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

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Beginning in late August, 1999, a raft of lawsuits against the BFA were filed in Maricopa County Superior Court.

In the months after the Arizona Corporation Commission shut down the BFA, 10 separate fraud lawsuits against the Foundation, including two class-action lawsuits, were submitted to the Court.

The first suit was filed on August 27th by BFA investor Franklin Kestner Sr.

Kestner, a Pima County resident, had invested $150,000 with BFA. Kesnter’s suit was a class action lawsuit, involving thousands of BFA investors,

Kestner named as defendants Crotts, Grabinski, Norwood, former BFA directors Harold Friend and Jalma Hunsinger and current director L. Dwain Hoover, the entire BFA board of directors, and dozens of BFA subsidiaries and affiliates,.

Another suit was filed by Richard Kimsey, a Southern Baptist pastor, who accused Crotts, Grabinski, Deardorff, the BFA directors – and the Arizona Southern Baptist Convention — in his fraud complaint.
Kimsey argued that the Arizona Southern Baptist Convention “assists the Baptist Foundation of Arizona in persuading pastors and others to invest with the Foundation.”

Richard Kimsey invested $100,000 with the BFA After Kimsey spoke out against the BFA, he told the Phoenix New Times that he received death threats, and that the words “white trash” were painted on his house. He also said he lost half his congregation due to his stance on the BFA and the Arizona Southern Baptist Convention.

James Cook was an unlikely plaintiff against the BFA. Cook, a former Taco Bell franchise owner and former board member of the BFA, filed lawsuit against his former board. Cook contended, that BFA ha”unjustly enriched” by freezing his $2 million “Easy Access Investment.”

This was personal. After he left the BFA board, Cook had an office at BFA’s headquarters at 1313 East Osborn.

On November 9th, 1999, the Baptist Foundation of Arizona filed Chapter 11 bankruptcy. The BFA claimed $640 million in liabilities, with only $160 million to $200 million in assets.

Along with the bankruptcy filing, the BFA announced the Foundation would be replaced by a new Southern Baptist foundation, one expressly prohibited from borrowing from investors.

A problem for BFA investors was that most of the Foundation’s assets were in illiquid real estate. Much of that real estate was connected to the phony deals in which BFA officers kited millions of investors’ dollars.

BFA proposed a bankruptcy settlement to pay investors. They offered two options.

• “The Cash-Out Option:” BFA would place $40 million in a pool to pay investors 20 cents for each dollar invested. The money was to be paid upon completion of the bankruptcy, which BFA predicted would be in “early 2000.”

• “The New Company Option:” Investors could trade in their now-worthless BFA promissory notes for stock worth about 40 percent to 50 percent of their original investments in a “New Company,” to be formed to take over BFA’s assets. The “New Company” would, after two years, pay a “dividend” of 6 percent.

On February 18th, 2000, BFA investors filed a class-action lawsuit against Arthur Andersen, LLP, seeking to recover $400 million. The Plaintiffs charged that Arthur Andersen did not follow Generally Acceptable Auditing Standards.

In November of 2000, a federal judge signed a bankruptcy settlement plan that cashed in an estimated $240 million in BFA assets. This money was to be divided among BFA investors.

The Arizona State Board of Accountancy, in December, 2000, filed a complaint against Arthur Andersen LLP, seeking $600 million in restitution for investors.

The next month, January 2001, the Arizona Corporation Commission and Arizona Attorney General’s Office filed suit against Arthur Andersen for its “clean” opinions of BFA’s financial health during the ponzi scheme.

On May 8th, 2001,a Maricopa County grand jury indicted former BFA President, Bill Crotts, former general counsel, Thomas Grabinski, former board members Lawrence Hoover and Harold Friend and other functionaries of the scheme on various charges of fraud.

The next month, Jalma Hunsinger Donald Deardoff, Edgar Alan Kuhn plead guilty to fraud and theft charges and agreed to testify for the state against Crotts and the others.

In May of 2002, Arthur Andersen agreed to settle its lawsuit a week after the trial began. The firm would pay a $217 million settlement to investors. The settlement came to $203 million after attorneys fees. This was about 40% of what was invested. And it still needed to be collected.

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