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.
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.
"Paetz specifically advised McGrath of various accounting improprieties, and informed her as to problem areas," the suit says.
Among other things, the complaint says, Paetz told McGrath that insiders were "incapable of paying their enormous debts to BFA" and that BFA inflated the value of real estate assets to enable sham insider deals.
According to the lawsuit, Paetz also told McGrath that five BFA accountants, who had since resigned, had warned BFA in April 1996 about the "financial manipulations and accounting irregularities that pervaded BFA's business operations."
So what did McGrath do with Paetz's tips?
According to the investors, McGrath huddled with other Arthur Andersen officials, who then met with BFA's lawyers, Jennings Strouss and Salmon, to figure out "potential legal and regulatory exposure stemming from the ongoing misconduct at BFA."
And then Arthur Andersen gave BFA another clean audit.
In its February 25 letter to New Times, Arthur Andersen offers another version of the Paetz-McGrath luncheon: "In response to a confidential request, Ms. McGrath met with Karen Paetz for lunch one time in 1997, following Ms. Paetz's resignation from BFA. Ms. Paetz read her resignation letter to Ms. McGrath. The letter contained quotes from the Bible, but no specifics regarding the transactions of BFA. Ms. Paetz sounded confused and uncertain to Ms. McGrath. Without specifics, further action by Arthur Andersen was not practical."
Paetz moved to New Mexico. Like a staff attorney and several other devout Southern Baptist CPAs who resigned from BFA after warning officers about fraud, Paetz was labeled a misinformed troublemaker by BFA loyalists. In a December 3, 1998, letter to New Times, BFA chairman of the board, the Reverend Berry Norwood, dismissed the concerns of professionals like Paetz: "Perhaps it was lack of information or failure to understand the transactions that led some individuals to believe that there were 'ethical reasons' to resign that never existed."
Paetz, who is reportedly cooperating with state prosecutors in their ongoing criminal investigation of BFA, could not be reached for comment.
Jack Henry, managing partner of Arthur Andersen's Phoenix office for 17 years, has decided to take early retirement. Henry, who presided over the Phoenix office during the years Jay Ozer audited American Continental and BFA, claims through a spokeswoman that his early retirement has nothing whatsoever to do with the BFA imbroglio.
"Mr. Henry is retiring in accordance with his longstanding plan to do so at a retirement age that is typical for Arthur Andersen partners," the firm wrote on February 25. "Mr. Henry will be pursuing his many community interests in his retirement."
Henry is the chairman of the Arizona Chamber of Commerce and is active in civic affairs.
In its February 25 letter, Arthur Andersen attributes the following quote to Henry: "Arthur Andersen is sympathetic to those who have suffered losses. However, Arthur Andersen followed generally accepted auditing standards in auditing the financial statements of BFA and stands by its work for BFA. . . .The independent auditor's role does not extend to advising the client on business decisions. BFA's management made its own decisions regarding investments and investment management."
The firm says it thoroughly investigated the "allegations" in ongoing New Times series on BFA, "The MoneyChangers." The series, which began in April 1998, initially called into question complicated transactions in public records between BFA and insiders Hunsinger, Hoover and Friend (the entire 17-story series can be found at http://www.phoenixnewtimes.com/specialprojects/bfa/).
"The New Times articles first began to appear in April 1998," Arthur Andersen wrote in its February 25 letter.
"Arthur Andersen investigated the allegations and discussed them with management at BFA. BFA's management had reasonable responses for each allegation. The transactions discussed in the articles appeared to have economic substance and were properly recorded in BFA's books in accordance with GAAP [Generally Accepted Accounting Principles]."
What's more, the letter says, BFA's "offering circulars" sent out to investors "did not reference Arthur Andersen" and the firm never authorized BFA to use its name in connection with selling junk bonds.
In the end, a Maricopa County judge and the state Accountancy Board will determine the true role of Arthur Andersen in what appears to be the largest charity fraud in the history of the nation.
Contact Terry Greene Sterling at 602-229-8437 or online at [email protected]
