that was being given to investors by BFA management," the firm wrote in a February 25 letter to New Times.
Investors do not agree. They say they were scammed by Andersen in concert with BFA, and they want the accounting firm, with 1999 revenues of $7 billion, to pay a huge chunk of the $590 million they lost in the BFA scam.
Two weeks ago, investors added Arthur Andersen to a fraud and racketeering class-action lawsuit filed in late 1999 against former BFA officers and three insiders -- Harold Friend, Dwain Hoover and Jalma Hunsinger -- who profited from BFA's bogus insider real estate and stock deals. Besides enriching insiders, the transactions had another effect: they made BFA look profitable on reports sent to investors, when in fact the Southern Baptist charitable foundation was hopelessly mired in debt.
Among other things, investors say in court that Arthur Andersen failed to protect them, even after receiving detailed tips about BFA's financial fraud reported to the firm by a former staff accountant for BFA.
What's more, New Times has learned, the accountant assigned to audit BFA, Jay Ozer, was on the team Arthur Andersen used to audit Charles Keating's failed American Continental Corporation.
Like BFA, American Continental, which folded in the late 1980s, defaulted on junk bonds sold to elderly investors, engaged in convoluted insider real estate and stock deals and allegedly cooked its books to disguise debt from investors.
Ozer, a partner in Arthur Andersen's Phoenix branch since 1985, was involved in two controversial audits in 1984 and 1985 of American Continental Corporation, which was the parent company of Keating's failed Lincoln Savings and Loan. American Continental investors later claimed in court that Andersen's rosy audits helped Keating promote an illusion of prosperity that lured investors into buying junk bonds. Arthur Andersen declined to continue auditing American Continental in 1986, but never warned unsuspecting investors of American Continental's financial malaise.
Without admitting wrongdoing, Arthur Andersen, in the early 1990s, paid more than $24 million to American Continental investors and various regulatory agencies -- including the Arizona Board of Accountancy -- in connection with American Continental failure. (Keating served more than four years in prison on state and federal fraud convictions, but was released when his convictions were overturned on a technicality. He then pleaded guilty to four separate counts of fraud, but did not serve more prison time.)
Andy Friedman, a Phoenix attorney who recovered money for American Continental bondholders, is also on the legal team representing BFA investors.
BFA investors claim in court that Arthur Andersen's involvement in the American Continental debacle is particularly relevant because, among other things, the failed audits conducted by its Phoenix office "recklessly disregarded the same type of sham, non-arms length real estate transactions and accounting manipulations that were perpetrated by BFA."
Arthur Andersen would not comment on its assignment of Ozer.
Investors say in court that Arthur Andersen failed to protect them even in the face of damning, detailed warnings of fraud within BFA. According to the lawsuit, Karen Paetz, a CPA who had recently resigned from BFA, tried to warn Arthur Andersen of BFA's many fraudulent deals. Paetz met for lunch with Ann McGrath, Arthur Andersen's audit manager, in February 1997. McGrath had been employed by Arthur Andersen for 13 years.