THE PYRAMID COLLAPSES
The artifice of the BFA scheme began to crumble in 1996 when five BFA employees – one attorney and four CPAs – confronted Bill Crotts about the financial condition of the foundation, and the safety of investor funds.
Three of the BFA staffers, the attorney and two of the accountants, wrote letters to Crotts charging that the full BFA board and Arthur Andersen auditors were not aware that BFA was hiding millions of dollars in nonperforming loans by “selling” them to companies associated with BFA insiders.
One company – ALO – particularly concerned the staffers and was mentioned by name in one of the letters. ALO – Hunsinger’s ‘bad bank’ — owed the BFA $116 million.
The extraordinary letters were obtained and originally published by the Phoenix New Times newspaper.
Kyle Tresch, the BFA attorney, wrote in his letter of resignation to Crotts, dated April 15th, 1996 :
“To the extent that you consider your position regarding BFA and ALO moral and justified, I am convinced that you honestly fail to appreciate the moral, economic and legal gravity of your actions. Not only do our board members have potential liability for such decisions (i.e. savings and loan examples), but our constituents believe, and have every reason to, that our Board is providing just this kind of oversight.
“Legally, the current situation is fraught with liability. Beginning with the first transfer of bad assets [from BFA] nearly ten years ago to a so-called ‘bad bank’ which would not be audited but which you controlled through an outside party, there was actionable fraud. Each transfer of assets made to such off-balance sheet companies over the last ten years that was similarly made to improve BFA’s balance sheet was likewise fraudulent.
“Not only have you placed yourselves in a position of civil and criminal liability for your actions, but you have likewise placed the auditors, directors and even innocent officers in positions of civil liability.
“After consulting with counsel, I have been advised that in fact I have a duty to ensure that the Board of Directors is informed about ALO and its relationship to BFA. My heart aches for my family, our churches, the reputation of Christians and Southern Baptists, the employees of BFA, the outside parties who have given credence to BFA without fully understanding the problem, and the many individuals who have invested millions of their hard-earned dollars with BFA.”
Richard Polley was a BFA trust account manager and a friend of attorney Tresch’s. Three weeks after Tresch resigned, Polley wrote a scathing “for the file” memo to Crotts in May, 1996, criticizing the BFA for selling several millions of dollars worth of worthless loans to another shell company, this one called East Valley Investment Group (EVIG). EVIG, Polly noted, had no assets.
EVIG was “owned” solely by another former BFA director named E.A. Kuhn When Kuhn gave his deposition after the scheme crashed, Kuhn had so little knowledge of EVIG that he said he could not name where his own company did its banking. He testified that he left complete management of EVIG up to BFA.
In his May, 1996 memo, Polley wrote to Crotts:
“… I believe that Christ demands and expects more from those that carry His name.
“II Corinthians 4:1-2 says ‘Therefore, since through God’s mercy we have this ministry, we do not lose heart. Rather, we have renounced secret and shameful ways, we do not use deception, nor do we distort the word of God. On the contrary, by setting forth the truth plainly we commend ourselves to every man’s conscience in the sight of God.’
“It is my opinion that the continuance of transactions such as the one outlined above [EVIG] fail to show the kind of turning away from sin required of true repentance.
“Proverbs 28:13 is quite clear, ‘He who covers his sins will not prosper, but whoever confesses and forsakes them will have mercy.’
“I firmly believe that so long as the Foundation continues to do transactions such as the one listed above [EVIG], that God will not be able to bless us as He wishes to. It is my sincere hope and prayer that God might use this conversation to persuade you of the need to make deep and lasting changes in the way we do Christ’s business.
“I think most IRA investors [in Ventures] would be shocked to learn that their dollars were put to this use. It appears the main motivation behind this transaction was to remove these notes from our books before the auditors required a writedown.
“As I stated in my earlier conversations with you, I believe that at its core this situation is a sin issue. I do not believe that our Lord and Savior, Jesus Christ, would have us conduct His business in a manner that withholds important information from our investors — information that might possibly change their decisions regarding investing with BFA. To have done so, and to continue to do so, is to deceive our investors regardless of the outcome to them. The Scriptures are quite clear that such an outcome is sin.”
Richard Polley resigned on August 5th, 1996.
In November, three months after Polley left the BFA, Michael Maxson, a BFA Financial Services account manager, quit.
Maxson also wrote a letter of resignation to Crotts. Maxson’s letter of November 3rd, 1996, like Tresch’s and Polley’s memo, was obtained and published by the Phoenix New Times:
“… Although I have had no direct involvement in the transactions in question or the associated accounting for these transactions, I am being encouraged by all counsel to disclose this information to the appropriate authorities.
“To date, I have been reluctant to take this step because of the religious nature of this organization and the possible adverse consequences to new, as well as current investors. However, it appears that a systematic effort has been made to continue hiding this questionable activity as the dollars invested in BFA continue to grow.
“I believe that I have certain responsibilities professionally, ethically and morally to bring these unprofessional and criminal actions to light. I feel it would be in your best interests to come forward and, therefore, I must respectfully request that you contact the appropriate legal authorities, i.e. United States Attorney or Arizona Attorney General as soon as possible.”
Two other Baptist Foundation of Arizona CPAs — Steve Brock and Karen Paetz — resigned from the BFA in 1996.
In response to the published letters from the former BFA staffers, the Reverend W. Berry Norwood, the compliant chairman of the BFA board of directors, told the Phoenix New Times that his board had seen the letters and memo written by Tresch, Polley and Maxson.
“The individuals upon whom you apparently rely never had the information necessary to evaluate the transactions, transactions in which they had limited involvement. 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,” Pastor Berry wrote to the newspaper.