Article Archives >> Lead Stories >> November 16-December 15, 2008
Ponzi Victims May Sue Pastor
Who Introduced Them to Scheme
Court dismisses claims for fraud and misrepresentation
but allows claims under state securities law
The Court of Appeals of Ohio has affirmed the dismissal of fraud and misrepresentation claims against a Church and its Pastor who introduced the victims of a Ponzi scheme to the perpetrator. But it has allowed the victims to proceed with an attempt to show that the Pastor illegally aided in the sale of an unregistered security within the scope of his employment. (Johnson v. Church of the Open Door, Ct. of App., OH, Ninth App. Dist., No. 08CA009387, 11/24/08.)
Rich and Trina Johnson were “conned” out of more than $1 million in a Ponzi scheme and a commercial loan agreement by a Canadian investor who apparently achieved great returns in the market. The Johnsons had been introduced to the investor in connection with becoming associated in the ministry of the Church. A trial court dismissed all of the claims. The Court of Appeals has affirmed on some counts, but reversed on others.
Gary McNaughton had worked with the Church of the Open Door in its youth ministry and told people he could work full time because he had a friend in Canada who was such a wizard in the stock market that he could live off of his investments. When the Church sought to expand its ministry, its Pastor, Tim Guenther, met with Johnson who said he had substantial savings and was looking for a way he could live off the investments and minister full time. The Pastor introduced him to McNaughton.
After checking some references, Johnson and his wife ultimately invested about $750,000 with McNaughton, and also co-signed a note for $400,000 to purchase a property for a youth center, even though the property was purchased for only about $200,000. McNaughton said the extra $200,000 would be used to fund programs.
Ultimately, the Ponzi scheme failed and the Johnsons and a number of others involved in the scheme sued the Church. The other cases were thrown out earlier, and the trial court relied on those decisions in dismissing the Johnsons’ case as well.
On appeal, the Court of Appeals agreed that there was no legitimate claim for fraud or negligent misrepresentation against the Pastor or the Church. Each of those theories requires “justifiable reliance” by the victim on the representation or concealment, the Court said. Although the Pastor told Johnson he knew that McNaughton helped other pastors and churches, he said he did not know much about how the program worked. When he met with McNaughton and Johnson, the Pastor did not say much.
“Even if it was reasonable for the Johnsons to think Guenther was trustworthy because he was a fellow minister,” the Court said, “they knew he had no expertise with financial instruments. Moreover, despite Guenther’s recommendation, the Johnsons sought other assurances…. The Johnson continued to be wary about McNaughton’s plan and contacted others who had invested with him. Under these circumstances, their reliance on Guenther’s statements was not justified as a matter of law.”
The issue under the Ohio Securities Act was different, however. The Act provides that “every person that has participated in or aided the seller [of an unregistered security] in any way … [is] jointly and severally liable to the purchaser….” A person who has not received remuneration based on the sale shall not be deemed to have participated in or aided the sale.
While there is not much law interpreting the provision, the Court said the language is “broad in scope” because of the phrase “in any way.” Since the Pastor not only told the Johnsons about the investment program, but arranged for them to meet McNaughton and attended the meeting with them, “a genuine issue of material fact, therefore exists regarding whether he aided McNaughton in the sale of unregistered securities.”
The Pastor argued that he had not been compensated for the sale. But the Court said there was evidence that around the time the Johnsons began investing with McNaughton, the Pastor’s wife, who worked in the Church, received a salary increase for which McNaughton was responsible. There was also evidence that the Pastor’s wife received $30,000 from McNaughton’s investment account and that some of her salary was paid directly from the investment account. This was enough to raise a genuine issue of material fact to proceed to trial, the Court held
The Court also said that there was a genuine issue of material fact about whether Guenther was acting on behalf of the Church and within the scope of his employment in encouraging the investment in order to recruit Johnson to work for the Church full time. If so, the Church could be vicariously liable for improper acts of its Pastor.
YOU NEED TO KNOW
Does the name Bernard Madoff come to mind in reading this case? While the people who introduced victims to Madoff may not to be liable on a fraud or misrepresentation claim, their potential liability under state or federal securities law could be an issue. It will be interesting to see how many suits are started and get beyond a motion to dismiss.
Article Archives >> Lead Stories >> November 16-December 15, 2008
