Bill Crotts was the principal architect of the complex BFA ponzi scheme, but he had a little help from his friends.
Crotts’ right hand at the BFA was Vice-President and General Counsel, Thomas D. Grabinski.
Grabinski, in his 30s during the scheme, joined the BFA in 1988. Grabinski was also an officer, usually the president, for many of the BFA shell corporations. Grabinski signed documents for both BFA and several of the fake companies in multimillion-dollar transactions.
Former BFA board member, Jalma Hunsinger, a man in his early 60s at the time, received a huge amount of BFA investment funds that he evidently squandered. Hunsinger was highly regarded in the Arizona Southern Baptist community, with a reputation as an astute businessman.
Hunsinger controlled several of the BFA non-profit corporations that borrowed heavily from the foundation. As president of BFA’s “Arizona Southern Baptist New Church Ventures,” Hunsinger borrowed money ostensibly to build new churches. By the end of 1997, New Church Ventures owed the Baptist Foundation of Arizona $58.2 million
Another former BFA board member was intimately involved in the BFA scam. Harold Friend, mid-60s, was a Paradise Valley resident who had dealt extensively with Hunsinger and BFA. Friend was an officer in several of Hunsinger’s companies, and had signed documents for the companies in real-estate deals with BFA.
In one case that demonstrates the close relationship between the schemers, a Hunsinger non-profit corporation paid a debt to BFA with land supposedly valued at $1.6 million. Friend then purchased the land from BFA for $3.2 million. He paid just $800,000 down, then wrote an IOU for the remaining $2.4 million. BFA’s books show a “profit’ of 100% on the Hunsinger note.
L. Dwain Hoover was a sitting BFA board director during the scheme. Hoover, then in his early 60s, was a former butane-company owner turned real-estate investor. He had served several three-year terms on the BFA board.
Hoover was involved with several artificial real estate transactions with the BFA. In one case at the end of a calendar year, Hoover “gifted” the BFA a piece of Colorado real estate. The BFA recorded the value of the “gift” at $3.1 million. A later investigation found the land to be valued at $151,999.
Another BFA insider involved in this scheme was W. Berry Norwood, the chairman of the BFA board of directors. Norwood , a Prescott pastor, was blindly obedient to Crotts. With Norwood’s support, Crotts was never denied anything from the BFA board.
Don Deardoff, a CPA, served as BFA’s controller. Deardorff, aware of the foundation’s financial machinations, had a fiduciary duty to advise BFA to request its auditor to audit the shell companies that were artificially propping up the BFA’s pyramid. He said nothing.
Perhaps the most important accomplice in Bill Crotts’ bilking of BFA investors was not a person, but a giant 85 year-old accounting firm, Arthur Andersen, LLP.
The Phoenix offices of Arthur Andersen had been auditing the Baptist Foundation of Arizona since 1984, two years after Bill Crotts succeeded his father.
In each year from 1984 through 1997, Arthur Andersen issued what were called an “unqualified,” or ‘clean’ opinions after auditing the “Combined Financial Statements” of BFA, and several of its subsidiaries.
In addition to its work as BFA’s auditor, Arthur Andersen, which had billions in annual revenues during the 1990s, also performed tax and consulting services for BFA.
Two of the lead Arthur Andersen auditors working on the BFA audit– Ann M. McGrath and Jay S. Orzer – had been working on the BFA account since 1988 and 1992, respectively.
Although the BFA scam was pre-Enron, Arthur Andersen had recently faced some problems. In 1992, the company, without admitting wrongdoing, agreed to pay elderly victims of one of Charles Keating’s failed banks, American Continental Corporation, $22 million out-of-court. The victims had claimed that the Arthur Andersen financial statements were misleading.
In California, in the middle of the BFA scam, in 1994, Arthur Andersen paid $1.3 million to the California Board of Accountancy to settle three cases related to the Lincoln Savings and Loan disaster.
In examining BFA’s financial reports, Arthur Andersen auditors ignored or chose not to report several “red flags,” including:
– The BFA’s overly complex organizational structure, with several legal entities, was not normal for a non-profit corporation.
– Several of the transactions involved current and former BFA board members, a clear conflict of interest.
– Many companies that engaged in major transactions were unaudited entities.
– There was no oversight of BFA senior management.
– With offices in Arizona, Arthur Andersen auditors certainly were aware the local real estate market had been decimated since late 1980s . Further, they knew that real estate properties on the books of BFA had not been appraised for several years. Arthur Andersen auditors must, therefore, have known the valuation of BFA’s real estate assets were grotesquely inflated.
– Arthur Andersen auditors knew that BFA was not only acting as the custodian of self- directed IRA trust funds, but also was receiving significant fees for managing the investment of those funds. This relationship of BFA to its IRA investors created serious issues related to federal and state laws that Arthur Andersen was professionally required to report.
Arthur Andersen’s “unqualified” (clean) reports were always included in the year-end financial reports sent to BFA investors. Included in the year end packet, would be a “Letter from the President,” a note from Bill Crotts reporting on the financial health of the BFA. Every year under Crotts the BFA reported revenues vastly exceeding expenses.
The Arthur Andersen clean reports were also prominently featured in the written offerings and other promotional material, including videos, used by BFA to solicit investment funds. As one victimized BFA investor said of Arthur Andersen after the scandal broke:
“This was no 25 cent firm.”