Baptist Charity Involved in Alleged Investment Scam Files for Bankruptcy in Arizona

The Baptist Foundation of Arizona filed for bankruptcy in federal court last week, owing nearly $600-million to 13,000 people who had bought securities from the organization.

The foundation’s bankruptcy marks one of the biggest financial collapses ever by a charity.

Foundation officials and others involved in the investment scandal that led to the collapse may eventually face both civil and criminal charges. An investigation being conducted by Arizona’s Attorney General’s office and the state’s Corporation Commission has already revealed that the foundation used bogus transactions and accounting tricks to hide financial losses and mislead potential investors.

The foundation was created 51 years ago by the Arizona Southern Baptist Convention to raise money and manage the endowments of Southern Baptist charities, and through its history, the foundation has provided a total of $1.3-million in gifts to church causes. But the foundation has operated independently of the convention, and state regulators say it is unlikely that the statewide group would be held liable for the foundation’s actions.

Officials at the Arizona Southern Baptist Convention were unavailable for comment.

The Baptist foundation began selling investment products to church members in 1983. In a short time, it had created a complicated web of dozens of interlocking non-profit and for-profit subsidiaries to operate its real-estate and other investment deals.

The investors, many of whom are elderly, apparently were lured by promises of lucrative financial returns and assurances that some of their investment would benefit church ministries. The foundation halted security sales in August, however, when state regulators found that it did not have the money to cover its debts to investors.

Potential financial losses in the case overshadow the losses accumulated by non-profit groups and donors who gave money to the Foundation for New Era Philanthropy. New Era, which solicited investments largely from Christian institutions, folded in 1995 after taking in about $350-million in what had amounted to a Ponzi scheme.

Paul D. Nelson, president of the Evangelical Council for Financial Accountability, a watchdog group in Winchester, Va., says that the Arizona foundation’s bankruptcy, like New Era’s high-profile collapse, reflects poorly on religious organizations as a whole.

“It’s an investment scam, yes,” Mr. Nelson says, “but because it is a religious organization, it only fuels stereotypes about taking advantage of people based on their faith.”

Among Southern Baptists in Arizona and the neighboring states, where many of the investors live, the impact of the case may be more direct. Some Baptist leaders worry that fund-raising efforts by Baptist agencies and local churches may be hampered not only by ill will created by the foundation’s troubles, but also simply because some donors will not have money to give.

“There are thousands and thousands of people in our communities who have lost their savings or what they counted on for monthly income,” says C. Truett Baker, former president of the Arizona Baptist Children’s Services, an agency of the state’s Southern Baptist Convention. “With what are they going to make donations?”

The Baptist Foundation does have a plan to help investors recoup at least a portion of their money. They can either “cash out” of the foundation, receiving 20 per cent of the value of their investments and the interest due to them, or elect to receive shares of stock in a new for-profit company that will be publicly traded. The company will be organized to hold the foundation’s existing assets, which are estimated to be between $160-million and $200-million.

Both options for investors have limitations. A total of $40-million is available to those who choose to cash out. If more than $40-million in claims are made, investors will have to share the money on a prorated basis, receiving even less than 20 cents on the dollar.

Investors who choose to roll their money into securities may be risking even bigger losses. The new company will, like its not-for-profit predecessor, invest its assets in real estate, venture-capital deals, and some equities. It expects that its preferred stock will start paying annual dividends of 6 per cent by 2002. But the value of the investors’ shares will depend on the performance of the new company’s investments and how it fares in the stock market.

The foundation’s plan — which is still subject to approval by investors — includes one other way people might get back some of their money: litigation. The foundation says it will pay up to $5-million into a trust intended to pay legal fees to pursue claims against what a spokesman called “any third parties” that could be held liable for the foundation’s troubles. Investors who agree to receive any money recovered in such litigation must give up their rights to pursue other legal action against the foundation, such as joining the two class-action lawsuits that have already been filed against the foundation and its affiliates.

A written statement from the foundation says that at the completion of the bankruptcy proceedings and the creation of a new for-profit company, the Baptist Foundation of Arizona will no longer exist. It says that a new charity will be established that will be involved in “traditional Baptist charitable activities, including, for example, ministries, education, and providing routine trust and estate planning.” The new charity, the statement says, will be prohibited from selling debt securities.

The foundation’s statement also acknowledges past wrongdoing, saying that the organization concealed money-losing investments by transferring them to affiliated companies. It also says that the foundation’s “operating overhead was maintained at excess levels” and that it engaged in costly transactions with insiders. Since August, the foundation has fired its top three officials, severed ties with the law and accounting firms with which it had worked, laid off 72 of its 127 employees, and closed its two branch offices.

As for how Southern Baptists in Arizona and elsewhere will emerge from the mess created by the foundation, Bill May, president of the Arizona Church Growth Board, a unit of the state convention, says this: “It’s like family. You have to deal with the embarrassment of it, the cleanup of it, but it doesn’t put you out of business.”