May 16, 2002 | Read Time: 3 minutes
The Arthur Andersen accounting company has reached a new agreement to pay $217-million to settle lawsuits arising from its role as auditor of the Baptist Foundation of Arizona, which collapsed in 1999 owing $570-million to more than 11,000 people who had bought securities from the nonprofit group. The agreement means that investors may be able to recoup about 70 percent of the money they put into the failed foundation.
Andersen had reneged on a similar deal in March, after its insurance carrier, a Bermuda company owned by Andersen and its international affiliates, declined to pay the settlement, citing its own financial problems.
The new accord came a week after a trial had started in Arizona state court on a civil lawsuit filed by a bankruptcy trust representing investors in the nonprofit organization. The suit accused Andersen of ignoring or inadequately investigating potential financial fraud by Baptist Foundation officials.
The settlement, which resolves the trust’s case, a separate class-action lawsuit, and disciplinary proceedings by state regulators, came on the first day of jury selection in a Houston federal court in a criminal case against Andersen related to the Enron collapse.
Under the Arizona deal, Andersen neither admitted nor denied wrongdoing in its work with the Baptist Foundation. In a written statement, the company appeared to pin blame for the foundation’s collapse on others, including the group’s leaders, eight of whom have either pleaded guilty to fraud charges or await trial.
“There is clear evidence,” the company’s statement says, that foundation officials “engaged in a conspiracy of silence to deny essential information” about the foundation’s financial condition to Andersen’s auditors.
The statement also says that the company hopes to be able to cover the $217-million settlement by injecting new capital into the faltering Bermuda insurance company, thus improving its ability to pay.
Andersen has already made an $11.3-million down payment to an account controlled by the Arizona attorney general’s office. The entire settlement bill is due no later than October 25.
The deal also requires the two Andersen accountants who were primarily responsible for the foundation’s audits to relinquish their licenses to practice in the state. And if Andersen fails to meet the October payment deadline, the deal calls for the entire company to surrender its registration to practice accountancy in Arizona.
If the money is paid in full, investors who bought securities from the foundation can expect, after lawyers’ fees, more than $170-million, according to the bankruptcy trust. Combined with money from other settlements and the sale of foundation assets, an estimated $418-million could be available to investors, according to the trust.
The foundation, which was formed in 1948 as the fund-raising and endowment arm of the Arizona Southern Baptist Convention, sold investments to church members, who were told that the foundation’s profits would benefit Christian causes. Investors, many of them elderly and seeking retirement funds, apparently were lured by the charity’s promises of lucrative financial returns. The foundation earned money to pay investors through a complicated web of interlocking nonprofit and for-profit subsidiaries that invested largely in real estate.
But soured real-estate investments in the late 1980s created huge losses, and, according to state regulators, the foundation wound up using scores of shell companies to hide the losses and to raise cash to pay investors promised returns. The foundation’s operations, regulators said, had turned into a Ponzi scheme, in which money from new investors was used to pay old ones. The group filed for protection from creditors under federal bankruptcy laws, marking one of the biggest financial collapses ever by a charity.
