By Jim Schutze
By Rachel Watts
By Lauren Drewes Daniels
By Anna Merlan
By Lee Escobedo
Beginning sometime in 1990, Reynolds began operating several companies that used variations on the name "California Pacific Bankers and Insurance," according to federal prosecutor Floyd Clardy. One of the companies, California Pacific and Bankers Inc., was incorporated in Texas, and Reynolds ran his businesses out of an office on Preston Road in Dallas.
The various companies sold many different types of insurance and surety bonds, mostly to high-risk customers. Independent brokers sold the policies, which were peddled in California, New York, Canada, and the Caribbean. Apparently no policies were sold in Texas.
For about two years, California Pacific claimed Melchizedek as its home country, but in 1993 Reynolds moved his companies to Aruba. The move might have had something to do with the curiosity of the California Department of Insurance.
In early 1993, the Orange County Register discovered that Reynolds' company was selling automobile policies in California without a valid insurance license. The fact that California Pacific claimed to be chartered by a fictitious island nation also aroused suspicion, and the company was under investigation by the California Department of Insurance, the paper reported.
One customer duped by the phony company, in fact, had been the government of Orange County, which would later become notorious for fiscal mismanagement when it invested heavily in high-risk derivatives and was forced to file for bankruptcy.
In 1992, according to the Register, Orange County accepted a $73,000 bond from California Pacific to guarantee construction of a county fire station. The contractor hired to build the fire station went bankrupt, but the surety bond from Reynolds' company proved worthless. More than $200,000 in claims has never been paid.
When California regulators began poking around in California Pacific's business, it became clear the companies were a sham, says Nancy Ayoob of the state's Department of Insurance.
Reynolds, according to his indictment in Dallas, claimed the companies had assets of $3,750,000. Assets are fundamental for an insurance company--to ensure that the company can pay out claims made by policyholders.
In fact, Ayoob says, Reynolds' companies had no assets at all. "We were never able to determine that they were financially sound or had a license to do business," Ayoob says. "They never gave us one piece of paper that proved an asset, although we were repeatedly asking them for it."
Then there was the Melchizedek problem. When state regulators began probing Reynolds' ties to the fake country, Ayoob says, Reynolds moved his companies to Aruba. But that didn't make them any more legitimate. "They started the ball rolling with Melchizedek and then kept bouncing it from island to island," she says.
California regulators barred Reynolds from doing any further insurance business in their state. Since the department lacks the authority to pursue criminal charges, Ayoob says, it passed its information about Reynolds and Melchizedek along to the FBI.
Because Reynolds was working out of Dallas, the case ultimately landed in the Northern District of Texas. In January of this year, Reynolds was indicted on 20 federal fraud counts for his insurance dealings. According to Clardy, Reynolds' companies sold policies with a purported value of about $47 million. Reynolds' share of the premiums paid by customers came to an estimated $500,000.
In many cases, Ayoob says, customers may have had no idea they were buying insurance from a company chartered in a fictitious country. The policies--many of them for boats--were offered through independent agents, and customers may not have looked closely at the fine print on the policies.
The scheme was already flagging by the time Reynolds was indicted, Clardy says, but the Dallas con man did not go down without a fight.
Initially, Reynolds decided to be his own lawyer, not generally a smart move for someone facing 20 federal fraud charges. Eventually, Reynolds agreed to let federal public defender Mick Mickelsen be appointed as his attorney.
Reynolds mounted a spirited, if unusual defense. Part of it consisted of an effort to convince U.S. District Judge Barefoot Sanders that Melchizedek really is a legitimate country. "The Dominion of Melchizedek has typically been considered an ecclesiastical sovereignty. It has published a bible which may be purchased through most any major bookstore," Reynolds argued in one court brief.
Noting that the country had been recognized by the Central African Republic, Reynolds asserted that "the existence of the Dominion of Melchizedek is not dependent upon recognition by the United States government."
Reynolds even included news articles, specifically clips from Forbes explaining the country's fraudulent roots, in an attempt to show that the dominion was to be taken seriously.
To further bolster his argument, Reynolds provided the court with a 1993 legal opinion written by Kenneth Kirk, an attorney from Austin, which purports to explain why Melchizedek is a legitimate nation. In the opinion, Kirk explores the various notions of sovereignty, and contends that Melchizedek is a legitimate entity.
"Just as Rome was not built in a day, nor will the dominion complete its momentous task of establishing a new nation except over the course of years," Kirk wrote in his opinion. "Slowly, it is expected that the dominion will gain credibility and even formal recognition among the world's nations and institutions."