U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19500 / December 19, 2005
Accounting and Auditing Enforcement Release No. 2355 / December 19, 2005
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 C H/S (S.D. Indiana 2002).
District Court Affirms Jury Verdict, Enters Disgorgement, Civil Penalty and Injunction Orders Against Former Presidents of Church Extension of the Church of God, Inc. and United Management Services, Inc.
The U.S. Securities and Exchange Commission (Commission) today announced that in two separate rulings entered on December 14 and 15, U.S. District Court Judge David F. Hamilton, in the Southern District of Indiana, affirmed a jury verdict reached in July 2004 finding James Perry Grubbs (Grubbs) and Shearon Louis Jackson (Jackson) liable for violating the antifraud provisions of the federal securities laws, and imposed monetary and injunctive remedies against each of them. The Court also entered separate final judgments against Mr. Grubbs and Mr. Jackson, permanently enjoining both from future securities law violations and from future violations of federal securities laws and from service as officers or directors of issuers of federally registered securities and federally regulated broker-dealers, ordering disgorgement of $44,500 plus interest by Mr. Grubbs and $37,000 plus interest by Mr. Jackson, and imposing third tier civil penalties of $120,000 on Mr. Grubbs and $90,000 on Mr. Jackson.
The Commission commenced this action on July 22, 2002, charging Church Extension of the Church Of God, Inc. (Church Extension) and United Management Services, Inc. (UMS) and the former presidents of those entities, Grubbs and Jackson, with engaging in a fraudulent scheme from approximately 1996 to the time of the lawsuit, through which Church Extension raised $85 million from the sale of investment notes to thousands of individuals throughout the country, most of whom were members of the Church of God, a Christian denomination headquartered in Anderson, Indiana. Church Extension was a not-for-profit corporation set up by the Church of God to help finance the construction and expansion of local churches. The Commission alleged that in connection with the offer and sale of investment notes, defendants repeatedly made material misrepresentations and omitted to state material facts in Church Extension's solicitation and offering circulars, concerning, among other things, the primary use of investment note proceeds and the financial conditions of Church Extension and UMS. The complaint alleged that during the period from 1996 to 2002, instead of using investment note proceeds primarily to fund church loans as stated in the offering circulars, Church Extension departed from its original focus and instead used the note proceeds to fund speculative non-church real estate transactions and to make interest and principal payments to prior noteholders. The SEC also alleged that Grubbs and Jackson caused Church Extension and UMS to overstate dramatically the company's financial condition in its offering circulars through the overvaluation of properties it received in connection with these real estate transactions that were used to give Church Extension a misleading appearance of solvency. By the spring of 2001, Church Extension owed noteholders more than $80 million, but was actually insolvent.
After an eight-day trial in 2004, the jury found in favor of the Commission on all of its claims, and determined that Grubbs and Jackson each violated the antifraud provisions of the federal securities laws, codified at Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder.
The disgorgement amounts ordered by the Court represent one-half of each defendants' base salaries for 2001, based on the Court's reasoning that, but for the securities violations, Church Extension would have collapsed earlier, so the violations enabled defendants Grubbs and Jackson to continue their employment.
Church Extension and UMS previously settled the Commission's charges against them on July 31, 2002, consenting to the entry of permanent injunctions prohibiting future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Church Extension and UMS also agreed to pay disgorgement of approximately $81 million. In consenting to the entry of the civil injunctions and disgorgement, Church Extension and UMS neither admitted nor denied the allegations of the Commission's Complaint. In connection with this settlement, on July 31, 2002, the Court appointed Jeff J. Marwil, a partner at the law firm of Jenner & Block in Chicago, Illinois, as an independent Conservator in this case. The Conservator's mandate is to protect the interest of investors who invested or reinvested in the note program. Since his appointment, Mr. Marwil has liquidated and distributed to investors assets totaling in excess of $25 million, and has also commenced independent lawsuits against various officers, directors and third parties who were involved in the transactions giving rise to the SEC's lawsuit. At the trial, the Conservator estimated that investor losses will exceed between $20 million and $40 million.
For further information, please see Litigation Release Numbers 18790 (July 23, 2004) [jury verdict against Grubbs and Jackson], 17966 (February 4, 2003) [order approving plan for note-holder repayment and related relief], 17656 (August 5, 2002) [final judgment entered against Church Extension and UMS] and 17623 (July 22, 2002) [complaint filed].