Protecting What God Has Given You From Those Who Use His Name

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by Pat Huddleston

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Cornerstone Ministries Investments, Inc. (CMI) was incorporated in 1996 to make loans to churches seeking to build or expand their facilities. To generate the cash that it intended to loan to those churches, CMI sold bonds to individual investors.  Thousands of people bought CMI bonds.  In February 2008, CMI filed a petition seeking Chapter 11 bankruptcy protection, and the Court appointed me to investigate several questions, including whether CMI’s business was “characterized by self-dealing” on the part of the officers and directors.

My investigation revealed that many — perhaps most — CMI bondholders believed that CMI bonds were safe because the company loaned to churches and because of the religious background of the company’s officers and directors.  In that way, the CMI case was similar to another recent church bond case.

“Never sell the facts,” Vaughn Reeves instructed the salespeople who sold bonds issued by Alanar, Inc. (an Indiana company very similar to CMI).  “Instead,” he told them, “sell warm stewardship and the Lord.” Like CMI, Alanar actually did loan money to churches. But a taste for expensive living by Reeves soon left not enough money to make scheduled interest payments. At that point, Reeves turned Alanar into a Ponzi scheme, taking money from one bond offering to pay the obligations of another.

The misconduct at CMI was of a different kind. While most investors believed that CMI was primarily in the business of loaning money to churches, by the end of the 1990s it had shifted almost exclusively to investing in for-profit ventures like senior living communities and residential housing projects.  My investigation revealed that several corporate officers and directors had undisclosed investments in those for-profit ventures and that CMI was, therefore, funding those private investments.  If investors had known that information, they might have seen the attractive interest rate on CMI bonds in a different light.

Neither Alanar nor CMI was a fraudulent enterprise from its inception; they started out with the best of intentions.  Both inside and outside of church, many fraudulent enterprises start out legitimate and morph into a fraud through something every believer knows about: temptation.  A close look at the nature of that temptation can help you protect your assets.

The temptation that led to the misconduct in the Alanar and CMI cases, and which will lead hundreds of otherwise honest financial advisers into a fraud this year, is not some rare breed of temptation.  It is the ordinary, every day desire to cover up our mistakes or to buy something we can’t quite afford or maintain a certain image in the community.  And who among us has not fought with and sometimes surrendered to those temptations?  Immersed, as we are, in a world that pushes and pulls us toward things that are of no value from the eternal perspective, we are all bound to slip up.  Just like you and me, church-going, Bible-believing financial advisors are tempted and sometimes surrender to those quite ordinary temptations.

But it isn’t just our misunderstanding of the mundane root causes of investment fraud that keeps Christians at risk.  It’s our forgetfulness about what the Gospel teaches.  We are too prone to believe that moral behavior is at the center of our faith.  While we use the word “grace” freely, we kid ourselves that we don’t really need it.  That translates into a belief that the financial adviser with the sparkling reputation and the seemingly sin-free life doesn’t need it either.  He’s one of the good people, we think.  And financial disaster follows like winter follows autumn.

Among my favorite sayings about church is one I heard from John Maggard, my co-leader of 12^th-grade young men at North Metro Church.  It’s a saying that John remembers from attending church with his grandmother when he was a boy.  The preacher used to say’ “This place (the church) is not a hotel for saints.  It’s a hospital for sinners.”  To that I can only say “Amen” and ask every believer to remember that it applies to everyone who has ever crossed the threshold of a church.  We are human and prone to do what humans do best: make mistakes.  The discerning believer remembers that some people have jobs in which their inevitable mistakes can cause much more damage than other people’s mistakes.  Financial advisers, stockbrokers, and investment promoters are on that list.

Sound stewardship is not as easy as trusting those who claim to follow Christ.  Jesus told his disciples to be “as innocent as doves but as wise as serpents.”  He means for us to use our brains.   A knee jerk belief that someone who attends church and quotes the Bible is honest requires no thinking at all.

We’ve never been better equipped to do the kind of thinking that can save us from a life-altering financial collision.  Psychologists and neuroscientists are confirming every day that healthy human brains come with certain cognitive biases that help us simplify a complex world, but which make us all pre-disposed to fall for financial fraud.  The CIA knows about cognitive biases and trains its operations personnel about them.  The CIA’s Center for the Study of Intelligence writes about cognitive biases:

Cognitive biases are similar to optical illusions in that the error remains compelling even when one is fully aware of its nature. Awareness of the bias, by itself, does not produce a more accurate perception. Cognitive biases, therefore, are, exceedingly difficult to overcome.

Identifying those biases and how to disengage them is covered in Chapter One of my book, The Vigilant Investor, which will be released by AMACOM Books (New York) in October and is available for pre-order at Amazon and Barnes & Noble.  There is a chapter on “affinity fraud,” the type that typically targets the faithful.  Our goal is not only to help people avoid such frauds, but to empower them to report them to regulators so that other investors do not fall victim to them.  Looking out for number one is all well and good, but it isn’t what Christians are called to do.  I am convinced that informed groups of investors, including Christian investors, can make the investing landscape much safer, and I pray that many take up the cause.

What are the lessons that investors can learn from the CMI and Alanar cases? First, never invest in anything pitched by even a subtle appeal to your faith.  Make that your Eleventh Commandment.  Second, understand that the commission offered on the sale of a church bond is likely more than what a stockbroker can earn by selling to a listed stock or a no-load mutual fund.  The broker therefore has an undisclosed financial incentive to guide you into church bonds.  Third, never concentrate your assets in any one investment or class of investments.  Any broker who would advise a senior citizen to invest more than ten percent of his assets in church bonds is either reckless or inept.

I was not surprised by the apparent self-dealing I found at CMI. I’ve been swimming in the ocean of investment fraud for more than two decades, both inside and outside of the SEC.  That experience helps me recognize subtle red flags that others miss.  That experience also tells me that there is a storm coming; a tsunami of investment fraud so large that it threatens to make us forget Bernie Madoff. Sadly, much of the devastation will take place in houses of faith.  The first raindrops have already begun to fall. I pray that informed Christians will not only escape the damage, but also alert others to the danger.

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Pat Huddleston is a former SEC Enforcement Branch Chief and the author of The Vigilant Investor. As a court-appointed Receiver in SEC fraud cases and as a Chapter 11 Examiner, he has seen misconduct ranging from honest enterprises gone wrong to multi-national hedge fund frauds.  He appears frequently as an expert guest on radio and television and has been quoted by the Wall Street Journal, the New York Times, the Washington Post, and Kiplinger’s Personal Finance, among other publications.  Professor Bernard Malkiel, author of the best-selling A Random Walk Down Wall Street, calls Pat “the investors’ perfect teacher.”

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