The Securities Division of the Arizona Corporation Commission, in an unprecedented action against a major accounting firm, said it would seek restitution from Arthur Andersen to help investors in the Baptist Foundation of Arizona. The state accused Andersen, which had revenues of $7 billion in 1999, of committing fraud by covering up and participating in the Baptist Foundation of Arizona's Ponzi scheme, in which 13,000 investors lost $590 million.
Ed Dawson, 69, and Janyce, 68, have wintered in the East Valley for 15 years. The couple, who once owned a Dairy Queen in Missouri, are devout Southern Baptists. In 1990, they picked up a BFA brochure in church, went to a sales meeting, and were told BFA was audited every year by Arthur Andersen. They invested immediately, figuring two trusted gatekeepers -- their church and Arthur Andersen -- would never deceive them. By 1999, when BFA filed for bankruptcy, the Dawsons had invested most of their life savings, $340,000, with the foundation.
They lost their money at the very time they needed it most. For two years, Ed Dawson has battled a particularly virulent cancer, multiple myeloma. Medicare will not cover the expensive drugs doctors have prescribed in a last-ditch effort to fight the disease, and the Dawsons now pay about $2,000 a month for Ed's medicines. Next month, Ed's drug bill will jump to $4,000. The Dawsons' total monthly income is about $3,000. So far, they've managed to get by juggling bills and borrowing money from their grown children.
"We will sell everything we have in order to pay for Ed's medicines," Janyce says.
The Dawsons aren't hanging much hope on getting any distributions soon from the BFA bankruptcy. A ballot to approve a distribution plan went out this week to BFA investors, but even if the plan is approved, the Dawsons are uncertain about exactly when they'll get any money. Or how much, precisely.
And they have little hope for a quick settlement in a class-action fraud lawsuit filed in 1999 on behalf of BFA investors against Arthur Andersen and the alleged perpetrators of BFA's fraudulent Ponzi scheme -- former board members Harold Friend, Jalma Hunsinger and Dwain Hoover, and former officers William Crotts and Thomas Grabinski, among others. The civil lawsuit is inching along in Maricopa County Superior Court.
Beyond getting their money back, the Dawsons would also like the emotional satisfaction of seeing BFA scamsters go to jail. Janyce is frustrated by the fact that two additional state probes into the BFA scandal are still ongoing. The Arizona Attorney General's Office is still conducting a criminal investigation of BFA's officers and insiders; the Arizona Board of Accountancy, which licenses accountants, continues investigating the role of individual Arthur Andersen accountants.
(As previously reported in New Times, one of the Andersen accountants assigned to BFA was Jay Ozer, who also helped audit Charles Keating's failed American Continental Corporation, the parent corporation of Lincoln Savings and Loan, which sold junk bonds to elderly investors. Arthur Andersen had to pay more than $24 million to various regulatory agencies for its role in giving American Continental clean audits. Ozer and his boss, former managing partner Jack Henry, have recently retired from Arthur Andersen.)
The Dawsons are outraged at Arthur Andersen's alleged behavior, and they are hanging their hopes on the Securities Division's recent move to make Arthur Andersen pay restitution, which could total hundreds of millions of dollars. But that process could take years.
Technically, the Securities Division last week gave Andersen a "Notice of Opportunity for a Hearing" on proposed orders to cease committing securities fraud and pay restitution to victims. The firm must respond by the end of this week. The hearing must be scheduled within 60 days. At the conclusion of the hearing, which could take months, the three corporation commissioners must vote on a hearing officer's findings. If Arthur Andersen doesn't like the commissioners' decisions, it can take the case to Superior Court, the Arizona Court of Appeals and the Arizona Supreme Court.
Or Arthur Andersen could avoid the embarrassment of drawn-out public proceedings and opt to settle with the state.
In a brief written statement, the firm's Arizona managing partner, David J. Scullin, says Arthur Andersen is "disappointed" by the allegations.
"As previously stated, we believe we took appropriate actions and followed our professional guidelines in our work," the statement says.
The state's allegations against Arthur Andersen, which audited BFA from 1984 until its collapse, are detailed and chilling.
"While Arthur Andersen's audits were seriously flawed in 1991 through 1994, beginning in 1995 the facts led to the conclusion that Arthur Andersen not only aided and abetted that securities fraud being perpetrated on investors but in fact may have directly or indirectly participated in the fraud," Securities Division documents say.
The state says the accounting firm in 1994 should have seen "significant warning signs that management of BFA was perpetrating a financial fraud against investors."
By 1995, in-house BFA accountant Ron Estes warned BFA management about a "bogus" $4 million insider deal with Hoover, and refused to sign off on a letter from BFA management to Arthur Andersen, the state says. But instead of picking up on the "red flag," Andersen gave BFA a clean audit. Estes quit.
In February 1997, BFA accountant Karen Paetz had lunch with Ann McGrath, the lead manager for Arthur Andersen in the BFA engagement. During lunch, Paetz gave McGrath a "detailed road map of the fraud that was occurring at BFA," the state says. Arthur Andersen reacted to Paetz's allegations by requesting more financial documents from BFA, but when BFA refused, Andersen did no further investigation.
Instead, Andersen gave BFA another clean audit.
"At this point, Arthur Andersen became a full participant in hiding the fraud being perpetrated by the investing public . . . ," the complaint states.
Last March, in a written response to New Times questions regarding the Paetz-McGrath luncheon, Arthur Andersen said Paetz "sounded confused and uncertain to Ms. McGrath. . . . Without specifics, further action by Arthur Andersen was not practical."
By 1997, the accounting firm was also altering its work papers on BFA, the state says, to "cover up" the fraud.
Also in 1997, the state says, Arthur Andersen's world headquarters in Chicago was tipped off to the "alleged Ponzi scheme and illegal sale of securities" at BFA. Yet when Jay Ozer met with BFA officials, he discounted the tip from national headquarters, the state says.
New Times' 1998 award-winning investigative series on BFA, "The MoneyChangers," is repeatedly cited in the Securities Division's charges against the accounting firm.
"The New Times articles contained serious allegations of fraud and insider dealings, mentioned specific questionable transactions and implied misdealing by Grabinski, Crotts, Hunsinger, Friend and Hoover," the state documents say.
"Regarding one high profile transaction described in New Times involving the Simms Tower in Albuquerque, New Mexico, Arthur Andersen had evidence that the New Times allegations were true, and yet Arthur Andersen failed to address that evidence."
The state says Arthur Andersen "failed to address in a serious and meaningful way allegations of fraud raised in the series. . . . Instead Arthur Andersen ignored direct evidence that certain New Times allegations were correct and accepted the word of [BFA staff attorney] Grabinski that the allegations were without merit and relied on its previously flawed audit work."
The state also cites a December 1998 New Times article detailing for the first time the 1996 resignations of a BFA staff attorney and several staff accountants. The article quoted several resignation letters that contained serious allegations of financial fraud at BFA.
Audit rules "required that Arthur Andersen make a thorough investigation of the allegations being made by the former BFA employees to determine whether they were reliable. . . . Instead Arthur Andersen continued to ignore the evidence and dismissed [the accountants' and attorney's] serious allegations as being not applicable to its audit responsibilities," the state says.
Although the main thrust of the Securities Division's action is to get money for the Dawsons and other investors, forcing Arthur Andersen to pay money isn't enough for Janyce Dawson.
She'd like to see all the alleged perpetrators of the BFA scam -- including officers, insiders and accountants -- have their day in court and, if found guilty, go to prison.
"I do believe in righteous indignation," she says. "These people should get what's coming to them."
An archive of Terry Greene Sterling's reporting on the Baptist Foundation of Arizona can be viewed at www.phoenixnewtimes.com/specialprojects/bfa
View Arizona Corporation documents at http://www.ccsd.cc.state.az.us/Enforcement/Actions/sep27-00.pdf