Taken On Faith

Ever since Enron there has been worry in this country about the security of the money we put away for retirement - it's a shock to see people lose everything they worked for and not even know it.

This past spring, Scott Pelley reported another warning about our retirement funds - the spectacular collapse of an investment fund that wiped out the savings of more than 11,000 people, the investors in the Baptist Foundation of Arizona. Many signed up after hearing a salesman's pitch in their own church.

Baptist Foundation failed in 1999. Investors had $570 million in the fund. It is the largest bankruptcy of a non-profit organization ever. Like Enron, Baptist Foundation concealed its losses, and like Enron and Worldcom, the accounting firm Arthur Andersen audited its financial reports. Today many of the investors say they believed that the security of Baptist Foundation and the credibility of Arthur Andersen could be taken on faith.

Thousands of investors lived on monthly checks from the foundation - the interest on their investments. Then, three years ago the checks stopped coming.

When a letter came to Freda Sanders saying that Baptist Foundation was broke, she couldn't believe her eyes. "Impossible," Freda remembers thinking. "Because everyone said they'd been in business so long they would - no way."

One can understand her shock upon seeing Baptist Foundation's sales pitch, which states "not one investor has ever lost a penny of their investment or the interest they earned."

But as the announcer spoke those words, Baptist Foundation was losing millions. The Foundation started back in the 1940's, paying a high rate of return and using some of the profits to build churches. But in the 1980's came new management. Under CEO Bill Crotts, Baptist Foundation went completely, secretly broke.

A series of bad real estate investments ruined Baptist Foundation. But instead of admitting its losses the Foundation hid them through fraud.

Here's how it worked: Baptist foundation sold its rotten real estate to a company called ALO. The bad investments moved off the foundation's books and over to ALO. But ALO wasn't really a separate company. It was created, controlled, and financed by Baptist Foundation itself. The real estate sales were phony, just an accounting trick to make the foundation's books look good and conceal its overwhelming debt.

Arizona Attorney General Janet Napolitano indicted eight Foundation officers for fraud including the CEO Bill Crotts.

"As they sucked more and more investors in, there was no reasonable likelihood that those investors would ever get any return on their money," Napolitano says. "And in fact, they lost all their money."

Charles and Wanda Phillips put their whole nest egg into Baptist Foundation, $120,000.

"I felt it was safer there than it would be in a bank or any other institution," Charles says. "Because we thought we were dealing with Christians and a real Christian doesn't steal your money."

When the checks stopped coming, Wanda became scared about what would happen.

"I panicked," Wanda says. "I panicked terrible. I couldn't sleep at night or anything else because I didn't know what we were going to live on."

The Phillips' had retired to a little dream house in Arizona. But now they're back at work. At 69, Charles is working in a grocery store, Wanda, 66, is in a chiropractor's office.

"It's hard to be poor," says Wanda. "It really is."

Napolitano says Baptist Foundation managed to convince the investors that it was running a clean operation by producing audits every year.

"They were audited by a Big Five accounting firm," says Angela. "The audits were clean, everything seemed hunky dory."

Arthur Andersen was responsible for the audits. And that, Attorney General Napolitano says, is all Baptist Foundation needed to make the scheme work-- the legitimacy of an independent audit to reassure investors.

The state of Arizona sued Arthur Andersen claiming that, like in the Enron case, the accounting firm overlooked serious trouble and issued clean audits year after year.

Although Napolitano says the act "at minimum, is willful ignorance, she says there were warnings that should have been eye openers for Arthur Andersen.

Starting with nothing less than a Baptist Foundation insider. Karen Paetz was an accountant for the Foundation. More than two years before the bankruptcy, Paetz had a crisis of conscience. In a deposition she testified she met with Andersen and explained the nature of Baptist Foundation's phony partner ALO.

After Paetz there was more. A Texas Baptist group became suspicious and called Andersen saying they thought the Foundation was a fraud. A Phoenix newspaper ran 13 articles that laid out the scheme in detail. Even in its own internal documents Andersen called the Foundation "a maximum risk client." But there was no hint of any of this in the public audit reports.

Ed Novak represents Arthur Andersen. He's a lawyer defending Andersen in the Baptist Foundation suits.

"There is no way in corporate America to ensure against a well-orchestrated fraud," Novak says. "That's simply not what the ordinary audit is designed to detect."

Novak believes there is only one way Arthur Anderson could have figured out Baptist Foundation's scam.

"Arthur Andersen could have figured it out if the people who were perpetrated the fraud and then decided to provide some information had provided full and complete information," he says.

Novak also thinks that the warning from Foundation insider Karen Paetz was just too vague to follow. Andersen's conclusion was there was nothing wrong with Baptist Foundation's financial statements.

"This was a fraud that was deep, it was thorough, it was long in duration and it was not cracked by Arthur Andersen," says Novak. "It wouldn't have been cracked by any auditor."

But, in fact, it was. Dee Griebel says she figured out the fraud in an afternoon. She's a CPA and financial adviser in Phoenix. A worried investor asked her to have a look at the Foundation's financial statements.

"This was about literally Accounting 101, Auditing 101," Griebel says. "The assets versus the liabilities were almost equal. I said, 'Whoa, there's no cushion here.'"

Griebel noticed one of the Baptist Foundation's biggest assets was a $50 million loan owed to it by none other than its phony partner, ALO. She says she knew at this point that Baptist Foundation was broke.

So she did something that Andersen never did. She turned to the state corporation commission for ALO's financial records, public documents anyone can get.

"I'll go to my grave remembering my emotional reaction," Greibel says. "They had a negative net worth of about $106 million. And I said, 'Whoa! I wouldn't loan these people a penny.'"

What did she do with her discovery? She called Arthur Andersen. She called Andersen's Chicago headquarters and called the Phoenix office twice.

"I made the message very blunt because I wanted to be sure to get their attention," Dee says. "You must withdraw your unqualified opinion immediately. The company's effectively broke. Call me."

Andersen never called back. From the first warning to the end, Andersen issued two more clean audits. And Baptist Financial took in another $200-million from investors.

Andersen's representative, Ed Novak, says Baptist Foundation's board should share the blame, and the state of Arizona, and to some extent the investors.

"Andersen is just as sorry for what happened to the investors as everyone is," Novak says. "There are many parties to blame for this collapse. No investor should rely solely upon the fact that there is an audit. Investors need to do their homework. They need to be diligent, they need to be skeptical."

"People need to understand that an audit is not a guarantee," Novak says.

But Lynn Turner says it should stand for something. Turner was chief accountant at the Federal Securities and Exchange Commission. He says investors had a right to put all they had in Baptist Foundation - given the audits.

"If you'd gone to Baptist Foundation and the numbers were really true numbers and showed how lousy, then, fine, you lost everything," Turner says. "But when the numbers look right and they made a decision based on that, okay? Then it's a total cop-out of the system for people to say its partially their fault. That's baloney."

In a single day the retirement they saved for all their lives was gone. Freda explained that the change from having money, to having nothing at all was hard.

"You just do without things," Freda says. "Your health insurance goes up all the time and it's worrisome. I dropped my termite insurance. The bugs can have my house because I won't need it much longer."

"We should have started checking more," adds Ray. "We used to go to the store to shop and all, for clothes and stuff. And I go to the Salvation Army now. It's not right."

In March, Andersen settled the Baptist Foundation lawsuits. It will pay $217 million. Two of its auditors will surrender their licenses. The settlement means, next fall, investors will get 44 cents on the dollar. There will be more as the foundation's real estate is sold. With Enron and Baptist Foundation, Andersen now has the distinction of having been the auditor at both the largest corporate bankruptcy and the largest bankruptcy of a non-profit organization in U.S. history.