U.S. SECURITIES & EXCHANGE COMMISSION
Litigation Release No.17623 / July 22 , 2002
Accounting and Auditing Enforcement Release No. 1598 / July 22, 2002
U.S. Securities and Exchange Commission v. Church Extension of the Church of God, Inc., United Management Services, Inc., James Perry Grubbs and Shearon Louis Jackson, U.S. District Court for the Southern District of Indiana, Cause No. IP 02-1118 CH/S (S.D. Indiana 2002).
SEC Charges Indiana-Based Religious Entity for Defrauding Church Members Nationwide in an $85 Million Financial and Offering Fraud
On July 22, 2002, the U.S. Securities and Exchange Commission ("Commission") filed a civil enforcement action alleging that from at least 1996 though at least April 2002, Church Extension of the Church of God, Inc. ("Church Extension"), United Management Services, Inc. ("United Management"), a Church Extension affiliate, James Perry Grubbs ("Grubbs"), the president of Church Extension, and Shearon Louis Jackson ("Jackson"), the president of United Management (collectively, "Defendants"), fraudulently raised approximately $85 million from the sale of investment notes to thousands of investors nationwide. Church Extension, the fundraising entity of a long-established church, was formed in 1921 for the primary purpose of raising funds to loan to churches for the construction of new churches and to fund renovations of existing churches of the Church of God.
In its Complaint, the Commission alleges that, in connection with the offer and sale of the investment notes, the Defendants repeatedly made material misrepresentations and omitted to state material facts in Church Extension's solicitation materials and offering circulars, concerning, among others: the financial condition of Church Extension and United Management, the primary use of investment note proceeds and the safety and risks associated with the investment notes. Each of Church Extension's offering circulars included an unqualified, independent auditor's report and a consolidated statement of financial condition.
Specifically, the Complaint alleges that Grubbs and Jackson, through Church Extension and United Management, embarked on a fraudulent scheme to cover up financial difficulties suffered by Church Extension and United Management from investors. For example, the Defendants improperly used a provision of the Internal Revenue Code, afforded non-profit corporations, as a vehicle to generate non-existent income. This income was recognized by Church Extension on its consolidated statement of financial condition and was used to offset Church Extension's losses. As a result, from at least 1996 through at least April 2000, Church Extension improperly recognized at least $24,052,667 in non-existent income that was used to offset other losses and thereby avoided recording at least $26,066,879 in losses.
The Complaint further alleges that, instead of using investment proceeds primarily to fund church loans, the Defendants used the proceeds to, among other things: a) fund speculative real estate transactions; b) fund losses at these failing properties; and c) make interest and principal payments to prior investors. Finally, the Complaint alleges that as a result of 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.
The Commission asked the Court to impose a permanent injunction against each defendant for violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission also asked the Court to order disgorgement of approximately $81 million in ill-gotten gains, plus prejudgment and post-judgment interest, from Church Extension and asked the Court to order disgorgement of any ill-gotten gains received by Grubbs and Jackson and civil penalties from Grubbs and Jackson.
In addition, the Commission recommended that the Court appoint Jeff J. Marwil, a partner at the law firm of Jenner & Block in Chicago, Illinois, as a Conservator in this matter. The proposed Conservator's mandate is to protect the interests of the investors who invested or reinvested in Church Extension's investment note program.
Church Extension and United Management have established a Joint Oversight Committee ("Joint Committee") for the purpose of drafting a joint corporate restructuring plan ("Restructuring Plan"). The Restructuring Plan will address, among other things, a manner in which to meet Church Extension and United Management's proposed $81 million disgorgement obligations. During the time period when the Joint Committee is drafting the Restructuring Plan, the Commission and the proposed Conservator will aggressively monitor the activities of Church Extension and United Management. Within 60 days, the Joint Committee will submit the Restructuring Plan to the Court, the Commission and the proposed Conservator. After a limited period of review, the Restructuring Plan will be presented to the Court for its ultimate determination, including, its approval, modification or rejection of the plan. At all times, the Commission and the proposed Conservator will reserve the right to petition the Court for immediate relief, including, the appointment of a federal receiver, if either deems any activity, transaction or expenditure contemplated by Church Extension and United Management is not in the best interests of investors.
The Commission wishes to acknowledge and thank the Indiana Securities Division of the Secretary of State for their assistance in this matter.