The Organized Crime and Fraud Section of the Arizona Attorney General's Office, with the assistance of the Securities Division of the Arizona Corporation Commission, is conducting a criminal investigation of certain BFA staffers and others involved in some of the complicated insider transactions, sources close to the investigation say. The insiders with whom the foundation has done business include one current and two former BFA board members.
New Times has confirmed that grand jury subpoenas have been issued in connection with the attorney general's investigation.
Investigators are working with former BFA staff accountants and a former staff attorney who quit the foundation in 1996 after warning top managers that their business dealings were unethical and possibly criminal.
"I am convinced that you honestly fail to appreciate the moral, economic and legal gravity of your actions," former BFA attorney L. Kyle Tresch wrote to his BFA superiors in a draft of his letter of resignation. The letter, which was obtained by New Times, goes on to say that BFA had for a decade engaged in transactions that amounted to "actionable fraud."
Former accountant Richard Polley wrote to BFA bosses that their business practices seemed intended "to deceive our investors regardless of the outcome to them. The Scriptures are quite clear that such an outcome is sin."
The Reverend W. Berry Norwood, chairman of the BFA board, dismisses the criticism, saying the former staffers "never had the information necessary to evaluate the transactions" and did not understand them.
The attorney general and Corporation Commission are not the only state agencies scrutinizing BFA. The Arizona Board of Accountancy is investigating Arthur Andersen LLP, a Big Five accounting firm with offices in Phoenix, to determine if the firm followed acceptable accounting standards and principles when preparing BFA's audited financial statements.
No one has been charged with any crime in connection with any of the current state investigations, which were initiated following the publication of a New Times series detailing the findings of a six-month public records investigation of BFA.
The series revealed that BFA, a nonprofit corporation chartered in 1948 to help Southern Baptist causes, in 50 years had returned only $1.3 million of its own money to the Southern Baptist community, yet lent nearly $140 million to companies associated with current BFA director Dwain Hoover and former directors Jalma Hunsinger and Harold Friend. Much of the cash BFA funneled to insiders had come from church treasuries and the faithful, who have lent BFA more than $317 million.
Although BFA says it has always repaid every penny to investors, public records raise serious questions about the true value of the real estate assets collateralizing some of those loans. 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 retain a steady stream of investors. BFA acts like a bank, borrowing money from investors and lending some of that money out for real estate projects. BFA's most recent audited statement reports that it has interest payments going out much faster than coming in: In 1997, interest-bearing liabilities totaled $382 million, while interest-bearing assets totaled $209 million.
Transactions between insiders and BFA are conducted through a web of at least 60 interlocking corporations, and many transactions were conducted without the knowledge of BFA's full board of directors. Such a complicated corporate structure and insider transactions are unusual for a religious foundation, officials of similar foundations say.
Five former BFA employees--four certified public accountants and one attorney--are assisting state investigators. All five resigned from BFA in 1996.
Their resignation letters and other internal documents obtained by New Times reveal that as early as 1996, BFA management was repeatedly warned by its own employees that, in their opinions, BFA management might be criminally liable for some of the complicated transactions.
A key question the state investigations may answer is whether illegal "self-dealing" occurred, whether transactions benefited insiders at BFA's expense. Self-dealing violates the Internal Revenue Code, fiduciary-duty laws, and fraud statutes. Penalties may range from revocation of tax-exempt status to criminal prosecution of officers and board members.
Attorney General's Investigation
Neither the Arizona Corporation Commission nor the Arizona Attorney General's Office will comment on the ongoing criminal investigation, which was confirmed to New Times through several knowledgeable sources, including BFA President Bill Crotts.
"As usual, we can't confirm or deny criminal investigations," says Karie Dozer, spokeswoman for the attorney general.
Dozer also declines to answer specific questions about the expected length of the probe, possible crimes that may have been committed or names of any individuals targeted in the investigation.