Source: https://www.sec.gov/litigation/complaints/comp17623.htm
Timestamp: 2019-04-24 19:53:18+00:00

Document:
Complaint: SEC v. Church Extension of the Church of God, Inc., et al.
1. This matter involves an $85 million fraudulent scheme perpetrated by Church Extension of the Church of God, Inc. ("Defendant Church Extension"), United Management Services, Inc. ("Defendant United Management"), James Perry Grubbs ("Defendant Grubbs") and Shearon Louis Jackson ("Defendant Jackson") (hereinafter, collectively the "Defendants") and others, in connection with the offer and sale of investment notes to thousands of investors nationwide, the vast majority of whom are members of the Church of God.
2. From at least 1996 through at least April 2002, in connection with the offer and sale of investment notes, the Defendants and others distributed, among other things, advertising materials and offering circulars to prospective and current investors. These materials, among other things: a) misstated the true financial condition of Defendants Church Extension and United Management by artificially inflating income, which offset losses and enabled Defendant Church Extension to reflect positive income instead of recognizing losses; b) mislead investors about the primary use of their investments when, instead of funding church loans, Defendant Church Extension used investment proceeds to make interest and principal payments to prior investors and fund speculative real-estate transactions; and c) misstated the safety and risk associated with the investment notes.
3. The Defendants directly and indirectly, have engaged and, unless enjoined, will continue to engage in acts, practices, and courses of business that constitute and will constitute violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §77q(a)] and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder [15 U.S.C. §78j(b) and 17 C.F.R. §240.10b-5].
4. Plaintiff Commission brings this action to enjoin such acts, practices, and courses of business, and for other equitable relief pursuant to Section 20(b) of the Securities Act [15 U.S.C. §77t(b)] and Sections 21(d) and 21(e) of the Exchange Act [15 U.S.C. §§78u(d) and 78u(e).
5. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. §77v(a)], Section 27 of the Exchange Act [15 U.S.C. §78aa] and 28 U.S.C §1331.
6. The transactions, acts, practices and courses of business alleged herein occurred within the jurisdiction of the United States District Court for the Southern District of Indiana and elsewhere.
7. The Defendants, directly and indirectly, have made use of the means and instrumentalities of interstate commerce and of the mails in connection with the transactions, acts, practices and courses of business alleged herein in the Southern District of Indiana and elsewhere.
8. The Church of God was established in 1881 and is headquartered in Anderson, Indiana. The Church of God has approximately 2,239 affiliated local congregations and approximately 231,048 members nationwide.
9. Defendant Church Extension was incorporated in 1921 under the laws of the state of Indiana as a non-profit corporation and is organized as a tax-exempt entity under Section 501(c)(3) of the Internal Revenue Code. The Church of God endorses Defendant Church Extension, whose principal offices are located in Anderson, Indiana. Originally established as a fundraising entity for the Church of God, Defendant Church Extension's stated primary business purpose is to fund the construction of new churches and renovations of existing churches. In or about 1922, in furtherance of this purpose, Defendant Church Extension began offering and selling investment notes to members of the Church of God. In addition to its investment note program, Defendant Church Extension receives endowments to fund specified charitable projects and provides charitable services to members of the Church of God, including, but not limited to, charitable trusts, annuities and pooled-income funds. Defendant Church Extension also engages in other religious ministries, including but not limited to youth, retirement and affordable housing. Defendant Church Extension operates and manages its ministries, including extensive real-estate holdings, through a complex series of for-profit subsidiary corporations and controlled non-profit affiliates. On or about May 2, 2001, Defendant Church Extension entered into a consent agreement with the Indiana Division of Securities for the sale of unregistered securities in connection with its investment notes, requiring a rescission offer to all 383 Indiana investors.
10. Defendant United Management was incorporated in 1989 under the laws of the state of Indiana as a non-profit corporation and its principal offices are located in Anderson, Indiana. Defendant Church Extension controls United Management through its ability to elect its directors and appoint senior management.
11. Defendant Grubbs, age 60, resides in Anderson, Indiana and has been the president of Defendant Church Extension since in or about 1987. Defendant Grubbs is expected to retire from Defendant Church Extension on or about June 30, 2002.
12. Defendant Jackson, age 65, resides in Anderson, Indiana and recently retired from Defendant United Management. From in or about 1994 to in or about 1997, Defendant Jackson was the executive vice president of Defendant Church Extension and from in or about 1994 to on or about January 1, 2002, Defendant Jackson was the president of Defendant United Management. As president of Defendant United Management, Defendant Jackson was responsible for, among other things, managing all of Defendant Church Extension's subsidiary corporations, including the executive oversight of Defendant Church Extension's extensive real-estate holdings.
13. From at least 1996 to at least April 2002, Defendant Church Extension raised approximately $85 million through the offer and sale of investment notes to thousands of investors nationwide, the vast majority of whom are members of the Church of God.
14. Defendant Church Extension's investment notes ranged in length from terms of one to five years and earned rates of return comparable to certificates of deposit. Upon maturing, if investors did not direct otherwise, their investment proceeds were automatically reinvested in a new investment note for the same term as the matured investment note.
15. The interest rates of the investment notes varied by term and were determined by, among other things, the interest rate of outstanding church loans made by Defendant Church Extension. Generally, Defendant Church Extension attempted to maintain an interest spread of approximately 1.5% to 2.5 % between its investment notes and church loans.
16. From at least 1996 to at least April 2002, Defendant Church Extension primarily solicited members of the Church of God through direct mailings of advertising materials. The advertising materials primarily consisted of postcards and fliers advertising special, "limited-time" interest rates for Defendant Church Extension's investment notes. The advertising materials were sent out approximately one to five times a year to approximately 38,000 members of the Church of God nationwide.
17. From at least 1996 to at least April 2002, Defendant Church Extension solicited prospective and current investors through at least two internet websites: http://www.chog.org and http://www.bce.org.
18. Among other reasons, the solicitation materials appealed to Church of God members by highlighting that investment note proceeds would be loaned to local congregations for the construction of new churches and/or to fund renovations of existing churches. For instance, one of the postcard advertisements represented that "Church Extension provides loans and services to help build and grow the church." In addition, Defendant Church Extension's current website represents that "[i]n the last decade, Church Extension approved funding of $110 million in church loans to grow 371 churches throughout North America" and that within the "past year, 351 conversions were reported by seventeen Church of God congregations which received building loan funds from Church Extension."
19. In addition to the solicitation materials described above, from at least 1996 to at least April 2002, Defendant Church Extension offered its investment notes through at least six offering circulars ("Offering Circulars"). Among other things, the Offering Circulars described the investment note program in detail and each included an unqualified, independent auditor's report and a consolidated statement of financial condition. The consolidated financial statement included, among others, the financial statements of Defendants Church Extension and United Management.
20. Defendants Grubbs and Jackson, among others, each provided substantial information that was contained in the Offering Circulars and the corresponding consolidated financial statements. For instance, Defendant Grubbs and Jackson each provided information to Defendant Church Extension's auditors in connection with the preparation of the several consolidated financial statements. In addition, they each provided information that was included in the narrative sections contained in the Offering Circulars, which were distributed to prospective and current investors nationwide. Church Extension officials, including, but not limited to, Defendant Grubbs, reviewed and approved the final version of each of the Offering Circulars.
21. Each of the Offering Circulars described, among other things, the different types of "unsecured debt securities" that Defendant Church Extension issued, risk factors associated with the investment notes and the purposes for which the proceeds of the investment notes would be used. For instance, the Offering Circulars disclosed that the risk associated with the investment notes depended on, among other things, the financial condition of Defendant Church Extension. The Offering Circulars further represented that Defendant Church Extension had established and purportedly funded a reserve fund for outstanding investment notes. Additionally, at least five of the Offering Circulars represented that the money raised through the sale of Defendant Church Extension's investment notes would be "primarily used" to fund church loans. The Offering Circulars also represented that investor proceeds would be used to support, among other things, Defendant Church Extension's youth, retirement and affordable housing ministries.
22. Among other things, the financial condition of Defendant Church Extension and/or United Management was an important factor that investors considered in determining whether to invest and/or reinvest in Defendant Church Extension's investment notes.
23. Defendant Church Extension's primary sources of funds included, but were not limited to, proceeds raised through the offer and sale of investment notes, as described above, and interest payments on church loans.
24. Beginning in or about the late 1980's, Defendant Church Extension began to encounter serious financial difficulties. The financial difficulties were attributable to, among other things: a) a negative interest spread between Defendant Church Extension's outstanding church loans and its outstanding investment notes, i.e., the interest rate of the church loans was lower than the interest rate of the investment notes; and b) losses recorded at various ministries funded by Defendant Church Extension that, in turn, defaulted on several payments to Defendant Church Extension.
25. Defendants Grubbs and Jackson, among others, initially attempted to remedy Defendant Church Extension's financial difficulties by, among other things, using investment note proceeds to invest in real-estate properties nationwide, contrary to the stated primary purpose in the Offering Circulars. However, some or all of the investment properties failed to generate net income. As such, Defendants Grubbs and Jackson needed to use investment note proceeds to cover losses on the investment properties.
26. Defendants Grubbs and Jackson, among others, through Defendants Church Extension and United Management, embarked on a fraudulent scheme to cover up the financial difficulties suffered by Church Extension and United Management from investors and to offset the losses that Defendant Church Extension incurred from, among other things, the failing investment properties described above. In particular, instead of using investment proceeds primarily to fund church loans, the Defendants used the proceeds to, among other things: a) acquire properties through the improper use of bargain sale transactions; b) fund losses at these failing properties; and c) make interest and principal payments to prior investors. Finally, as a result of Defendant Church Extension's deteriorating financial condition, it was unable to maintain the promised reserves stated in its Offering Circulars, which were distributed to prospective and current investors nationwide.
27. From at least 1996 to at least April 2002, the Defendants and others, in connection with the offer and sale of Defendant Church Extension's investment notes, made misrepresentations and omitted to state facts regarding the investment notes. Specifically, the Offering Circulars contained misrepresentations and omitted to state facts, concerning among other things: the financial condition of Defendants Church Extension and United Management, the primary use of investment note proceeds and the safety and risk associated with the investment notes. Defendants Grubbs and Jackson, among others, each provided substantial information that was contained in the Offering Circulars and corresponding consolidated financial statements.
A. The Defendants Made Misrepresentations and Omitted to State Facts About the Financial Condition of Defendants Church Extension and United Management.
28. From at least 1996 to at least April 2002, the Defendants and others made misrepresentations and omitted to state facts concerning, among other things, the financial condition of Defendants Church Extension and United Management. Specifically, the Defendants and others artificially inflated Defendants Church Extension and United Management's income through the use of bargain sale transactions, which concealed the true financial condition of Defendants Church Extension and United Management. These transactions offset losses and enabled Defendants Church Extension and United Management to reflect positive income instead of recognizing losses. In turn, these representations, among others, enticed investors to invest and/or reinvest in Defendant Church Extension's investment notes because they were not aware of the true financial condition of Defendants Church Extension and/or United Management.
29. A bargain sale transaction generates income, or a non-cash contribution, for a charitable organization when it acquires property at less than full value. Thus, the acquiring organization pays less than full value and the difference between the purchase price and the actual value is characterized as a "non-cash contribution." As a result, the acquiring organization recognizes the "non-cash contribution" as income. In addition, the selling party may receive an income tax charitable deduction based on the difference between the purchase price and the actual value.
30. From at least 1996 to at least April 2002, the Defendants and others engaged in a scheme to conceal Defendant Church Extension's mounting financial difficulties in order to, among other things, entice investors to invest and/or reinvest. Specifically, the Defendants and others improperly used bargain sale transactions to generate false paper income by recognizing the difference between the price paid by Defendant Church Extension and/or United Management and falsely inflated appraisal values as non-cash contributions. Some of appraisers used in connection with the bargain sale transactions were Members of the Appraisal Institute, i.e., MAI appraisals. The appraisals used by the Defendants and others were false for several reasons, including, but not limited to: a) the use of overstated net-operating income figures, which formed the basis of some appraisals; b) the failure to account for the limited real-estate market of some of the properties, due to federal regulations and private covenants; and c) the failure to account for potential environmental hazards on some of the real-estate properties. Significantly, because inflated appraisal values were used, the price paid by Defendants Church Extension and/or United Management was a much closer reflection of the actual value of the properties than the inflated appraisal values. Thus, as a result of using falsely inflated appraisal values, the Defendants and others artificially increased the amount of non-cash contributions that Defendants Church Extension and/or United Management recognized as income.
31. The Defendants, among others, improperly used investment note proceeds to fund, in whole and part, the acquisition of properties through bargain sale transactions.
32. From at least 1996 to at least April 2002, the use of at least nine bargain sale transactions resulted in Defendants Church Extension and/or United Management's improper recognition of at least $24,052,667, in false paper income.
33. From at least 1996 to at least April 2002, Defendants Church Extension and/or United Management improperly continued to carry the properties it acquired through bargain sale transactions at inflated values, less depreciation. As a result, Defendants Church Extension and/or United Management offset other losses against false paper income and avoided recording losses of at least $26,066,879.
34. From at least 1996 to at least April 2002, the improper recognition of income, the continued carrying of properties at inflated values and failure to record losses were reflected on Defendant Church Extension's consolidated financial statements. As a result, the consolidated financial statements did not accurately reflect the financial condition of Defendants Church Extension and United Management. The consolidated financial statements were included with each of the Offering Circulars, which were distributed to prospective and current investors nationwide.
35. Defendants Grubbs and Jackson, among others, actively participated in Defendants Church Extension and/or United Management's bargain sale transactions by engaging in, including, but not limited, to the following activities. Defendants Grubbs, Jackson and others negotiated the terms of some of the property acquisitions, commissioned appraisals and traveled to some of the potential acquisition sites. Defendants Grubbs, Jackson and others hired a number of appraisers, including some MAI appraisers, to perform the inflated appraisals for Defendants Church Extension and/or United Management. Defendants Grubbs, Jackson and others reviewed some of the appraisals, used in connection with bargain sales, with Defendant Church Extension's auditors and assisted in determining valuation. As Defendant United Management's president, Defendant Jackson was responsible for, among other things, the executive oversight of Defendants Church Extension's real estate holdings and brought several of the property transactions to Church Extension. As Defendant Church Extension's president, Defendant Grubbs authorized the use of funds to pay for the bargain sale transactions, which were then turned over to Defendant Jackson to execute the transactions.
36. In or about 1998 and in or about 1999, Defendant Church Extension acquired two, low-income housing apartment complexes, regulated by the Department of Housing and Urban Development, located in Tennessee and Arkansas ("HUD I" and "HUD II"). Prior to acquiring HUD I and HUD II, the Defendants and others commissioned appraisals of the two properties. The two appraisals valued HUD I and HUD II higher than the amount Defendant Church Extension paid, in properties and cash, for the two properties. Specifically, the appraisals were inflated because they were based on overstated net-operating income figures and did not account for the limited potential market for HUD I and HUD II, due to federal regulations and private covenants. In turn, Defendant Church Extension recognized the difference between the amounts it paid for HUD I and HUD II and the inflated appraisal amounts as non-cash contributions. The non-cash contributions improperly recognized by Defendant Church Extension, in each respective year that it acquired the properties, totaled approximately $8,485,669, for the two apartment complexes. As a result, Defendant Church Extension offset other losses and avoided recording losses in each respective year by improperly recognizing inflated non-cash contributions.
37. In addition, Defendant Church Extension continued to improperly carry HUD I and HUD II on its financial statements at inflated values, less depreciation. As a result, Defendant Church Extension continued to avoid recording losses in the subsequent years it carried HUD I and HUD II at inflated values.
38. In or about 1999, Defendant Church Extension acquired approximately 18 acres of land in Austin, Texas, for approximately $1.2 million. The Defendants and others commissioned two appraisals of the approximate 18-acre Austin property that had approximately 13 buildings, which were formerly part of a state mental hospital. The appraisals valued the property at approximately $2.5 million. However, the appraisals were inflated because they failed to account for, among other things, costly building renovations and potential environmental costs, including, but not limited to, the removal of asbestos and lead paint. In addition, within the real-estate market around the property acquired by Defendant Church Extension, prices of comparable vacant tracts of land were significantly less. In turn, Defendant Church Extension recognized a $1.3 million non-cash contribution, which was the difference between the amount it paid for the properties ($1.2 million) and the inflated appraisal amount ($2.5 million). As a result, Defendant Church Extension offset other losses and avoided recording losses, in or about 1999, by improperly recognizing the inflated non-cash contribution.
39. In addition, Defendant Church Extension continued to improperly carry the approximate 18-acres Austin property on its financial statements at an inflated value, less depreciation. As a result, Defendant Church Extension continued to avoid recording losses in the subsequent years it carried the approximate 18-acre Austin property at its inflated value.
40. In or about 2001, Defendant Church Extension acquired two, low-income housing apartment complexes in Indianapolis, Indiana. Prior to the acquisition, Defendants Grubbs, Jackson and others received an appraisal of the two apartment complexes. The appraisal valued the two apartment complexes higher than the amount Defendant Church Extension paid, in properties and cash, for the properties. Specifically, the appraisals were inflated because the seller, a non-profit corporation, had purchased the properties in or about 1999, for significantly less than the appraisals valued them. Although the seller made minor capital repairs, it was unlikely that the properties appreciated significantly during the approximate two years the seller held the properties. Nonetheless, Defendant Church Extension recognized the difference between the amount it paid for the two properties and the inflated appraisal amount as a non-cash contribution. The non-cash contribution improperly recognized by Defendant Church Extension, in or about 2001, totaled approximately $8,850,000. As a result, Defendant Church Extension offset other losses and avoided recording losses, in or about 2001, by improperly recognizing the inflated non-cash contribution.
41. At all relevant times, Defendants Grubbs, Jackson and others were aware that Defendant Church Extension improperly recognized non-cash contributions, based on inflated appraisals.
42. At all relevant times, Defendants Jackson, Grubbs and others were aware that Defendant Church Extension continued to carry certain properties at inflated values, less depreciation.
B. The Defendants Made Misrepresentations and Omitted to State Facts About the Primary Use of Investment Note Proceeds.
43. From at least 1998 to at least June 30, 2001, the Defendants and others made misrepresentations and omitted to state facts concerning, among other things, the primary use of proceeds raised through the offer and sale of investment notes.
44. From at least 1998 to at least June 30, 2001, the Offering Circulars represented that the proceeds from the sale of Defendant Church Extension investment notes would primarily be used to fund church loans. Instead, Defendant Church Extension used the majority of investor funds to make interest and principal payments to prior investors and to fund speculative real estate transactions, including the improper bargain sale transactions described above. From in or about the end of 1998 through in or about June of 2001, the amount of Defendant Church Extension's outstanding church loans declined from approximately $27 million to approximately $14 million. During the same time period, the amount of Defendant Church Extension's outstanding note proceeds increased from approximately $67 million to approximately $85 million.
45. In or about 1998, Defendant Church Extension used few, if any, new proceeds raised from the sale of new investment notes to fund church loans. In or about 1998, Defendant Church Extension raised approximately $11,662,846 in new proceeds from the sale of investment notes. Defendant Church Extension used approximately 35%, or approximately $4,082,835, of the new proceeds to fund church loans and used approximately 35%, or approximately $4,040,789, of the new proceeds to make interest payments to prior investors. Defendant Church Extension used the remaining approximate 30%, or approximately $3,539,222, of the new proceeds to fund speculative real estate transactions.
46. In or about 1999, no new investment note proceeds raised from the sale of new investment notes were used to fund church loans. In or about 1999, Defendant Church Extension raised approximately $2,650,631 in new proceeds from the sale of investment notes. Instead of funding church loans, Defendant Church Extension used all of the new proceeds to make interest payments to prior investors and to fund speculative real estate transactions.
47. In or about 2000, Defendant Church Extension used few, if any, new proceeds raised from the sale of new investment notes to fund church loans. In or about 2000, Defendant Church Extension raised approximately $6,255,696 in new proceeds from the sale of investment notes. Defendant Church Extension used approximately 6%, or approximately $363,929, of the new proceeds to make church loans and used approximately 76%, or approximately $5,759,207, of the new proceeds to make interest payments to prior investors. Defendant Church Extension used the remaining approximate 18%, or approximately $1,132,560, of the new proceeds to fund speculative real estate transactions.
48. In or about 2001, no new investment note proceeds raised from the sale of new investment notes were used to fund church loans. In or about 2001, Defendant Church Extension raised approximately $9,376,431 in new proceeds from the sale of investment notes. Instead of funding church loans, Defendant Church Extension used all of the new proceeds to make interest payments to prior investors and to fund speculative real estate transactions.
49. At all relevant times, Defendants Grubbs, Jackson and others were aware that new proceeds raised from the sale of Defendant Church Extension's investment notes were not primarily used to fund church loans.
C. The Defendants Made Misrepresentations and Omitted to State Facts About the Safety and Risk Associated with the Investment Notes.
50. From at least 1996 to at least April 2002, the Defendants and others made misrepresentations and omitted to state facts about the safety and risk of Defendant Church Extension's investment notes, including, but not limited to, the amount and adequacy of reserves for outstanding investment notes.
51. From at least 1996 to at least May 1, 2000, each of the Offering Circulars represented that Defendant Church Extension had a reserve goal of approximately 20% of its outstanding investment notes and that the reserve goal was met and surpassed.
52. From at least May 1, 2000 and through at least April 2002, at least two of the Offering Circulars each represented that Defendant Church Extension had a reserve goal of not less than 8% of its outstanding investment notes and also represented that the reserve goal was met and surpassed.
53. At all relevant times, Defendants Grubbs, Jackson and others were aware that each of the Offering Circulars contained representations regarding these reserve goals and representations that the reserve goal was met and surpassed. The Offering Circulars were distributed to prospective and current investors nationwide.
1. The Reserve Schedules in the Offering Circulars Were Inflated.
54. Each of the Offering Circulars contained a detailed schedule of reserves for outstanding investment notes. The reserve schedules included, among other things, a categorical and numeric break-down of the assets making up the reserves for outstanding investment notes.
55. Defendants Grubbs, Jackson and others were aware that each of the Offering Circulars contained reserve schedules. The Offering Circulars were distributed to prospective and current investors nationwide.
56. From at least 1996 to at least April 2002, the reserve schedules included double-counted assets. For example, one of the categories making up the reserve schedules was cash and cash equivalents. However, the majority of assets in the cash and cash equivalents category were already pledged for annuities, endowments, pooled-income funds and other programs. Therefore, the Defendants could not use the double counted assets to repay investors because they were already earmarked for other purposes. Thus, the reserve schedules were artificially inflated because they included double-counted assets.
57. At all relevant times, Defendants Grubbs, Jackson and others, were aware that double-counted assets were included in the reserve schedules contained in each of the Offering Circulars. The Offering Circulars were distributed to prospective and current investors nationwide.
Assets, Classified as 100% Collectible that Appeared to be Liquid.
58. From at least 1996 to at least May 1, 2000, the reserve schedules included assets that were classified as 100% collectible and appeared to be liquid, but were in fact impaired. The impaired assets included, but are not limited to: a) notes receivable from affiliates; b) contracts receivable; and c) $2.2 million in preferred stock.
59. Defendant Church Extension generated the majority of its notes receivable by advancing funds to three failing affiliates. However, these receivables were impaired because payments on them were continually several months in arrears.
60. The majority of Defendant Church Extension's contracts receivable were long-term loans that could not be immediately liquidated.
61. For instance, in or about 1992, Defendant Church Extension purchased, at face-value, approximately $2.2 million in preferred stock of an insurance company. However, the stock was impaired because it had no buy-back provision, was not readily marketable and was poorly rated. In addition, the stock was further impaired because, due in part to the poor financial condition of the insurance company, dividend payments were continually in arrears.
62. At all relevant times, the Defendants and others were aware that impaired assets, including, but not limited to, notes receivable, contracts receivable and preferred stock were classified as 100% collectible and appeared to be liquid in the reserve schedules contained in each of the Offering Circulars. The Offering Circulars were distributed to prospective and current investors nationwide.
2. The Reserve-To-Investment-Note Ratio in Each Offering Circular Was Inaccurate.
63. From at least 1996 to at least April 2002, each of the Offering Circulars represented that the reserve goal of outstanding investment notes was met and surpassed. In addition, each of the Offering Circulars presented a percentage that purportedly reflected the amount that Defendant Church Extensions maintained in reserves in comparison to its outstanding investment notes ("reserve-to-investment-note-ratio"). However, the reserve-to-investment-note-ratio was based on an amount that included, among other things, double-counted assets.
64. From at least 1996 to at least May 1, 2000, at least four Offering Circulars each represented that the reserve goal of outstanding investments was met and surpassed. In addition, at least four of the Offering Circulars presented a reserve-to-investment-note-ratio. However, the reserve-to-investment-note-ratio was based on an amount that included, among other things, double-counted assets and impaired assets classified as 100% collectible that appeared to be liquid.
65. At all relevant times, the Defendants and others were aware that the reserve-to-investment-note-ratio contained in each of the Offering Circulars was based on double-counted assets and/or impaired assets classified as liquid and 100% collectible. The Offering Circulars were distributed to prospective and current investors nationwide.
66. On or about November 30, 2001, Defendant Church Extension had approximately $84 million in outstanding investment notes. On or about November 7, 2001, Defendant Church Extension represented that it purportedly had approximately 12% of its outstanding investment notes in reserves. Though, according to Defendant Church Extension's own schedules, it purportedly only maintained approximately 9.62%, or approximately $8.1 million, in reserves during this time. Of the 9.62% amount, however, approximately 70%, or approximately $5.7 million, consisted of doubled-counted assets. In addition, of the 9.62% amount, approximately $129,000 consisted of municipal bonds issued by Defendant Church Extension's subsidiaries. When the double-counted assets and municipal bonds were removed, the actual amount of reserves was approximately $2.4 million or approximately 2.85% of outstanding investment notes. Of the approximate $2.4 million available for reserves, only approximately $300,972.56, or approximately 0.36% of outstanding investment notes was actually segregated by Defendant Church Extension for reserves.
67. In or about 2000, six high-level employees of Defendant Church Extension expressed concern to officials at Defendant Church Extension, including Defendants Grubbs and Jackson, about, among other things, the operations and management of Defendants Church Extension and United Management. The six employees were: Larry E. Sloan (Treasurer and Chief Financial Officer), L. Kent Adcock (Vice President and Assistant Treasurer), David H. Fortune (Secretary and Senior Assistant Treasurer), Kay Scott Grant (Assistant Secretary and Director of Investments), James Goossen (Controller), and Victoria J. Rice (Vice President for Operations).
68. On or about August 17, 2000, these six employees submitted various allegations of fraud in writing to Defendant Church Extension's Board of Directors and provided Defendant Church Extension's Board of Directors with approximately one week to address their allegations. Additionally, the six employees indicated that, based partly on the advice of counsel, their simultaneous resignations would be effective on or about August 25, 2000.
69. The Defendants and others were aware of the six employees' various allegations of fraud and their subsequent resignation.
70. Paragraphs 1 through 69 are realleged and incorporated by reference.
71. At all times alleged in this Complaint, Defendants Church Extension, United Management, Grubbs and Jackson, in the offer and sale of securities, namely in the form of investment notes, by the use of the means and instruments of transportation and communication in interstate commerce and by the use of the mails, directly and indirectly, employed devices, schemes and artifices to defraud.
72. Defendants Church Extension, United Management, Grubbs and Jackson knew or were reckless in not knowing the facts and circumstances described in Paragraphs 70 and 71 above.
73. As a result of the activities described in Paragraphs 70 through 72 above, Defendants Church Extension, United Management, Grubbs and Jackson each violated 17(a)(1) of the Securities Act [15 U.S.C. § 77q(a)(1)].
74. Paragraphs 1 through 69 are realleged and incorporated by reference.
75. At all times alleged in this Complaint, Defendants Church Extension, United Management, Grubbs and Jackson, in the offer and sale of securities, namely in the form of investment notes, by the use of the means and instruments of transportation and communication in interstate commerce and by the use of the mails, directly and indirectly, obtained property by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and engaged in transactions, practices or courses of business that operated as a fraud and deceit upon investors.
76. As a result of the activities described in Paragraphs 74 and 75 above, Defendants Church Extension, United Management, Grubbs and Jackson each violated Sections 17(a)(2) and 17(a)(3) of the Securities Act [15 U.S.C. §§ 77q(a)(2) and 77q(a)(3)].
77. Paragraphs 1 through 69 are realleged and incorporated by reference.
78. At all times alleged in this Complaint, Defendants Church Extension, United Management, Grubbs and Jackson, in connection with the purchase and sale of securities, namely in the form of investment notes, and by the use of the means and instrumentalities of interstate commerce and by the use of the mails, directly and indirectly, employed devices, schemes and artifices to defraud, made untrue statements of material fact and omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and engaged in acts, practices and courses of business that operated as a fraud and deceit upon investors.
79. Defendants Church Extension, United Management, Grubbs and Jackson knew or were reckless in not knowing the facts and circumstances described in Paragraphs 77 and 78 above.
80. As a result of the activities described in Paragraphs 77 through 79 above, Defendants Church Extension, United Management, Grubbs and Jackson each violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder [15 U.S.C. §78j(b) and 17 C.F.R. §240.10b-5].
Find that Defendants Church Extension, United Management, Grubbs and Jackson committed the violations alleged above.
Grant a Final Judgment and an Order of Permanent Injunction and Other Equitable Relief ("Final Judgment"), in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, enjoining Defendants Church Extension, United Management, Grubbs and Jackson, their officers, agents, servants, employees, attorneys and those persons in active concert or participation with them who receive actual notice of the Final Judgment by personal service or otherwise, and each of them from, directly or indirectly, as principals or aiders and abettors, by the use of mails or any means or instrumentalities of interstate commerce, engaging in the unlawful acts, practices or courses of business described above, or any conduct of similar purport and object, in connection with the transactions in the securities described in this Complaint or any other security, including violations of Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act [15 U.S.C. §§ 77q(a)(1), 77q(a)(2) and 77q(a)(3)].
Grant a Final Judgment, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, enjoining Defendants Church Extension, United Management, Grubbs and Jackson, their officers, agents, servants, employees, attorneys and those persons in active concert or participation with them who receive actual notice of the Final Judgment by personal service or otherwise, and each of them from, directly or indirectly, as principals or aiders and abettors, by the use of mails or any means or instrumentalities of interstate commerce, engaging in the unlawful acts, practices or courses of business described above, or any conduct of similar purport and object, in connection with the transactions in the securities described in this Complaint or any other security, including violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder [15 U.S.C. §78j(b) and 17 C.F.R. §240.10b-5].
Grant a Final Judgment requiring Defendants Church Extension and United Management to jointly and severally disgorge all ill-gotten gains resulting from their violations, plus prejudgment and post-judgment interest.
Grant a Final Judgment requiring Defendants Grubbs and Jackson to disgorge all ill-gotten gains they received resulting from their violations, plus prejudgment interest.
With regard to Defendants Grubbs and Jackson's violative acts, practices and courses of business set forth herein, grant a Final Judgment imposing upon them the appropriate civil penalties pursuant to Section 20(d)(1) [15 U.S.C. §77t(d)(1)] of the Securities Act and Section 21(d)(3) of the Exchange Act [15 U.S.C. §78u(d)(3)].

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