SEC seeks church assets in FRM probe
The Securities and Exchange Commission is seeking to freeze the assets of the Center Harbor Christian Church in order to retrieve any ill-gotten gains resulting from the alleged Financial Resources Mortgages Ponzi scheme.
In a U.S. District Court filing, the SEC said that FRM (along with related companies and individuals) transferred $669,000 in assets to the church over the years, even though that money was supposed to be going toward specific investments.
The church is run by Pastor Robert Farah, the father of FRM's president, Scott Farah, who also served as the church's treasurer and deacon. The church's assets are the only known assets of FRM that are not already in bankruptcy court, according to the SEC, though the bankruptcy court’s trustee is seeking to attach the church’s property.
"An asset freeze is necessary and appropriate to prevent the Center Harbor Christian Church from misappropriating, dissipating or secreting any proceeds of Defendants Farah’s and FRM’s fraudulent offering and to ensure that assets are preserved for investors and are available to satisfy an eventual judgment for disgorgement and/or penalties in favor of the Commission," said the filing.
That might set up a conflict between the SEC and bankruptcy court trustee, who are seeking the same assets. Both agree the company was insolvent and should not have donated so much money to the church, but the SEC’s mission is to protect investors, while the bankruptcy’s trustee’s aim is to protect creditors.
According to the SEC filing, donations to the church were among the reasons that FRM failed and the whole Ponzi scheme collapsed, causing hundred of investors to lose tens of millions of dollars.
"By November 2009, the Defendants had diverted so much money from FRM and CLM that they had no funds left with which to operate," according to the filing.
FRM was the church's largest single donor, accounting for a substantial amount of its $190,000 budget, according to the January sworn deposition of Robert Farah, which was released with the SEC filing.
For instance -- in 2008 the last full year before FRM’s collapse in October 2009 -- FRM gave the church $105,000, Robert Farah testified. That would have accounted to more than half of its budget. (In the first three quarters of 2009, FRM donated about $84,000, according to the deposition.)
Robert Farah said that FRM donated $2,000 a week to the church, which paid him a salary of $850 to Robert Farah’s salary.
Scott Farah and his wife also personally donated more than $60,000 to the church, and Scott Farah bought his father a retirement property, the SEC charged. The younger Farah also hit up investors to both raise funds for the church and lend it money.
But Robert Farah said he had no reason to believe that there was anything wrong with the money that his son donated.
"I always felt that my son was as honest as the day is long," he said in the January deposition. "This was a total surprise to me … My son and I are very close. It was a total shock to me and my wife."
Farah said in the deposition that while he never specifically asked churchgoers to invest with FRM, he said, "Go to someone like Scott who would invest your money wisely, yes. Get a high interest rate,"
Then he added, "Did I say, 'Go to Scott or I will kill you.'? No."
Robert Farah said he was unaware that he was listed as president of Earth Protection Systems, one of the companies in which FRM invested. Though he said he was "supposed to get a percentage," since he introduced the company’s founder to his son, he said, "I didn’t know I was the president of any corporation. I never went to one executive meeting, never signed one executive paper that I know of."
He said he was "angry" when he learned of it.
In its motion, the SEC maintains that many of FRM transactions are securities under Federal law, although on state level the Securities Regulation Bureau have maintained that they were mortgages, not securities (though the Bureaus said that some earlier products of FRM were, and won a $1 million restitution to preferred investors in 2007.)
The SEC estimates that the asset transfer to the church was about twice the amount estimated by the bankruptcy trustee, whose estimate was $382,150 in an April 1 motion to attach the church property.
The church is contesting that bankruptcy motion. Last month, Robert Farah said, "We do not know where the funds originated. They were given to us in good faith," that "there is no unjust enrichment and/or ill-gotten gain" and that the bankruptcy court attachment "would put the church out of business." -- BOB SANDERS/NEW HAMPSHIRE BUSINESS REVIEW