A class action lawsuit filed on August 27 by BFA investor Franklin Kestner Sr. charges that BFA and former and current officers and directors bilked investors by funneling their money into projects "to finance BFA's officers and/or directors' real estate deals which were transacted for . . . personal gain and profit."
Three days later, on August 30, Richard A. Kimsey, a Southern Baptist pastor, and his wife, Ann, sued BFA and current and former officers, alleging BFA's investment sales "pyramided into a Ponzi scheme in which the mountain of debt could be sustained only by selling new notes and persuading investors to roll old notes into new investments."
Both lawsuits were filed after the Arizona Corporation Commission on August 12 orderd BFA to stop selling illegal securities. The "securities" sold by BFA and affiliated companies amount to more than $500 million worth of high-interest promissory notes involving more than 13,000 investors, many of whom were Christians and elderly and had entrusted their life savings to BFA.
Shortly before the Corporation Commission took action, BFA had frozen investors' assets, but agreed to continue paying interest payments to IRA holders and other investors who had stipulated to monthly interest payments in their investment contracts.
The Corporation Commission's order stemmed from an ongoing criminal investigation of BFA and certain insiders by the Arizona Attorney General's Office. Sources close to the investigation say criminal indictments are expected this year.
The Attorney General's Office is also cooperating with the Arizona Board of Accountancy in an ongoing investigation of Arthur Andersen LLP, the Big Five accounting firm that prepared financial statements that were sent to BFA's investors. Both investigations were initiated in 1998 after New Times began publishing an investigative series on BFA.
In an August 7 letter to investors, BFA said bankruptcy was a possibility.
Three weeks later, BFA's board of directors fired president William P. Crotts, chief counsel Thomas Grabinski and comptroller Donald Deardoff.
On September 3, BFA spokeswoman Lorri Paetz, when asked to comment on the lawsuits, said in a faxed statement: "We are aware of the filings. We are reviewing all of the allegations. We have no comment with respect to ongoing litigation."
In March 1999, the Reverend Richard Kimsey moved to Phoenix from Georgia with his family to take a new job as pastor of Desert Valley Church, a Southern Baptist church in New River.
Now, Kimsey and his wife are suing BFA, Chairman Berry Norwood, former officers Crotts, Deardoff and Grabinski and other unnamed officers and directors.
In his lawsuit, Kimsey claims he invested $100,000 -- the proceeds from the sale of his Georgia home -- with BFA on July 15. That was one day after BFA officers had learned that BFA would soon be subjected to disciplinary action by the Arizona Corporation Commission.
Kimsey says his investment contract with BFA provided a "seven day grace period" in which he could have withdrawn his funds after the July 15 initial deposit.
But, he says in the lawsuit, no one at BFA alerted him about the impending regulatory action. No one told him his money would be frozen by BFA itself. No one told him he might never see his money again.
"During this seven day period, defendant Norwood and other Foundation executives concluded that the evidence that investors were being misled required that no further money be accepted from investors. A freeze on raising new money was implemented under Norwood's leadership. Despite this, plaintiffs' $100,000 check was cashed within the seven day revocation period without alerting plaintiffs to the events which caused the Foundation to implement the freeze."
Kimsey says he was "falsely assured . . . there was no reason to be concerned."
Kimsey also says BFA failed to disclose to him that the foundation was "insolvent" and "operating a Ponzi scheme in which new money and rollovers of existing investments were needed to avoid a collapse."
Kimsey's lawsuit singles out Crotts and Grabinski as architects of insider deals that channeled millions of dollars of investors' money into speculative investments with former and current board members.
The suit blames Norwood, Crotts and Grabinski for approving plans "to continue selling Foundation notes without corrective disclosures or any independent investigation" even after they were warned of possible fraud and criminal liability by a former BFA attorney and several former BFA CPAs.
Neither Norwood, Crotts, Grabinski nor Deardoff responded to telephone calls seeking comment for this story.
Kimsey, through his attorney Richard Himelrick, declined to comment for this article. According to Himelrick, members of Kimsey's church advised Kimsey not to speak publicly about the lawsuit lest it be misconstrued that Kimsey was speaking "for the whole church."
In an August 30 memo to "Arizona Southern Baptist Pastors," BFA expressed reservations about ministers granting interviews to reporters. Instead, the memo urged pastors to refer media inquiries to BFA's public relations department.
"It is up to you to decide if you want to speak to the media in the future, but we must remind you that the media usually focuses on the bad news and that 'scaring people' sells more newspapers," the memo said.
Franklin Kestner is a Pima County resident who invested $150,000 with BFA and affiliated companies.
In a class action lawsuit that is expected to involve thousands of investors, Kestner names as defendants BFA, its directors, dozens of BFA subsidiaries and affiliates, Crotts, Grabinski, Norwood, former directors Harold Friend and Jalma Hunsinger and current director Dwain Hoover.
"BFA offered and sold various securities and investment contracts to Plaintiff and the Plaintiff Class, and represented itself to be a ministry dedicated to furthering Southern Baptist and Christian causes through raising funds and providing resources to Southern Baptist charities," the suit says.
Instead, the suit says, BFA used investors' money to finance insider deals.
". . . most of BFA's assets consist of real estate holdings, approximately half of which are linked to officers and directors, including the individual defendants. . . . Many of BFA's assets are based on over-valued real estate and promissory notes owing on over-valued real estate, which values were artificially created through Defendant's fraudulent business transactions. . . . ," the suit says.
Kestner also claims Norwood and other officers and directors of BFA and affiliated companies also committed fraud because they "had knowledge of the fraudulent and deceitful transactions, practice and course of business in which the other defendants were engaged in connection with the sale of securities to Plaintiffs. . . ."
In addition to allegations of fraud and violations of state securities law, the suit also alleges breach of fiduciary duty and breach of contract.
Kestner, through his attorney, Lawrence Wilk, declined to comment.
The named defendants -- Friend, Hoover, Hunsinger, Norwood, Crotts, Deardoff and Grabinski -- did not return telephone calls seeking comment for this story.
To see an archive of the previously published "MoneyChangers" series, visit the New Times Web site at http://www.phoenixnewtimes.com/1998/121098/baptist.html
Contact Terry Greene Sterling at 602-229-8437, or online at [email protected]