The long-running Baptist Foundation of Arizona trial entered its last phase Monday as attorneys delivered their closing arguments in the case that has been described as Arizona’s Enron.
The defendants, former BFA President William Crotts and former BFA general counsel Thomas Grabinski, are each charged with three counts of fraud, one count of racketeering and 23 counts of theft.
The criminal trial began in September, and at 10 months it ranks as the longest case ever prosecuted by the Arizona Attorney General’s Office, exceeding the Charles Keating/Lincoln Thrift case.
The BFA defendants are accused of playing on religious affinities to raise millions of dollars from investors, many of them elderly, who believed their money was going to benefit Southern Baptist charitable causes. Prosecutors say the defendants were operating a Ponzi scheme in which money raised from investors was used for elaborate schemes to make the taxexempt organization appear solvent so it could raise more money from investors.
Prosecutors said BFA owed 11,000 investors $550 million at the time the foundation collapsed and went into bankruptcy proceedings in 1999.
The investors eventually recovered $260 million from the liquidation of assets, mostly real estate.
In his closing arguments Monday, prosecutor Donald Conrad said the foundation’s troubles began with the Arizona real estate downturn in the late 1980s, when properties owned by BFA lost value.
To hide losses that would otherwise appear on BFA’s books, the defendants created off-balance-sheet “sham” companies to assume the ownership of the assets, Conrad said. The defendants used funds raised from investors to make loans to those other companies, which in turn used the money to acquire the assets from BFA, giving the false appearance of income to BFA.
Conrad said the defendants were able to hide those transactions from investors and Arthur Andersen, BFA’s auditing firm, for a decade.
In the long run they hoped to invest their way out of their financial “hole,” Conrad said, but in fact the collective debt of BFA and the sham companies increased as time passed, he said.
“Rather than face the shame, they kept feeding investors lies and half truths to get the money to cover up their tracks,” Conrad said.
In his closing argument, Daryl Williams, attorney for Grabinski, insisted that BFA’s financial condition was “rock solid” and “no one was in danger of losing a dime” when the state intervened in 1999 to close the foundation.
The long-term value of the real estate assets assured that the other companies would eventually be able to repay their debts to BFA and in turn to the investors, he said.
But when the state moved to close BFA and force it into bankruptcy, those assets lost their value, he said. The liquidation of the assets results in the recovery of only a small percentage of their full market value because the liquidator was forced to sell them quickly, he said.
“You cannot rely on the prices obtained in liquidation proceedings to say there was some hole here,” Williams told the jurors.
“This (low return) is typical of liquidation proceedings.”
He also challenged the prosecutor’s assertion that investors were not told of risks involved in their investments. He pointed to an offering circular given to investors that stated repayment was not guaranteed and that their investments were backed by promissory notes secured by real estate.
“They (the defendants) were doing what they said they were doing, and they were being very successful at it,” Williams said.
The attorney for Crotts will give his closing arguments today and then the prosecutor will give his rebuttal to the defense arguments before the case goes to the jury.
Jury deliberations are scheduled to begin Monday.