The Story So Far
A six-month New Times investigation reveals that companies controlled by one sitting Baptist Foundation of Arizona director and two former directors have received nearly $140 million worth of loans in complicated real-estate and stock transactions with BFA.
A company controlled by one of those insiders in 1997 reported a net worth of negative $116 million, raising the possibility of default on some insider loans.
Although BFA was set up 50 years ago to raise funds for needy Southern Baptist causes, it has donated a pittance to causes while expanding its bureaucracy into a labyrinth of at least 60 for-profit and non-profit companies. And until 1997, when auditors disclosed all the insider deals, BFA president Bill Crotts kept the majority of the trusting 21-member BFA board in the dark, several former directors say.
BFA has borrowed more than $265 million from "investors"--church treasuries, individual church members and the general public. Although it says it has always repaid its investors, BFA does not guarantee repayment of the loans (which are not federally insured), but relies instead on its position of trust in the Southern Baptist community to funnel a steady stream of the faithful to its money managers.
In pronouncements from its $6.5 million headquarters at 1313 East Osborn, BFA claims to be a financially sound $368 million company that reinvests the money it borrows in real estate and real-estate-related notes, with profits returned to Southern Baptist causes.
Yet the true financial condition of BFA remains a mystery.
BFA's own audited statements--the most recent is for 1996--don't disclose enough details about its real estate holdings to reveal how well the company is doing, according to a financial expert retained by New Times to analyze BFA's financial statements.
Although BFA has not been investigated by any law enforcement agency, and has not been accused of any crime, the paper trail raises questions about whether all of the insider real-estate transactions were legal. When some of BFA's activities were generically described to law enforcement officials, they declined to comment for the record but suggested such practices warrant investigation.
The key question is whether insiders broke the law by "self-dealing"--conducting transactions to their benefit at BFA's expense.
Self-dealing violates the Internal Revenue Code. It violates state and common fiduciary-duty law. It violates fraud statutes. Penalties range from revocation of tax-exempt status to criminal prosecution of officers and board members.
There has been little oversight of BFA from state and federal authorities. Because BFA is a religious, tax-exempt corporation, it is not required to file an annual IRS tax form--although some of its subsidiaries do. (Non-religious foundations must file Form 990, which is open to public inspection.)
In Arizona, a new state law releases many BFA companies from filing annual financial reports with the Arizona Corporation Commission.
With little oversight, BFA has been accountable only to its directors. And for years, directors permitted BFA to transform itself into a real-estate investing machine that loaned millions to insiders while charities scrambled for funds.
However, the New Times investigation reveals that BFA used millions of dollars of investors' money to fund insider real-estate deals that provided only a trickle of support for hurting Southern Baptist charities. Among the findings:
* As of March, non-profit and for-profit companies controlled by former BFA board member Jalma Hunsinger owed BFA at least $124.8 million--about one-third of the foundation's reported assets. Financial documents filed by Hunsinger himself with the Arizona Corporation Commission in 1997 show that his for-profit companies owed BFA $66.6 million at the end of 1997. But Hunsinger told the Corporation Commission that his for-profit umbrella corporation had a net worth of negative $116 million in documents filed in 1997 (for the year ending 1996). Hunsinger's non-profits, meanwhile, owed BFA $58.2 million as of December 1997, according to BFA. Those non-profits reported a net worth of $11 million in documents filed with the state in 1996.
* Current board member L. Dwain Hoover bought into several BFA real-estate projects and owed the foundation $11.8 million as of December 1996. State law prohibits directors from borrowing from non-profit corporations. In a letter to New Times, BFA asserted that no laws were violated because Hoover did the deals with BFA's for-profit subsidiary companies. This assertion appears to be contradicted by BFA's own financial statement, which discloses the debt.
* Former board member Harold Friend has borrowed at least $2 million from BFA.
* Other Southern Baptist foundations interviewed for this article say they avoid investing in real estate because it is too risky. They claim they do not lend money to insiders for legal and ethical reasons.
* Many of Hunsinger's Arizona corporations are managed by BFA, share its Phoenix address and designate a BFA staff attorney as statutory agent. That attorney has represented Hunsinger on real-estate transactions involving both BFA and Hunsinger, an apparent conflict of interest that both parties say they waived.
Results of insider deals
* BFA acts like a bank, borrowing money from the faithful and re-lending those funds to the insiders and others. But according to BFA's most recent audited statement, BFA has interest payments going out much faster than coming in: In 1996, interest-bearing liabilities totaled $335 million, while interest-bearing assets totaled $173 million.
* Insiders paid off some multimillion-dollar loans with stock in their own companies and with real estate. BFA has then re-sold some of the so-called "non-cash" assets to other insiders for huge paper profits. Those paper profits offset losses on financial statements sent to investors.
* The value of some insider real estate recorded by BFA in documents is wildly inflated when compared to actual property-tax records. BFA denies inflating the value of real estate--a technique that could camouflage BFA's true losses on financial statements handed to potential investors.
Charities get little
* Despite claims of frugality and pious statements about helping the less fortunate, BFA's administrative costs are staggering. About half of the $69 million BFA spent in 1996 paid for salaries and administrative expenses. BFA's financial statements don't say how many people it employs.
* Charities can get money from two BFA sources--income from profits BFA earns and money dedicated from charitable trusts BFA manages.
In 50 years, BFA itself has given only about $1.3 million to Southern Baptist causes. This may be because its expenses are so high. In 1995 alone, BFA spent about $329,000 on staff automobiles. It spent $16 million on staff salaries in 1996.
High-profile causes such as Arizona Baptist Children's Services, which cares for children in crises, and Rio Vista Mission, which helps feed the hungry, have struggled financially and suffered cutbacks in services. BFA has not provided either any direct aid, although it has loaned about $150,000 to the children's agency.
BFA boasts that charitable trust funds it manages returned $1.7 to Southern Baptist causes in 1997. However, BFA will not disclose how much of that $1.7 million it returned to itself, since BFA designates itself as a charitable cause.
Regulation is lax
* Federal tax regulations prohibit the IRS from auditing the books of church-related organizations like BFA without prior approval of the regional commissioner. The catch--before the regional commissioner approves an audit, he must already know about problems in the very books that have yet to be audited.
* Unlike other organizations that are exempt from paying income tax under rule 501-C3 of the Internal Revenue Code, church-related organizations are not required to file annual Form 990, which discloses how money is spent in a non-profit organization.
* In Arizona, the public's right to know about how corporations spend money was squelched by a 1998 state law sponsored by Senator Carol Springer. The new law relieves for-profit corporations (such as BFA's subsidiaries) from filing annual financial statements with the Arizona Corporation Commission.
--Terry Greene Sterling
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