By CHARLES WILSON

The Associated Press

INDIANAPOLIS — A former pastor and his sons charged with bilking church members nationwide out of millions of dollars pleaded not guilty Wednesday, the same day state officials announced increased penalties for such schemes.

Prosecutors say Vaughn Reeves Sr., 65, and his three sons set up a company called Alanar Inc. and used it to dupe church members into a Ponzi scheme that played on their faith. They are accused of urging the members to purchase bonds to support church construction projects and using the money to buy themselves planes and sports cars.

The alleged scheme is an example of what investigators call affinity fraud, where groups are targeted because of factors such as their religious beliefs, age or ethnic origin.

Indiana Secretary of State Todd Rokita said the Legislature recently increased the penalties for affinity fraud, a felony, to six to 20 years in prison and a $10,000 fine. The charge had carried a prison term of two to eight years.

Indiana is believed to be the only state with a law targeting affinity fraud, which has been on the rise in recent years, said Bob Webster, a spokesman for the North American Securities Administrators Association in Washington.

“Unfortunately, this is a type of crime we’re seeing more and more of in Indiana,” Rokita said in a statement. “The Alanar case serves as a good example of why you should never make an investment based solely on the reputation of the person or the testimony of others, but should also do additional homework using the resources of our office.”

Reeves and his sons are accused of duping about 11,000 people into buying bonds worth $120 million, diverting money from new investments to pay off previous investors and pocketing about $6 million.

Investigators believe the men assembled teams of church members to sell bonds to other church members. The members were given training materials that instructed them to open sales calls with a prayer and to quote scripture. As the scheme progressed over about five years, the Reeveses allegedly shuffled incoming money between various accounts to hide defaults by churches and their own thefts so they could make scheduled interest payments to investors.

Officials say the scheme operated mainly in Indiana, though church members in other states, including Florida, Michigan, Maryland and Oklahoma, also were victimized.

“I’ve seen firsthand the financial devastation that can be caused by affinity fraud. Good people who thought they were doing the right thing end up losing their life savings,” said Bob Hunley, prosecutor is western Indiana’s Sullivan County.

Reeves and his sons — Chip, 44; Chris, 40; and Josh, 32 — are charged in Sullivan County with securities fraud and are being held on $1.5 million cash bond.

A judge on Wednesday appointed defense attorneys for Vaughn Reeves, Chris Reeves and Josh Reeves.

Chris Reeves’ attorney, Jeff Johnson of Sullivan, said he would seek to have his client’s trial moved to another county but otherwise declined to comment.