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Fraud History: The $500 Million Pyramid — How William Crotts Bankrupted the Baptist Foundation of Arizona

By   /   April 18, 2014  /   No Comments

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THE HARD SELL

Bill Crotts and the Baptist Foundation of Arizona had overvalued Arizona real estate in deals done from roughly 1986 through 1991.

The returns on BFA investments were not sufficient to cover debt payments to investors.

The core of the ensuing BFA fraud was the manufacturing of fake profits by “selling” BFA real estate holdings to phony buyers, who were affiliated with BFA, at inflated prices. The fraudulent deals occurred from 1986 until 1999.

BFA was now running classic Ponzi scheme – albeit an extremely intricate one — where BFA was taking money from new investors, and using that money not to invest, but to pay off existing investors.

To raise money, Bill Crotts and the BFA went into marketing overdrive, desperately trolling for enough new funds to satisfy old debts.

New investors were actively sought wherever BFA salesmen could find them — Bible-study groups, nursing homes, the Internet, retirement communities.

Bible-carrying salesmen fished for investors in Southern Baptist churches. Some pastors acted as BFA agents, and even spoke of BFA investments from the pulpit.

Helpful salesmen made house calls. After a home visit, one BFA agent left a flier with a potential investor:

“Here at BFA, our commitment is to ‘up close and personal service.’ So, if you’re not physically able to get around the way you used to, or if you’re simply too busy, just give me a call. I’ll be happy to stop by to visit with you about our financial services or to pick up your investment.”

A constant part of BFA investment marketing was the extensive use of the phrase, “Be good by doing good.” The word “stewardship” was another word that was typically used in a BFA pitch. The BFA was making “Biblically based” investments.

BFA used sleek, professionally-designed brochures and offering documents that were heavy on the hard sell.

We are a ministry dedicated to serving the Lord and furthering Southern Baptist and other Christian causes. We re-invest your money and the profit we earn goes to further such ministries as Christian education, care for children and senior adults, missions and new church starts. Your investment actually touches the lives of countless numbers while you earn a very attractive interest rate.
– Baptist Foundation of Arizona brochure

You don’t have to be a Southern Baptist and you don’t have to live in Arizona to take advantage of our outstanding interest rates and unique “Stewardship Investing” opportunities. Nearly one-fourth of our clients are not Southern Baptists.
– Baptist Foundation of Arizona brochure

We are very prudent in our investments and closely watch our expenditures. All this adds up to a low-cost operation which provides higher yields for you.
– Baptist Foundation of Arizona brochure

Included in the written promotional material were videos of actors pushing the investments. The actors pitching BFA investments were apparently cast to look like Charles Schwab, circa 1985.

“No investor has ever lost a penny with BFA,” says the well-dressed Schwab lookalike right into the camera, before adding the company tagline, “Be good by doing good.”

The marketing worked; at least at first. The frantic, perpetual recruitment of new investors to pay interest on a growing mountain of debt was, for the time being, able to keep the BFA’s plates spinning.

Bill Crotts was able to pull off his scheme because he operated with ‘rubber-stamp’ approval of the BFA board of directors. Bill Crotts and his father had been President of the BFA for more than 30 years. No one questioned Bill Crotts’ integrity. He was not admired; he was revered among Arizona Southern Baptists.

The actual transactions that Crotts was orchestrating would take volumes to describe in detail. The scheme was designed by Crotts, the lawyer, to be complex. Crotts took extreme measures to disguise the ponzi operation, creating a tangle of more than 60 for-profit and non-profit companies.

To disguise the actual financial condition of BFA, Crotts hid the enormous losses in what were called “bad banks.”

A ‘bad bank’ was a shell company created by Crotts about which investors were unaware. BFA would “sell” its depreciated assets – overvalued real estate – to a “bad bank,” which would write a promissory note to the BFA for the land. BFA would then record the promissory note from the bad bank as an asset on its books. The problem was the promissory note was worth nothing, which Crotts knew since he controlled both companies and orchestrated the transactions.

According to later investigations by Arizona securities regulators, the BFA transactions would usually occur in December of each year. This allowed BFA to create income, or avoid showing loss on year-end financial reports.

Without these fabricated transactions, BFA would have shown losses in the tens of millions of dollars each year. Crotts and his cronies did not have any of their own funds at risk in the scheme. The money came from trusting Southern Baptists.

The money to keep the pyramid standing came from thousands elderly investors. Soon after taking over for his father as President, the BFA began acting as custodian for individual retirement accounts. In 1983, BFA received approval from the Internal Revenue Service to act as a passive non-bank trustee.

By November of 1999, BFA, through two subsidiaries, acted as custodian for approximately 5,000 IRAs. All of the foundation’s IRAs were self-directed accounts, with interest rates ranging from 6.7 % to 8.25% for a “Maximum Value Performance Note.”

Although required for an IRA custodian, BFA did not maintain separate investment pools for each type of account. Instead, the BFA under Crotts co-mingled all IRA funds. It was that money which was used to pay interest to investors, or used for one of Crotts phony shell companies.

The principal amount of securities sold grew dramatically over the years Crotts led BFA, and at the time of the Pyramid’s collapse, the amount owed to investors was more than $500 million.

Another way Crotts manipulated the BFA books was by “flipping” real-estate. The Association of Certified Fraud Examiners Manual defines “flipping” as “the practice of buying and selling real estate very quickly — often several times a day or at least within a few months.”

Land flips artificially change the value of the land. The new value can be used on the books either for income tax purposes, or to make the land appear more valuable than it is.

One of Crotts’ BFA entities would sell a piece of land to one of the shell companies that he controlled, and which was run by a BFA insider. The land would be sold at a greatly inflated price; say a $10 million asset “sold” for $20 million.

The shell company would pay the BFA entity a small (maybe 2.5%) cash payment on the “$20 million” parcel, then write an IOU, or “carryback note,” for the remaining $19.5 million price of the overvalued real estate. The net effect is that the IOU made the BFA’s books appear profitable by $10 million.

But they weren’t. The “profits” were illusory. They didn’t exist except on those reports.

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