Andersen/Baptist Trial Gets Underway

May 6, 2002 (PLANSPONSOR.com) - The former chairman of the board of the Baptist Foundation of Arizona (BFA) denied Friday that he had been tipped off early to fraudulent activity by the BFA's management.

Attorneys for Arthur Andersen LLP had alleged that the board was aware of the fraud as early as 1996, according to Dow Jones. 

However, Reverend W Berry Norwood acknowledged that the BFA Chief Executive William Crotts told the board at a December 5, 1996, meeting that the BFA had transferred real estate assets to another company, in exchange for IOUs. Norwood also said the board was told that that firm was controlled by an entrepreneur who “made money maturing properties,” according to the DJ report.  Additionally, Norwood claimed that Crotts told the board that if something happened to the firm, the BFA would get back the properties.

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Ponzi Scheme?

The BFA offered high interest rates on retirement accounts and put its money in real estate. It claimed to be assisting in the funding of Baptist ministries that, combined with a promise of above-market returns, drew in some 13,000 investors. However, Arizona regulators said it was operating a Ponzi scheme – using money from new investors to make payments to old investors.

Senior managers at the BFA allegedly used transactions with companies run by current and former foundation executives to hide investment losses. One reason the scheme lasted as long as it did, the lawsuits had alleged, was that Andersen continued to certify the foundation’s financial statements. 

Signs of Trouble

Andersen attorney Peter Devereaux showed the jury footnotes in audited financial statements of BFA for 1997 that acknowledged that the foundation was paying out millions more in interest each year than it was earning – and that it expected to continue doing so for years.  However, there was no qualifier attached to BFA’s financial statements expressing doubt about BFA’s ability to continue as a going concern.

The trust’s expert witness, Dan Guy, testified that the financial statements of BFA “beg for a work paper” on whether there was doubt about BFA’s ability to continue as a going concern.

Devereaux, pointed out that according to accounting standards, an auditor is only required to evaluate whether there is substantial doubt about an entity’s ability to continue doing business for a period “not to exceed one year.”

Andersen was hired to advise the BFA on its vulnerability to IRS scrutiny, having audited the Foundation’s returns from 1984 though 1997, according to the Washington Post. According to the suit, an Andersen tax specialist spotted potential trouble, which she thought could affect Andersen’s audit opinion. But, in an action eerily similar to recent accusations in the Enron case, an Andersen partner allegedly told her to delete her written warning.

Court Costs

Andersen had reached a potential $217 million settlement in March – just days prior to going to trial. That agreement would have been the second-largest litigation settlement ever by an accounting firm over its work for an audit client, and the largest-ever by Andersen. 

However, a month later Andersen says its insurance carrier was unable to pay the promised settlement – and a trial date was reset.

Ca. Court Ruling Boosts Employers' Sex Harassment Defenses

April 18, 2001 (PLANSPONSOR.com) - California courts' practice of holding employers strictly liable for supervisor sexual harassment has been called into question by a recent 9th U.S. Circuit Court of Appeals ruling.

The court ruled last week that a woman whose sexual harassment claim was thrown out under federal law — because she did not use her company’s policies to deal with harassment claims before she sued — cannot pursue her claims under state law for the same reason.

The ruling “is going to do away with strict liability in California. And that is clearly a major defeat for employees,” said plaintiff’s attorney Mark Rudy.

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“Reasonable Care” Defense

In upholding a federal district court decision to throw out the woman’s state claims, 9th Circuit Judge Arthur Alarcon said that employers are allowed the same defense against harassment suits under California’s Fair Employment and Housing Act as they receive under federal Title VII of the Civil Rights Act of 1964.

In so doing, Alarcon ruled that previous California Court of Appeal opinions holding employers “strictly liable” for supervisor harassment did not preclude the defense established by the U.S. Supreme Court in two 1998 decisions.

The Supreme Court ruled in those cases that employers can avoid liability by showing that they exercised “all reasonable care” to prevent and correct the harassment, and that the employee did not take advantage of preventive or corrective company policies.

Faced with predicting how the California Supreme Court would decide the issue, Alarcon explained:

  • That California courts have consistently looked to Title VII for guidance in interpreting FEHA.
  • That the two statutes had the same legislative intent.
  • FEHA’s requirement that employers “take all reasonable steps to prevent harassment” is similar to the first test of an affirmative defense.

Attorney Richard Rahm, who represents management in employment disputes, said the 9th Circuit was looking at public policy. The judges “want to encourage employers to have a strong anti-sexual harassment policy, ” Rahm said.

– Fred Schneyer                                                       editors@plansponsor.com

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