PHOENIX (BP)—The much-anticipated restructuring plan for the troubled Baptist Foundation of Arizona includes filing for a Chapter 11 bankrupcty reorganization. Under the plan, more than 13,000 investors can choose options of 20 cents on the dollar of their investments or shares in a soon-to-be created for-profit company.

The embattled BFA, an agency of the Arizona Southern Baptist Convention, with more than $500 in investment products, is under an Aug. 10 "cease and desist" order by the Arizona Corporation Commission (see "Baptist Foundation Faces Investment Fraud Charges," Christianity Today, Oct. 25, 1999, p. 18). The commission ordered BFA to discontinue immediately the offering and selling of its investment products. According to the order, the foundation or its affiliates sold securities from Arizona through misrepresentations and omissions of fact and engaged in business practices in violation of state law.

In a news conference in Phoenix Nov. 5, the BFA and its Ad Hoc Noteholders Committee, representing BFA investors, revealed the terms of the BFA's restructuring plan. Officials said the BFA would file for protection under Chapter 11 of the U.S. Bankruptcy Code. That would protect the company from creditor suits while developing a reorganization plan which must be acceptable to the creditors and the bankruptcy court.

"Due to the economic circumstances of some of the investors, the [restructuring agreement] permits each investor to choose one of two alternatives," said Jock Patton, Phoenix attorney and chairman of the committee formed to oversee the restructuring process. "Under the first alternative, known as the 'Cash Out Option,' each investor will receive cash amounting to approximately 20 percent of the principal and interest due to them for their debt securities and related claims." The cash out option will be subject to a cap of approximately $40 million.

"Under the second alternative, known as the 'New Securities Option,' investors may elect to receive a unit comprised of two securities in a new for-profit company that will be formed as part of the restructuring," Patton said. A unit is comprised of preferred stock with a dividend rate equal to 6 percent per year, plus common stock representing 100 percent of the initial ownership of the new company. That company would hold the foundation's existing assets estimated to be worth $160 million to $200 million. The first dividend payment would be scheduled to be paid two years after the new company begins operation.

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"Investors may also choose to split their debt securities or related claims between the cash out option and the securities option," Patton said.

"To further enhance the potential recovery to investors, the restructuring agreement also requires the formation of a litigation trust to pursue potential claims against certain professional firms previously employed by BFA and other third parties previously employed by or doing business with BFA," Patton said. "The litigation trust will be funded with up to $5 million to pursue such claims. Each investor will be entitled to share proportionally in the recovery from the litigation trust, regardless of which investment option they select."

Potential litigants could include the three top officers of the foundation, who have been fired; Arthur Anderson and Co., the foundation's former auditor; Jennings, Strauss and Salmon, former legal counsel; and the Arizona Southern Baptist Convention.

Arizona investigators also said they have found evidence the foundation used bogus transactions to cover up its real estate losses in the past decade.

An investigator for the Arizona Corporation Commission's Security Division, Mark Sendrow, said he found evidence the foundation's officers used fraudulent transactions in the last decade to conceal real estate losses. That resulted in bad information about the condition of the BFA when talking to potential investors.

Sendrow said if the investigation concludes officers used the foundation's funds for their own purposes, criminal charges will be filed.

Patton said the litigation fund would not affect a class-action lawsuit, previously made public, on the behalf of the investors. He said he hoped the investors would drop the lawsuit in favor of the litigation effort in the reorganization plan.

Patton explained the problems of the foundation included an investment mismatch in which long-term investments failed to produce income to meet short-term obligations. Poor investment decisions, deceptive accounting and high overhead, including large salaries and perks to officers, helped bring about the BFA's troubles.

The foundation's investments, which could not easily be liquidated, failed to generate enough cash to meet investors' withdrawals and other cash needs. Not writing down the value of slumping real estate holdings, investment managers effectively shielded such assets from scrutiny by transferring them to affiliated companies. There were numerous transactions between related administrative parties and, consequently, investors apparently absorbed higher costs than they would have with "arms-length" transactions.

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However, Patton told the news conference, "We have a very viable company under all these improprieties."

The board of directors of BFA named a new, five person Restructuring Committee with the responsibility for overseeing BFA until the expected completion of the restructuring in early 2000. Members of the committee, including Patton, are Jospeh Chan, Dan Stringer, Joseph Panter and Mark Roberts.

Unlike the foundation, the new company, as yet unnamed, will have not ties to the Arizona Southern Baptist Convention or any church organization. The new company will focus solely on recovering the most money for investors, Patton added.

For those who exchange their investments—primarily bonds—for stock in the new company, they will receive a stake in a broad investment portfolio that includes real estate, venture-capital positions, and other items. Patton said there would be a wealth of assets in many categories. BFA said it is intended that the new preferred and common stock of the new company will be registered for public trading on NASDAQ or an appropriate stock exchange in order to provide greater liquidity to the investors.

Upon successful completion of the restructuring, BFA will no longer exist. Instead, a new nonprofit Baptist charitable organization will be established. The new charitable organization will be involved in traditional Baptist charitable activities, including ministries, education and providing routine trust and estate planning. It will be expressly prohibited from selling debt securities.

William O. Crews, president of Golden Gate Baptist Theological Seminary, Mill Valley, Calif., and chairman of the Investor Committee which helped work out the restructuring plan, said, "[T]he negotiations with BFA and its representatives have been intensive, and numerous alternatives were explored. The Investor Committee believes that the restructuring that has been agreed to under these difficult circumstances represents the best alternative to maximize the recovery for all investors."

Crews said the committee believes that a liquidation of BFA and its assets would be "extremely harmful" to all investors. The current plan not only enhances potential recoveries but establishes meaningful safeguards to ensure that this does not happen again," Crews said.

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BFA in recent months has fired its three top executives, laid off 72 employees and shut down several offices.

Related Elsewhere

See our earlier coverage of the Baptist Foundation of Arizona.

Much of the investigative work into the Baptist Foundation was done by Terry Greene Sterling of the Phoenix New Times, which has a section of its web site devoted to its ongoing series, "The Moneychangers."

The official Baptist Foundation of Arizona web site has a list of frequently asked questions regarding the restructuring, but not much else.

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