Victim of a bad economy or a house of cards?

At first glance, the bankruptcy of a church-connected real estate firm may appear to be simple backwash from the real estate crash that wrecked Wall Street and the nation's economy. However, the imminent demise of Cornerstone Ministries Investments (CMI) has implications stretching back further, to its formation 23 years ago under the auspices of the Presbyterian Church in America (PCA).

After filing for Chapter 11 reorganization in February of 2008, the publicly held company is in the final stages of a bankruptcy whose effects have rippled through the Christian community nationwide. A few examples:

• Congregations such as Mason Memorial Church of God in Christ, Norfolk, Va. ($1 million), Linden Presbyterian (PCA) of Linden, Ala. ($600,000), and First Presbyterian (PCA) of Gadsden, Ala. ($220,000), have lost funding for emergency medical care, missions, orphanages, scholarships, and many other programs.

• Retirees say they are living in some cases on one-third less income after seeing CMI-invested bonds turn worthless. CMI dubiously invested in second mortgages 63 percent of its funds.

• Kathy Woody-Deming of Clermont, Ga., retired after a serious auto accident that killed her first husband, now must work as a job coach for a county school board after dividends stopped on the $523,000 she invested from an insurance settlement in 2005. "You put this stuff in the back of your mind and try to live day to day," the Southern Baptist church member said.

• Betty Smartt Carter of Birmingham, Ala., whose father used to work for the PCA, said about $50,000 of her children's college funds are in peril. She advocates more public discussion of CMI so others can avoid bad investments: "I wish they would come out and speak to people and give [investors] a chance to forgive them. And at least admit they made some bad decisions."

Linden Presbyterian's Ray Burge, a member of the creditors committee, has a harsher assessment. Noting the network of interlocking companies outlined in a bankruptcy court examiner's report, he said Cornerstone's demise doesn't surprise him. "Any time a company sets up with companies owning companies and dealing with themselves, it gives me the impression it's a shell game," Burge said. "You move money around and siphon a little off."

Much recent controversy stems from the mid-March report by bankruptcy examiner Pat Huddleston. It points fingers at many CMI principals, particularly former President Cecil Brooks-who died in late June-and one-time Chief Financial Officer John Ottinger Jr. Ottinger rejoined the company as interim CEO in late 2007.

"Through a tangled web of non-profit and for-profit corporations and limited liability companies, Brooks and . . . Ottinger profited from real estate development," Huddleston wrote. "Beginning with churches, they expanded in the late 1990s to senior housing facilities, single family housing and multi-family housing."

Among his charges: "Self-dealing" by the top two officers, both ordained PCA ministers, characterized Cornerstone's shift in making loans from non-profits to for-profit companies. Huddleston accused the pair of creating phony non-profits to hold some of Cornerstone's properties while appointing figurehead officers to oversee them.

Huddleston also says the officers didn't report some of their earnings in filings with the U.S. Securities and Exchange Commission. The largest gains include $6.2 million apiece for Brooks and Ottinger from the sale of a senior housing facility in 2007.

In addition, Huddleston reports that in 2006 Brooks, Ottinger, and two other Cornerstone directors acquired a 75 percent interest in a related company for $1,000 apiece. He alleges that later each received distributions of almost $171,000, although the subsidiary never made any money.

According to court documents, more than 3,500 investors hold $142 million in Cornerstone's bonds, with the bankruptcy settlement expected to yield only between 9 percent and 36 percent on those claims.

The distribution of assets and potential lawsuits likely will stretch beyond 2009, along with investigations by Georgia and Alabama securities officials. So could arguments over whether CMI was the victim of a bad real estate market or was an unethical house of cards. In one court filing, the company attributes its problems to the downturn in real estate and credit markets, starting in 2007. It says the squeeze created a liquidity crisis that left it unable to pay bondholders in the first quarter of 2008.

A CMI director contacted by WORLD said corporate legal counsel had instructed principals to maintain a low profile. In addition to possible legal action, he faced hostility from investors. Speaking on the condition that he not be named, the director said company records estimated that Cornerstone's assets would return at least 96 percent of investors' funds before the sagging real estate market and global recession slashed that number: "There are definitely a lot of broken hearts and people who feel they were taken advantage of, but things were done in good faith," he said, noting that Cornerstone's employees cumulatively invested $2 million in the company. "I mourn the loss of resources that we had counted on for retirement."

He also points out that many investors doubled and tripled their initial holdings over the years, and he maintains that Cornerstone did not hide its method of operations nor the projects in which it invested: "People are assuming we're all Bernie Madoffs and were manipulating things for our own benefit," he said. "It's not true. The staff's profit-sharing retirement accounts were invested in Cornerstone, as were many individual and family resources."

Ottinger's attorney, John Thomson Jr., did not respond to inquiries from WORLD. However, previously he told the Atlanta Journal-Constitution that Huddleston's report draws incorrect conclusions. Promising information will be released that will vindicate his client, Thomson pointed out that Ottinger also lost $1.4 million: "He personally regrets the losses that all of Cornerstone's investors, including he and his family, have suffered as a result of the collapse of the real estate markets and resulting collapse of Cornerstone's portfolio."

A suburban Atlanta attorney, Huddleston commented there may be information that Cornerstone didn't share with him in preparing his report. But he said he uncovered officers' self-dealing that had previously gone undetected. "Potentially, that will allow a greater recovery for the bondholders," Huddleston said. "It would support individual lawsuits against directors. Hopefully it will help folks recover more than they will from the bankruptcy [proceedings]."

Led by Brooks and Ottinger, CMI originated as the Investors Fund for Building and Development (IFBD) in late 1985. Later renamed the Presbyterian Investors Fund (PIF), it commenced operations the following spring by loaning money for church construction-under a Board of Directors elected by the PCA General Assembly in 1986, according to Roy Taylor, Stated Clerk of the PCA.

Headquartered at the denomination's offices in Atlanta, IFBD remained there until 1994, when members voted to divest the operation following an audit of the denomination. The results of that audit were never publicly released, but acting on the recommendation of its board of directors, IFBD "was ecclesiastically and legally disassociated" by the PCA, according to a statement by Taylor to WORLD.

The decision not to release the audit remains a sore point with Charles Wilson, a retired PCA minister and former chairman of Concerned Presbyterians: "When members of the general assembly tried to address these issues-particularly by asking for a copy of the [audit], they were constantly told, 'We can't release that material because someone might sue us.'"

In response to a question about the audit, Taylor provided WORLD minutes of the 1994 General Assembly deliberations. They indicate that despite overtures from at least two presbyteries to make the audit public, and complaints that about 20 companies operated under IFBD out of PCA headquarters, commissioners turned down the request on grounds that "the legal audit is protected by attorney-client privilege and its very contents may not be used against the PCA in a court of law." Taylor concurred that the terms of the audit precluded the PCA from distributing its contents beyond certain denomination officers.

At the time of disassociation, IFBD/CMI returned just over $1.3 million on investments to the PCA, according to PCA business executive assistant Tracy Lane-Hall. Those funds were part of a church-planting campaign that today has total assets of $2.1 million, she said.

Two years after going independent, Brooks and Ottinger formed Cornerstone to expand its reach beyond the denomination. That December CMI went public with a $3.7 million initial public offering and later merged with PIF.

Though the offering was minuscule in Wall Street terms, CMI's bonds-then paying 9 percent-attracted investors who liked the returns and appreciated its purpose of building churches and related facilities, such as Christian schools.

In a 2003 shareholder letter, Brooks said people regularly asked if the company was a "Ponzi scheme," named for an investment that pays illusory, above-market returns to first investors based on the infusion of cash from later investors. Emphasizing that the company had always been profitable, Brooks said, "Some do not invest because they fear the rate is a 'come on.' If it is, it is the best 'come on' I know and we have been doing it for 18 years."

However, the shift in CMI's emphasis a decade ago attracted criticism from Huddleston, who said Brooks and Ottinger unilaterally decided to start lending money to other businesses. The new deals included developments that went far beyond church construction, such as two upscale single-family home developments near Dallas. To show their risky nature, Huddleston's report cited a June 2006 email from Ottinger, which said, "This deal we are closing today is going to put us in a very precarious position financially."

According to Huddleston, CMI also spent money extravagantly on first-class and private jet travel, memberships in a championship golf course, and $250,000 sponsorships of a Dallas marathon. The extravagant spending on one subsidiary's projects left insufficient funds to finance others, forcing delays in development of several low-income housing projects, the report said.

With bankruptcy proceedings underway, the remaining question is how many investors will pursue legal remedies. Citing mismanagement, conflicts of interest, and failure to disclose material information, the examiner's report has provided ammunition: "In light of the evidence described above, the examiner believes that bondholders have valid causes of action against broker-dealers, Cornerstone directors and others."

Still, one Atlanta-area attorney doesn't think it will be that easy to recover damages. Jason Doss, who specializes in securities arbitration and class action cases, said the report shows the difficulty average investors face in trying to recover cash. He advised one client against legal action for that reason. "Everyone who sold these [bonds] is insolvent or out of business," said Doss. "They don't have any money to repay these people. I couldn't find it an economically feasible [case] and I didn't want my client to throw good money after bad."

Another issue is whether Cornerstone's previous link to the PCA will harm the denomination. In Wilson's mind, it already has. Though not an investor, the retired pastor says he agonizes over the widows and retirees who lost money and the poor witness he said company officials presented. "All this was done in the name of the Lord Jesus Christ," Wilson said. "Their behavior will most certainly have a negative effect upon the witness of the PCA. Both people within and without the PCA will identify the PCA with Cornerstone."

But Roger Schultz, a former PCA ruling elder who is now dean of the college of arts and sciences at Liberty University and part of the Reformed Presbyterian Church, said he believes that many looked at CMI as a case where the effort of well-intentioned Christians collapsed because of a bad economy. Still, he said the case offers instruction to the church as a whole-to avoid mixing commerce too closely with Christian purposes. "The church should be committed to missions and [starting] churches," said Schultz, a specialist in U.S. religious history. "If the church starts to play by the role of a banker, it complicates that mission.