Andersen faces another trial

Many elderly Arizonans face hardship after losing millions

David Schepp BBC News Online's North America Business Reporter

As if being caught up in the largest corporate bankruptcy in US history was not enough, Arthur Andersen, the embattled auditing firm, now finds itself defending its actions in the country's biggest non-profit collapse.

The Baptist Foundation... conceived of this fraud and perpetuated this fraud without our knowledge and assistance

Ed Novak, attorney, Arthur Andersen

In a case expected to drag on until July, Arthur Andersen's lawyers on Tuesday began defending the firm against charges that it failed to detect a fraud being perpetrated by the Baptist Foundation of Arizona (BFA), one of its audit clients.

Investors in BFA lost an estimated $590m (£365m) after the organisation filed Chapter 11 bankruptcy protection in 1999.

Investigators say the foundation was a scam aimed at bilking thousands of mostly elderly investors out of millions of dollars that Arthur Andersen failed to detect and report.

Wrongdoing denied

The case, being heard in State Superior Court in Phoenix, is unrelated to Arthur Andersen's role as auditor for bankrupt energy trading firm Enron.

Two months ago, Arthur Andersen agreed to pay a $217m settlement for its role in the BFA scandal. But the deal fell through after Andersen's insurance company said it could not pay.

Protests have hounded Arthur Andersen

Speaking to prospective jurors on Monday, Arthur Andersen lawyers said the firm was duped along with BFA investors, and denied it had a hand in any wrongdoing.

"The Baptist Foundation, through its senior management, conceived of this fraud and perpetuated this fraud without our knowledge and assistance," said Ed Novak, a Phoenix-based lawyer for Arthur Andersen.

He added the state of Arizona, BFA attorneys, and the Arizona Southern Baptist Convention were liable for failing to act on reported irregularities in BFA accounting practices.

Ponzi scheme

The BFA trust was founded in 1948 to promote Southern Baptist causes. In the 1990s, BFA along with two other firms sold some 11,000 investors investment products on the understanding that they would pay higher interest than what could be earned in banks.

But it later emerged that the BFA was using funds from new investors to meet its financial obligations, in what is termed in the US a Ponzi - or pyramid - scheme.

In 1999, Arizona authorities, suspecting fraud, ordered BFA to stop selling its products. Later that year, the trust filed for bankruptcy.

Arthur Andersen was implicated a year later for allegedly failing to note and take action against the fraud.

BFA executives have signalled that they will not testify at the Phoenix hearing.

'A very poor job'

At the heart of plaintiffs' case against Arthur Andersen is the claim that the firm placed greater emphasis on retaining clients than on spotting and reporting problems.

"When whistle-blowers came forward, the audit team chose not to turn over the rock for fear that something would be there," said Sean Coffey, the bankrupt trust's lead attorney.

He contends Arthur Andersen's negligence only compounded BFA's problems.

Among the thousands of investors who lost money is Louise Reynolds, a 77-year-old western Arizona investor who lost more than $100,000 along with her 86-year-old husband, Charles.

Mrs Reynolds hopes the court will find Arthur Andersen culpable for its actions.

"They should have caught this a long time ago," Mrs Reynolds said. "They did a very poor job, and I personally hope they pay for what they did to us."