Preying on the faithful

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Thousands of individuals have been brought to their knees by a plague infec ing Lorain County for the last six years, a contagion feeding on greed and naivete a it slowly spread from one trusting person to

Though there had been occasional warnings, a five-day series beginning today in The Morning Journal reveals for the first time the extent to which rampant investment and securities fraud in the county, perhaps unprecedented in scale, has ruined livelihoods and crippled families. It is tearing at the very fabric of the community as people lose faith in their churches and the other institutions that they blame for enabling the scourge.

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At one point, at least three different investment and securities schemes were trolling for victims in Lorain County all at the same time. Two of them were targeting members of the same churches, and on at least one occasion the operators were actually working together. Authorities say the largest of the three schemes was being directed from Canada by a rogue securities entrepreneur who had several accomplices funneling millions of dollars to him from Northeast Ohio and across Canada.

All three of the local schemes have been shut down. Theresa Stencil, the Amherst businesswoman who masterminded one of them, is in prison. Keith Dominick, a former mortgage lender who was behind a second one, pleaded guilty last month and awaits sentencing. Gary McNaughton and Andrew Lech, two Canadians involved in the largest one, have seen their local operation frozen by the U.S. Securities and Exchange Commission and are being investigated by federal and county prosecutors.

Although their activities have been halted, the damage is still being measured. Already, the human and financial tolls are incredible: As much as $30 million missing, more than 300 individual investors known to have been victimized, life savings wiped out, homes lost, retirements up in the air, college educations put on hold, and hundreds of other stories about dashed hopes and crushed dreams.

Attorneys and others trying to assess the losses say many others who were victims haven't come forward because they are embarrassed about their losses or the probability that any interest they may have earned on their investments came at someone else's expense. They now realize they were part of a ''Ponzi'' scheme and their so-called interest checks were simply redistributions of other people's money, perhaps the family sitting in front of them at church or the elderly couple living down the street.

For the most part, those individuals who lost money weren't typical securities investors, people who rely on stockbrokers and have a good understanding of how the markets work. That was evident in their interviews with The Morning Journal as they told about believing they would get unrealistic returns as high as 40 percent, by the risks they unwittingly took, and by the paucity of documents and accounting they received in return for handing over their life fortunes. One member of the Church on the North Coast in Lorain has testified about getting $30,000 in cash from his credit cards and then turning it over for ''investing.''

Many of those who lost money were salt-of-the-earth folks who relied on the advice of fellow church members, co-workers and friends -- people who authorities say had been carefully groomed to help draw others into the scheme.

Known as ''affinity fraud,'' the scheme begins when the perpetrator joins a church, gets a job or finds another way to rub shoulders with intended victims and be accepted by them. Sometimes it's volunteer work or making a noticeable financial contribution to a church. Then the pump is primed. Word gets around that the new person has financial acumen and access to special deals. One person and then another turns over money destined for some vague investment and in return gets a promissory note for hard-to-believe returns, followed quickly by interest checks that can come as often as every two weeks. The initial ''clients'' are usually well-positioned leaders and opinion makers. Before long they are gushing over their good fortune and endorsing the deals. Soon, without even being solicited, others come knocking and ask to be allowed to invest their money.

No institution has been rocked as hard as the Church of the Open Door in Elyria, ground zero for the Haven Equity investment account of McNaughton into which $23 million has disappeared, according to U.S. and Canadian investigators. McNaughton said in a deposition that about half of the money that flowed into Haven Equity came from the church's members, and now that some of them are suing Open Door to recover their losses the church's leaders are circling the wagons.

Those who sued say they have found themselves ostracized and on the outside, while McNaughton is still welcome. He and his family attend services regularly, and they were sitting in the balcony on a recent Sunday morning when the Rev. Jim Mindling, the senior pastor, advised the congregation not to talk about ''the ongoing financial misfortunes'' with outsiders.

McNaughton said in his deposition that he stepped aside as a youth ministry worker at the church when the SEC stepped in, but he said his job is being held open for him and he is confident he will be returning. He also revealed in the deposition that he wrote checks on the Haven Equity account for an estimated $300,000 in contributions to the church and for interest payments to church leaders for their own investments, including former pastor David Walls, who was given a bonus rate of return. In addition, he said, he wrote checks on the Haven Equity account for his own personal expenses estimated at $300,000 each year.

Bonus rates of return for church leaders was an offer that McNaughton didn't restrict to Open Door. The Rev. Greg Ball, associate pastor at Church on the North Coast in Lorain, has testified that he gave McNaughton $317,000 after being guaranteed a 40 percent return for the first six months. North Coast's pastor, the Rev. Louis Kayatin, confirmed recently that he and his wife had invested their entire retirement savings with McNaughton. Like many of the others, Kayatin said he eventually lost everything.

In the civil complaint brought against McNaughton to successfully halt his activities, SEC attorneys said that none of the money in the Haven Equity account was from earnings on investments, but simply was money taken from one hand and put in another. Although McNaughton told church members he was sending their money to Lech for investing, the SEC charged that Lech did not invest the funds. Rather, Lech merely sent the investors' funds back to McNaughton, who used them to pay other investors their monthly interest, the SEC said.

McNaughton does not face any criminal charges.

Besides the federal civil complaint, four civil suits have been filed in Lorain County Common Pleas Court naming McNaughton. Two of those suits also name the Church of the Open Door and claim the plaintiffs' losses resulted in part because the church participated in or aided McNaughton's activities.

The SEC alleges that McNaughton has violated federal securities law under one section of the Securities Exchange Act and three sections of the Securities Act, including one violation that is nearly identical to the count on which U.S. Attorney Gregory White charged Dominick with securities fraud in January.

However, attorneys familiar with the cases note that the SEC's civil allegation required only a preponderance of evidence for the federal judge to halt McNaughton's activities, while White faced proving Dominick's guilt beyond a reasonable doubt.

The scenario is also similar to an earlier case in which Dominick was convicted of federal securities law violations in Florida in 1996. In that case, the Commodities Futures Trading Commission first brought an anti-fraud enforcement complaint against Dominick to halt a $6 million scheme he was operating that involved church members, and later the U.S. attorney there charged him and won the conviction that resulted in a 37-month prison term.

Again, though, attorneys familiar with the cases say such enforcement actions and civil complaints don't necessarily evolve into criminal charges, and many frequently don't.

White won't comment on McNaughton, but Lorain County Prosecutor Dennis Will said his office is part of a joint investigation with White's office that has been going on for nearly two years. He noted that when White was the Lorain County prosecutor he spent two years investigating Stencil before he ran her to the ground.

Theories abound for the pace of the investigation. One is that many of those who lost money aren't yet cooperating with authorities because they want to believe Lech's claim that all the money is still out there, and only the investigations and court cases are holding up its return. McNaughton has also said the money will be eventually returned.

Although he had been convicted of securities law violations, Dominick somehow landed a job as vice president of commercial lending at Mortgage One Banc Financial Services in Lorain and ran an illegal trading operation on the side that fleeced 17 investors out of $1.6 million and led to his second conviction last month. Some of his accusers say they were fleeced in deals closed in his Mortgage One office.

White moved against Dominick quickly. The Morning Journal has interviewed other individuals who allege Dominick bilked them, too, but they weren't included in the federal charge. A plea agreement that is likely to bring Dominick a 20-year sentence says prosecutors won't pursue ''other facts'' they knew at the time he was charged.

Dominick also has been sued for his role in McNaughton's purchase of The Silos Ministries, a property used by several local churches for youth activities and which was repossessed after Haven Equity was frozen.

In a final twist to Dominick's story, he was a member of the Church on the North Coast and some of the victims he admitted fleecing were also members of the church. Kayatin and Ball, the pastor and associate pastor, confirmed they both knew Dominick was doing his time for his first securities conviction in a prison near Youngstown, and they said they welcomed him back into the flock when he was released five years ago.

Until recently, stories of fraud ruining the lives of local residents, though numerous, were thought to be an aberration, the work of just one person, Stencil, who was preying mostly on a circle of her acquaintances and their friends. She is now starting on the second year of a six-year sentence for her guilty plea to 38 counts for bilking 40 people out of $3.29 million. When she was sentenced she faced more than $5 million in civil claims involving more than 42 investors, individuals and organizations. Although there are few silver linings in these cases, the lawyers still working on this one have now managed to find an undisclosed portion of about $2 million that two different groups of investors lost to the smooth-talking Amherst businesswoman.

Stencil also had her share of enablers, including members of The Church of Jesus Christ of Latter-day Saints, who were also counted among her victims. Lorain's Community Development Department also was too easily cajoled out of a major loan by Stencil, which she used to help finance the headquarters from which she fleeced so many people. And this newspaper ran Stencil's advertising for one of her investment opportunities and published a story extolling it.

from: http://www.morningjournal.com/site/news.cfm?newsid=14318659&BRD=1699&PAG=461&dept_id=46371&rfi=6