Fighting Investment Fraud at Churches

How leaders can deter financial charlatans targeting Christians.

“The greatest trick the devil ever pulled was convincing the world he doesn’t exist.”

That quote from 19th century French poet Charles Baudelaire appeared in the Oscar- winning movie The Usual Suspects. And it speaks to why Christians have been, and will continue to be, victims of investment fraud. Just as many people don’t believe that the devil exists, many Christians don’t believe that we are at risk from investment fraud. We tell ourselves, People who lose their life savings to a scam or an unethical financial adviser are gullible, stupid, or greedy. I am none of those things. Therefore, it can’t happen to me. It’s the big lie that makes us all so vulnerable. Just as the devil is pleased that so many deny his existence, scam artists and unethical brokers are pleased that the universe of possible victims feels immune to fraud.

Many articles discussing investment fraud against Christians include a subtle suggestion that Christians are more gullible than most people, but that’s just not true. It isn’t their status as Christians that makes believers vulnerable to investment fraud; it’s their status as healthy human beings. Protecting Christians and Christian fellowships from investment fraud must therefore begin with helping them understand why we are so prone to believe—falsely—that it can’t happen to us.

All healthy human beings are born with what psychologists call “cognitive biases.” In essence, cognitive biases are pre-wired breakdowns in logical thinking. God wired our brains with certain shortcuts that help us in most contexts. But those shortcuts hurt us in the investment context.

Scientists believe that cognitive biases flow from the complex world in which we live. In an environment with more relevant information than we can comfortably process, we look for shortcuts and our brains work to simplify an issue to boil it down to a manageable size. So, rather than consider the dozens of factors that are empirically relevant to a decision to invest through a particular broker or in an investment he or she recommends, our brains make the problem more manageable. We put all of the complicated, inter-related factors aside and focus instead on a single question: “Can I trust this person?” The result, in my estimation, is more than $1 billion stolen from Christians every year and an epidemic of investment fraud that will destroy dozens, if not hundreds, of fellowships this year.

The optimism bias

Neuroscientists have observed a phenomenon they call the optimism bias. Don’t let the name fool you; it infects even the most naturally pessimistic person. The optimism bias is most directly to blame for our sense of invulnerability to fraud. We naturally believe that tragic events, including the tragedy of losing our life savings, are more likely to happen to other people than to us.

You can understand how this bias is important for everyday life. Without a deep-seated conviction that nothing too terrible is going to happen to us today, we would never leave our homes into a world full of germs, crime, and teenaged drivers. Unfortunately that bias makes us discount the possibility that the financial adviser with whom we are dealing will steal our hard-earned nest egg. And if we don’t believe the danger is present, we take no precautions to protect ourselves. While we like to believe that our assessment of ourselves as “too smart to fall for a scam” is accurate, intelligence alone is not sufficient protection, and that sense of invulnerability is the mental approach that every scam artist most wants you to have.

The congruence bias

You like to think that you never take anything at face value and always do your homework. There is another bias that often wrecks the best efforts of those of us who think of ourselves that way. The “congruence bias” is a product of the way in which our brains make us more efficient. If we had to consider every possible explanation for the hundreds of situations that present themselves to our senses every day, we’d never get anything done. So our brain quickly suggests a theory to explain any new situation. The congruence bias makes us stubbornly attached to that first theory.

When we meet with a financial adviser who we know through church and listen to her describe a seemingly sound investment opportunity, the first theory that occurs to us is that the adviser is honest and that the investment performs as described. Even if we set out to investigate the investment, the congruence bias leads us to accept evidence that supports our theory of legitimacy and reject evidence that seems to contradict that theory.

The congruence bias therefore sets the scam artists’ hook deeper even as we believe that we are doing a thorough pre-investment investigation.

The solution

As church leaders, it’s imperative we have a solution to combat the vulnerabilities that members of our congregations, including ourselves, may have. That solution is a combination of smart risk management strategies involving training and policies and procedures.

Wise Christian fellowships will train all staff and key volunteers. That training must include workers in every ministry area because, especially at large churches, a scam can gain steam in a far corner of the body and destroy hundreds of nest eggs without the leadership ever learning about it.

One example of this came in 2006. Lambert Vander Tuig, a member of Saddleback Church in Lake Forest, California (where more than 20,000 people attend), gave Pastor Rick Warren’s A Purpose-Driven Life to investors in Carolina Development Properties Inc., which supposedly developed luxury communities with exclusive golf courses. Using glossy brochures that included pictures of Jack Nicklaus and Greg Norman, Vander Tuig sold stock in Carolina Development to more than 1,000 people, including Saddleback members. In January 2009, California prosecutors charged Vander Tuig with securities fraud. While neither Pastor Warren nor anyone in leadership at Saddleback knew about the scam, it gathered $52 million.

There is more to learn than this article alone can teach, but an effective training session will last at least half a day and must cover, at a minimum:

  1. cognitive biases,
  2. the different types of characters who prey on Christian fellowships (not all are professional con artists),
  3. subtle red flags, and
  4. effective investigative techniques.

For example, training the staff should include helping them:

  • Overcome cognitive biases by looking for fraud, rather than a confirmation of legitimacy. They’ll never find the former by looking for the latter. Help them understand that most fraudsters are not career criminals; rather, it’s otherwise honest financial professionals who seek to cover up a relatively small loss, only to see the first lie lead to another and another.
  • Recognize vague or jargon-laced answers as a subtle red flag. Encourage them to become students of investment fraud. When we read about actual scams, it equips us to spot red flags that we would never otherwise recognize.
  • Know about two powerful—but little known—websites where they can begin the search for fraud. allows a search of the docket of every federal court nationwide and can reveal criminal convictions, bankruptcy filings, and lawsuits by disappointed investors from previous deals. can uncover misrepresentations about claimed academic credentials. There are no “white lies” in the investment world. A broker who will misrepresent his credentials is afraid that you won’t be impressed with the truth and is more likely to cover up losses.

Armed with such knowledge, staff members can not only protect the flock, but also can alert regulators early and thereby protect the public at large.

policies and procedures
Every fellowship of any size has policies and procedures designed to promote efficiency and transparency. Few, though, have adequate policies and procedures designed to stop the fraud contagion from taking hold.

Anyone who works in sales appreciates the value of satisfied customers. The investment world is no different. The endorsement of a satisfied investor speaks volumes to prospective investors. There is no endorsement a financial scamster would rather have than the endorsement of the lead pastor of a Christian church. Smart fellowships will therefore adopt policies designed to protect the flock against such endorsements. Whether they prohibit the pastor from using a financial adviser from within the flock, require an extensive background search of any investment adviser pastors use, or prohibit pastors from endorsing financial advisers altogether, such policies can protect the church from the most damaging type of financial catastrophe—one seemingly endorsed by church leadership.

Crossroads Christian Church in Corona, California, experienced this very scenario. According to news reports, at least one of the pastors at Crossroads vouched for choir member Randall W. Harding. Harding promised many of Crossroads’s 8,000 members that his business, JTL (“Just the Lord”) Financial Group, could generate attractive, guaranteed returns. He swindled hundreds of Crossroads members out of more than $18 million and served 51 months in federal prison. He was released in December 2009.

Effective policies will also address how the church raises money for expansion. Many churches sell church bonds to construct or expand their church campus. There are more than a few companies that offer to help with that process.

“Never sell the facts. Instead, sell warm stewardship and the Lord,” former Pastor Vaughn Reeves, Sr., told the salespeople he recruited to sell church bonds. Reeves’s company, Alanar, Inc., identified Protestant churches that needed money to build or expand but could not get financing from a bank. Alanar helped its church clients sell bonds to raise that money. The church got the money from the sale of the bonds and the investors received interest payments until the church paid off the debt, at which time the investors received return of their principal. At least that’s how Reeves said it would work. By having his salespeople open each sales call with a prayer and stress each prospect’s “Christian duty” to help the church, Alanar raised more than $120 million from more than 11,000 investors in 150 separate church bond offerings between 1988 and 2005.

Reeves and his sons Chip, Chris, and Josh had a taste for luxurious living. They bought two airplanes, expensive vacations, luxury cars, and enormous houses. Soon there was not enough cash to make interest payments to bondholders, and Reeves began moving cash from the proceeds of one church’s bond offering to make interest payments to investors in a separate bond offering. In October 2010, Reeves was convicted on nine counts of fraud. In December 2010, he was sentenced to 54 years in prison.

Thousands of investors lost millions of dollars in the Alanar scam. Churches that had used Alanar were inevitably stained by Alanar’s misconduct as their members lost money they had invested to fund a building campaign. A policy that required a professional due diligence investigation may have steered churches clear of Alanar and potentially saved those fellowships.

The stakes

In the past ten years, hundreds of Christian fellowships have disappeared because an investment scam swept the body away. Many churches will die this year for that reason, with members moving elsewhere amid doubts about the competence of church leadership. Most tragically, some who were anxious to learn about Christ will leave, never to fill another pew, because the conduct of Christians in the midst of a scam has given them a false, negative picture of the faith.

Albert Einstein defined insanity as “doing the same thing over and over and expecting a different result.” What Christian fellowships are doing—and not doing—over and over is costing Christians (based on multi-year surveys conducted by the North American Securities Administrators, I estimate Christians lose about $1 billion or more every year in fraud losses). It’s time to do something different, and there’s never been a better time to start. With 10,000 baby boomers turning 65 every day, and Social Security and Medicare soon to become less generous, now is the time for Christian leaders to take the fraud threat seriously by adopting sensible policies and training their staffs to be proactive protectors of the resources that God has entrusted to members of the church.

Pat Huddleston is a former Securities and Exchange Commission Enforcement Branch Chief. He is the author of The Vigilant Investor and chief executive officer of Investor’s Watchdog LLC, a fraud prevention due diligence company. He trains institutional investors, financial advisers, and individual investors nationwide on how to recognize and prevent investment fraud.

This article first appeared in Church Finance Today, November 2011.

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