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One day the law firm of Jennings, Strouss & Salmon was on top of the world — one of the oldest and most prominent Arizona firms, counting among its alumni U.S. District Judge Frederick J. Martone; U.S. Senator John Kyl, R-Ariz.; state supreme court Chief Justice Charles E. Jones; former U.S. Attorney General Richard Kleindienst; former U.S. Solicitor General Rex Lee; and any number of lesser judges and politicians. Then one of its biggest clients, the Baptist Foundation of Arizona (BFA), collapsed amid allegations of fraud. It filed for bankruptcy in the largest collapse of a charity in U.S. history, with more than 11,000 mostly elderly investors losing nearly $600 million. And the esteemed world of Phoenix-based Jennings Strouss began to crack. Investors threatened lawsuits, and the state opened a criminal investigation into everyone involved in BFA, including Jennings Strouss. The law firm has agreed to testify and has been granted immunity from prosecution. At issue was exactly what Jennings Strouss knew and when the law firm knew it — or should have known it. Today, nearly three years later, the 80-lawyer firm has not answered those questions publicly. Although it wasn’t sued, Jennings Strouss on May 14 announced a $21 million agreement with attorneys representing the BFA investors, the BFA Liquidation Trust and the Arizona Corporation Commission, which regulates securities in the state. The deal, which will pay nearly $18 million to investors, shields the firm from an investors’ suit and, presumably, from BFA-related complaints from the state over its exercise of due diligence surrounding public disclosures. The settlement needs final approval, and its language hasn’t been made public. The announcement came a week after BFA’s accounting firm, Arthur Andersen, agreed to pay $217 million to settle investors’ and the state’s complaints against Andersen. Neither Andersen nor Jennings Strouss admitted any wrongdoing. FALL FROM GRACE Here, pieced together from three years of court and public records, news reports and interviews with attorneys and state officials, is the story of a law firm that fell from grace. “It is,” says John Bouma of Snell & Wilmer, the Phoenix firm representing Jennings Strouss, “a story about how bad things happen to good people.” Jennings Strouss Managing Partner John West referred all questions to Bouma. The story revolves around Douglas Dunipace, described as a senior member of Jennings Strouss’ commercial department, a sought-after speaker and expert witness, a Phi Beta Kappa graduate of the University of Arizona and its law school and a community pillar who serves on various commissions and trusts. Other Jennings Strouss attorneys helped on one-time transactions, such as real estate deals that were attacked in civil and criminal actions, Bouma says. But Dunipace was the lead attorney on securities matters with BFA for about 10 years. Bouma says Dunipace was not an “insider” at BFA, and did not attend board meetings. He was primarily responsible for the accuracy of securities disclosure documents sent to investors. Reached by phone, Dunipace says he cannot discuss the case, then adds that he desperately wishes he could. His attorney, Gordon Greenberg of Chicago’s McDermott, Will & Emery, also declines to comment “for a variety of reasons, including the ongoing criminal proceedings.” Asked about Dunipace’s conversations with his superiors on problems at BFA, Greenberg replies, “Good question. But I can’t help you.” According to the records, questionable transactions began during Dunipace’s watch around 1994 and continued through 1997. By 1998, allegations were flying publicly in the press and from former BFA employees. In August 1999 the Arizona Corporation Commission issued a cease-and-desist order to BFA, accusing it of running a Ponzi scheme. BFA filed for bankruptcy in November 1999. Criminal indictments followed in April 2001, charging five BFA executives and insiders with 32 counts of fraud, theft and racketeering. The indictments allege that the defendants sold investments and savings accounts which they claimed were backed by collateral, but were not. They allegedly shifted the losses into shell companies, hiding the charity’s true financial status. The defendants include William P. Crotts, BFA president and CEO, and Thomas Dale Grabinski, senior vice president and general counsel. The prosecutor, state Assistant Attorney General Carolyn K. Passamonte, says the cases are in pre-trial conference hearings in Superior Court in Phoenix and no trial dates have been set. Three defendants have pleaded guilty to felony fraud and agreed to testify at the trials. Meanwhile, the office of state Attorney General Janet Napolitano has granted Dunipace and Jennings Strouss immunity from criminal prosecution. They have agreed to cooperate in the investigation and to testify at trials. LeRoy Johnson, director of enforcement with the Arizona Corporation Commission’s securities division, says most of the BFA board of directors were victims in the alleged fraud. They cooperated with investigators and waived attorney-client privilege so that Jennings Strouss could cooperate, he says. Attorneys on both sides say Dunipace’s integrity was never at issue. His judgment was. Bouma says that if there was massive securities fraud at BFA, Dunipace never had a clue. Some wonder why he didn’t. “It was a question of attorney malpractice,” says the state’s Johnson. “The red flags were apparent. They should have been brought to the [BFA] board’s attention.” One reason Jennings Strouss might be expected to spot red flags is that one of its specialties is securities fraud. Its Web site says that a three-person white-collar criminal defense team headed by attorney Douglas F. Behm has “provided defense representation in cases involving allegations of public corruption, securities fraud, tax evasion and fraud, government contracting fraud and RICO.” Dunipace is not part of that team. Passamonte says that when the state began investigating, Jennings Strouss asked Behm to begin his own investigation into BFA. Behm is also cooperating with the state, she says, as is at least one other Jennings Strouss attorney who participated in occasional transactions. One red flag, arguably, was that Andersen had paid $24 million in 1985 for its role in the Charles Keating savings and loan collapse in Arizona — and that the chief BFA auditor, Jay Ozer, was the same Andersen auditor who was disciplined in the Keating case. Accused of similar violations at BFA, he has lost his license as a certified public accountant. TIP FROM INSIDE A more tangible tip-off to problems reportedly came from inside BFA, according to Richard Himelrick of the Phoenix firm Tiffany & Bosco. He is lead counsel in the investors’ class action and co-counsel for the BFA Liquidation Trust, established to handle BFA’s assets on behalf of the investors. At one point in late 1997, he says, Dunipace received reports from a lawyer representing a former BFA accountant who was alleging fraud at BFA. Instead of thoroughly investigating, Himelrick says, Dunipace questioned BFA’s general counsel, who dismissed the allegations. That general counsel, Grabinski, is one of the five defendants facing trial. In a series of articles starting in April 1998, the Phoenix newspaper New Times alleged exactly the activity that eventually was officially uncovered at BFA, such as improper real estate and insider deals among its executives. On June 2, 1998, Jennings Strouss sent a 10-page letter to the BFA board of directors, reassuring them. It answered the articles’ allegations, point by point, saying there were inaccuracies in the newspaper reports, that there was no evidence of legal wrongdoing and that the transactions in question “were regular on their face.” Bouma says Dunipace prepared that letter, relying on information obtained from Andersen accountants and BFA staff. At least one reference in state documents suggests Jennings Strouss knew more than it admits. An Arizona State Board of Accountancy complaint filed against Arthur Andersen includes the statement that Jennings Strouss “had concluded that if state and federal securities regulators were fully aware of BFA’s securities activities and the flow of investment proceeds, BFA’s tax exempt status and its concomitant exemption from securities regulation would be invalidated.” Bouma says the statement is absolutely untrue, and that Jennings Strouss had no such knowledge. On the other hand, Himelrick says, “The law firm was on notice that fraud was occurring.” He says that Jennings Strouss approached him early on, signaling its willingness to settle so as to avoid being named a defendant in the investors’ class action, as Andersen eventually was. Jennings Strouss also talked with the Arizona Corporations Commission before any complaint was filed, and the state attorney general’s office. Negotiations began immediately, Himelrick says, and the settlement was reached on June 1, 2001. For legal reasons, authorities didn’t announce the settlement until the Andersen case was settled. It still must be made final by the court and accepted by investors. Then, in a letter dated Aug. 1, 2001, Jennings Strouss agreed to cooperate with the attorney general’s office and was assured that the office would “not charge Mr. Dunipace, JSS or any of JSS’ current or former attorneys with any criminal violation.” Dunipace and Jennings Strouss did not become defendants in the class action, were not cited by the commission overseeing securities fraud and were never charged with a crime. They also escaped national media attention, while headlines concentrated on BFA and Arthur Andersen. Dunipace continues to practice law with Jennings Strouss, and the Arizona State Bar Association says no discipline has been taken against him nor is there a pending complaint against him. Attorney Bouma credits the results not to fast footwork or nifty negotiating but to the firm’s innocence. He says there was never “any significant evidence of liability” at Jennings Strouss. So why did it seek so quickly to settle claims before they were even filed? “It is fair to say a major loss occurred to some pretty innocent people,” Bouma explains. “It was apparent some people would be held responsible eventually. There is something to be said for making an effort to resolve it quickly.”

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