The Lady and the Preacher

Dr. L.D. Kramer is not likely to forget the day he met Katherine Kessner Glasscox Smith. It was several years ago in the unlikely town of Tulia, Texas, about halfway between Amarillo and Lubbock. Mrs. Smith had passed the word that she very much admired Dr. Kramer’s evangelical work as an ordained Assembly of God minister, and especially his nursing homes, including a day care center in Tulia. She was considering donating a million dollars to him, for use in Challenge Ministries, a 12-year-old nursing home empire built by Kramer. His nursing homes had been expanded into Texas, including Dallas-Fort Worth, and a million dollars would certainly help his ministry.

Mrs. Smith was a short, brown-haired lady who dressed well and often wore very expensive looking jewelry. Dr. Kramer visited with her in Tulia, then later flew Mrs. Smith to the company headquarters, which at the time was in Glenwood, Minnesota. Mrs. Smith was even more impressed, and would soon talk of donating three million dollars to Challenge Ministries. But she wanted Dr. Kramer to see her empire too, so together they traveled around Oklahoma and Texas to see the vast holdings of Katherine Kessner Glasscox Smith.

Mrs. Smith said she lived in Belton, Texas, but also had a home in Woodward, Oklahoma. She didn’t take Dr. Kramer there, but did show him her two ranches in Oklahoma, the Turner Ranch and the Lazy S Ranch. Her mother was an Israeli orphan, she explained, who had the good fortune of being adopted by the Turners, a well-to-do Oklahoma family that owned a ranch near Oklahoma City. Dr. Kramer and Mrs. Smith visited the Turner Ranch, but for some reason she didn’t bother to stop and talk with any of the ranch hands or drop in at the house. They also visited the Lazy S Ranch, an impressive spread just across the Texas border at Ardmore. The Lazy S, she said, had belonged to the Pattersons, who were her father’s parents. Again Mrs. Smith failed to stop in anywhere at the Lazy S Ranch, which did seem a little odd for someone who was owner of such a ranching fortune. On another occasion, Dr. Kramer flew her down to Corpus Christi in a Challenge Ministry airplane (he was a licensed pilot and self-styled “flying parson”) where they looked over the Glasscox Oil building, which she said she owned as part of her vast oil inheritance.

Katherine Kessner Glasscox Smith certainly was a remarkable lady. She told Kramer that her education, which was quite extensive, had begun at Oklahoma University. She was a nurse, a doctor, and at one time a Rice University professor, she said. Also, Mrs. Smith was musically inclined. She said her father had made her practice the piano for long hours as a child, until she became accomplished enough to play concerts, in such places as Carnegie Hall, where on one occasion, Mrs. Smith told another Challenge employee, she had gotten so mad at the conductor that she just stalked right off the stage. Mrs. Smith also professed to be quite a pop song writer, author of such well known tunes as “I’m Standing On Top of the World Looking Down at Creation” and “The Stripper” (which she wrote after seeing a bunch of hippies take off their clothes). She told Dr. Kramer that she didn’t want credit for these tunes, so she just gave them to other song writers.

Mrs. Smith finally decided to make a “donation.” Impressed with what she had seen and heard, Mrs. Smith made a note payable to Assured Funds, a company owned personally by Dr. Kramer. The note, for one million dollars, was supposedly payment for purchase of Assured Funds. She would receive the Assured Funds stock when she paid off the note, and then hand the stock right back to Kramer, she said. This was a little strange, because Mrs. Smith easily could have donated the money directly to Challenge Ministries, and taken a million dollar tax deduction for the gift to a non-profit corporation.

Another odd thing happened. Whenit came time to pay her million dollar note, in October, 1974, Mrs. Smith requested permission to postpone the payment. At the same time she asked for a $29,000 loan from Dr. Kramer and his company, because she said her husband, Hollis Smith, and she were engaged in a bloody divorce suit and all of her assets were “frozen.” The suit was being tried in Corpus Christi, by Percy Foreman’s law firm, and had already been to the Texas Supreme Court and back. Mrs. Smith said she needed the money, so Dr. Kramer directed that she be given the loan.

Mrs. Smith continued to postpone payment of the note, advancing all sorts of wild stories about events which had prevented her from doing so. Despite the fact that Dr. Kramer continued to believe in Katherine Kessner Glasscox Smith, a few of his employees no longer did. They wrote a long memo to Challenge Ministries’ board of directors, detailing their suspicions that Mrs. Smith was a complete fraud. The memo was routed around Kramer, directly to the board, which was composed mostly of Assembly of God ministers like Dr. Kramer. The board called in Mrs. Smith, asked her a few questions, enough to satisfy themselves that Dr. Kramer wasn’t being taken in by another Margaret Medders. (Although one member was a little amazed when Mrs. Smith said Golda Meir had once visited Weatherford, Texas.) The board ordered copies of the employees’ report destroyed, because as the Rev. Herman Rhode later said, “it would be bad p.r.” to let them get out. Rev. Rhode, for one, had no doubt that the report was inspired by some ill-intentioned individuals and really wasn’t worth any serious consideration by the directors of Challenge’s $20 million empire. One of those who prepared the report, Rev. Rhode said, “goes to bed with another man’s wife, and I have a lot of questions about that.”

The not-too-surprising truth is that Katherine Kessner Glasscox Smith was a complete fraud, and when the Fort Worth office of the Securities & Exchange Commission squeezed out the truth about Mrs. Smith, Dr. Kramer’s $20 million empire began to collapse. It wasn’t long before the SEC had forced Challenge to appoint a new board of directors, which accepted the resignation of Dr. Kramer, who moved out of Challenge Ministries’ impressive headquarters building on Oak Lawn, half a block from the Melrose Hotel. Within a few months, Challenge would be bankrupt, and its 36 nursing homes, most of them in Texas, and four of them in the Dallas-Fort Worth area, would be in jeopardy. In wiping out Mrs. Smith’s story, the SEC knocked out the million dollarpillar that was holding up Dr. L.D. Kramer’s empire.

Katherine Kessner Glasscox Smith really didn’t have anything but a vivid, and sometimes half-accurate, imagination. Mrs. Smith was in fact married to Hollis Smith, and they did live together in Belton. But Katherine Smith hadn’t filed a divorce in Corpus Christi, and furthermore, Percy Foreman’s law firm had never heard of her. Although she said her Israeli orphan mother had been adopted by the Turners, that too was a lie. There really is a Turner Ranch near Oklahoma City and it is owned by Fred Turner II, of Tulsa. According to Kath-erine Smith’s story, Fred Turner II would be her brother. Contacted in Tul-sa, Fred Turner II said he never heardof Mrs. Smith, and was amazed at her story.

Mrs. Smith said that her father was a Patterson, the family which owned the Lazy S Ranch near Ardmore. For nearly 30 years the Lazy S Ranch was indeed owned by the Pattersons, until they sold it in 1959. Today the elderly Mrs. Patterson lives in Oklahoma City, where by telephone she confirmed that she and her late husband, Moss Patterson, had owned the ranch, but pointed out that she never had a son. She too had never heard of the mysterious Katherine Kessner Glasscox Smith. Today the Lazy S Ranch is owned by Lub-bock businessman Jack Markham, who isn’t familiar with Mrs. Smith. Mark-ham said that his ranch foreman has received two peculiar telephone calls from banks, wanting to confirm acreage and heads of cattle, apparently in response to loan requests. Markham said he hasn’t made those loan applications.

Mrs. Smith told Kramer that her father had been killed in an airplane accident, when his private aircraft struck an oil drilling rig, igniting a fire which famed oil well fireman Red Adair put out. In Houston, Red Adair says he never heard of such a thing, and certainly hadn’t put out a fire started by an airplane crash. And the Glasscox oil fortune? Her pretentions to it are almost as fanciful as the real story of the late Gus Glasscock of Longview. Gus Glass-cock was a boy circus performer, a tightwire walker who performed with Ringling Brothers Circus. He saved enough money to buy his own drilling rig, and struck it rich near Kilgore, in the East Texas boom. Gus Glasscock never had to walk the circus tightwire again.

Dr. L.D. Kramer had been taken by Mrs. Smith rather badly. He told the SEC, only months before Challenge slid into bankruptcy, that “I never caught her in a lie or had any reason to doubt her integrity.” This is the essence of the Kramer story. It reads like a Greek tragedy. He was successful but for one flaw, which brought his downfall – his gullibility and lack of business acumen.



Kramer started his nursing home empire in Glenwood, Minnesota, in 1961. He had been serving an Assembly of God church in Glenwood when he took $3,000 cash, borrowed another $22,000 and purchased an old community hospital, converting it into a 14-bed nursing home. Kramer incorporated the operation, so he could borrow mortgage money to finance new homes. The empire grew steadily through the Sixties, eventually stretching into Texas, which one day would be its focus of operations.

Kramer’s biggest mistake was founding a second company, named Assured Funds, in 1965. Originally Assured Funds was intended to raise money for building more Challenge nursing homes, but before long, that function was dropped. Assured Funds was owned entirely by Kramer, who began using it to borrow money from Challenge Ministries, in order to invest the money in other businesses, which presumably would make more money, which Dr. Kramer could turn back into the nursing home empire. If any of the businesses got in trouble, only Assured Funds and Kramer could be held legally responsible and Challenge Ministries would be protected from any lawsuits generated by Assured Funds’ operations.

Why Kramer chose to do what he did with Assured Funds’ money borrowed from Challenge is anyone’s guess, but before it was over, Kramer had taken nearly half a million dollars from the nursing homes and poured it into some very weird enterprises.

Perhaps the most telling day for Kramer came several years ago when he lent $2,000 to an Assembly of God deacon named M.M. Oman. Oman cheerfully offered to repay the $2,000 in two months, along with $200 interest. After two months passed Oman hadn’t repaid the loan, so Kramer wrote him, asking for payment. Oman wrote back, pointing out that $200 interest on $2,000 borrowed for two months amounted to 60 percent annual interest, which was usurious. Kramer took Oman to court and lost, and in the process “got quite an education.” Kramer later said Oman felt so bad about what he had done that he began repaying the loan.



Perhaps nothing sank Kramer deeper than his unswerving trust in his fellow man. Take the time Kramer lent $3,000 to the son of a Houston minister who came up with the not-so-good idea of a drive-through panty-hose store, much like a Fotomat drive-through. The building would be shaped like a giant lemon, with a leaf on top. The store never got off the ground, and another $3,000 was down the tube. On another occasion, Kramer lent $30,000 to a Los Angeles-based evangelical group, Faith Centers. Faith Centers telephoned Kramer and asked for the loan, supposedly because it couldn’t wire the money fast enough from Los Angeles to Hart-ford, Connecticut, where Faith Centers needed to make a payroll. Being closer, Kramer agreed to wire the money. All he got in return was a hot check from the brethren in Los Angeles. Kramer also lent money to church-going individuals who seemed needy, which in one instance included LuLu Roman, a star of the television series Hee-Haw, until she was busted for drugs. Kramer also lost money by investing in a shaky clothing retailer, a motor home factory, an oil pipeline x-ray company, a defunct used car business and various other unusual ventures.

If Kramer’s handling of corporate funds was strange, so too was his own financial situation. In 1975 Kramer signed a standard net worth statement, showing $2,469,000, which is a remarkable total for a minister earning $48,000 a year. Included in this total are two astounding figures. The first is the $1,000,000 note from Katherine Smith, which for some reason was listed as $1,250,000, and in any case was worthless. The second item was his ownership of Assured Funds, which he valued at $1,000,000. Included in that total was the note from Mrs. Smith (which in effect he was listing twice, once owed to him and once owed to Assured Funds), and a near worthless lot of securities.

The personal financial statement shows an annual income of $220,000, of which $175,000 supposedly was to come from money owed to Assured Funds, money which probably will never be collected. When the SEC asked Kramer why he was declaring an income of $220,000 when he had never received anything close to that, he replied, “A banker looks at that statement and looks at what you’re projecting your income is going to be … you don’t collect everything you have in writing.” Kramer’s income tax preparation is just as unusual. In 1974 he declared a gross income of $26,000, despite the fact that under oath he told the SEC his salary that year was $48,000.



The people who stand to lose badly in the Challenge debacle are 1,500 bondholders scattered throughout Texas and several other states. Among the largest of those bondholders are an elderly couple, William and Bertha Holzwarth, and two elderly brothers, Vernon and Roger Strom. They wrote Dean Gandy, a Dallas bankruptcy judge presiding over the Challenge case, and here are excerpts from their letters:



“I am writing in regard to our [$145,000] investment in Challenge Homes. When we invested this money we thought it would be safe as Dr. Kramer said he was working for God and man . . . And now that Challenge homes has filed bankruptcy we do hope and pray that our money will not be lost, as we have never asked the government for help, and do hope [now that] we are in our 70s, we won’t have to ask for help.

William Holzwarth



“This [$101,444] is our lifetime savings of hard earned money and all we have. We need our money real bad and are both getting older and not in too good health. . .”

Vernon and Roger Strom



There are about 1,500 of these bondholders, many of whom invested thousands of dollars, and some who had invested as little as $100. In part, they are victims of broken promises, made to them in writing by Challenge. The indentures accompanying the bonds stated that money raised in a particular community, to build a nursing home there, would be expended only on that project. In truth, some of these projects were never built, while funds from others that were built were freely diverted into other accounts, including Challenge’s payroll. The bondholders also were promised that a 20 percent reserve fund would always be kept on the outstanding bonds. The truth is that the reserve fund rarely approached 20 percent of the $3,500,000 of outstanding bonds, and in fact, at one time contained less than $7,000. Dr. Kramer was fully aware of this situation, and dismissed it by blaming an employee for putting the reserve fund clause in the bond indenture.

This extraordinary breach of promise occurred with the full knowledge not only of Kramer, but the man who was paid to sell the bonds, Jesse Toavs, of Lewisville. Toavs sold the bonds knowing full well that often the proceeds he took in from investors were diverted into payroll accounts or sometimes used to pay off other bondholders who wanted to redeem their bonds.

Under questioning from the SEC, Toavs admitted his participation in this breach:

SEC: Do you tell them [the investors] you set 20 percent aside?

Toavs: Yes we do.

SEC: Do you tell them that the money is withdrawn for purposes other than those for which it was intended?

Toaves: I have not told them that.

SEC: Do you ever tell people that that’s what they’re being used for, that you’re in that bad of shape, that you have to use your funds you’re raising for these facilities to pay off the old bondholders?

Toavs: No, we haven’t told them that, I don’t believe.

Besides Toavs, Challenge’s certified public accountant, Veon Scott, was fully aware of the bond situation. He certified financial statements which ignored the bond fund shortage.

SEC: Is the fact that [the shortage of reserve funds] is not disclosed in your financial statement a material misstate-ment as far as you’re concerned . . . ?

Scott: Yes, it is a misstatement.

The last major figure in the Challenge story is Veon Scott, the accountant who certified one financial statement after another which would have misled anybody who might have looked into the solvency of Challenge. Scott is a 39-year-old accountant, former IRS agent who passed the Texas CPA exam in 1963. During the several years prior to Scott’s involvement with Challenge, he said he had suffered a nervous breakdown, and had been in a mental hospital. Challenge hired Scott to prepare its financial statements after Ernst & Ernst walked away from the job, unableto get proper documentation of Challenge’s financial affairs. It was Scott who assigned values to the securities held by Assured Funds. Most of the values were grossly inflated, making Assured appear solvent. Scott admitted that sometimes he placed the value of those securities at whatever the owner claimed they were worth. He also admitted that Mrs. Smith’s lawyer and banker convinced him that her financial statement was correct, and that he made little attempt to independently verify her supposed vast financial holdings. It was the value of these holdings, certified by Scott, that kept the Challenge empire afloat, at least on paper, until the SEC moved in last winter and punctured the Challenge balloon.

Perhaps the best example of Challenge’s imaginative accounting practices is El Dorado Retirement Centers, an instrument used by Challenge to disguise operating losses in six nursing homes. Veon Scott was president of El Dorado, and part owner of its stock, and perhaps the sole owner. El Dorado operated the six nursing homes, which were quite unprofitable. Thus the operating losses showed up on El Dorado’s books, instead of Assured Funds’ or Challenge’s books. Challenge’s books showed a loan to Assured Funds, and in turn, Assured Funds’ showed a loan to El Dorado Retirement Centers. Both loans appeared safe, but the truth was that El Dorado was saving Assured and Challenge from reporting some enormous operating losses. In 1973, Challenge and Assured finally wrote off $500,000 in losses on the El Dorado loans, but even more money was lent to El Dorado, eventually totalling more than a million dollars.

Today it seems almost inconceivable that all of this could have happened. How could Katherine Kessner Glasscox Smith’s charade go undetected so long? How could the bondholders be deceived so easily? How could Challenge’s financial statements go unquestioned? The answer comes down to the inattentive board of Challenge, composed almost exclusively of Assembly of God preachers like Kramer, who knew precious little about business.

Kramer was the son and the grandson of Assembly of God ministers, and his higher education was limited to a year at the Church’s Bible College in Spring-field, Missouri. Many of the board members had similar backgrounds, and failed to see what either Kramer didn’t see or refused to acknowledge. Not only did the directors ignore the employees’ report questioning Mrs. Smith’s wild tales, they chose to ignore one other red flag. The Dallas office of Ernst & Ernst started an audit of Challenge in 1975, then backed off. Ernst & Ernst wrote personal letters to each director telling him of the problems at Challenge. The accounting firm said it couldn’t obtain adequate expense vouchers, it suspected there was something wrong with the bond funds, and Challenge may have endangered its tax-free status by lending all the money to Assured Funds, a company designed to invest Challenge’s money. The directors did nothing in response to the Ernst & Ernst letter. Instead, they hired Veon Scott to audit Challenge, at Kramer’s urging, withoutseriously questioning his background or auditing experience. His most recent experience had been preparing the badly distorted 1973 and 1974 balance sheets of Assured Funds.

Even when the SEC forced Kramer and the Challenge board to resign last spring, the new board quickly agreed to a consulting contact for Kramer, which at Kramer’s suggestion, would pay him two percent of the gross annual sales of Challenge – a consulting fee of approximately $400,000 a year. As it turned out, the contract was never executed.

Last summer Challenge filed bankruptcy, the type of bankruptcy which will allow financial corporations which hold mortgages on Challenge homes to either repossess those homes, or sell them. The bankruptcy court is currently attempting to find a way to at least partially pay off the hundreds of bondholders scattered across the country, who sunk much of their savings, liter-ally millions of dollars, into Challenge Homes. Challenge is currently under a management contract to Unicare, a health care company which is running Challenge’s nursing home business. On December 3, bankruptcy Judge Dean Gandy appointed a receiver to watch over the Challenge empire, at the urging of creditors who still aren’t convinced that Challenge is being operated efficiently.

Veon Scott is no longer a certified public accountant. In October, the Texas Public Accountancy Board suspended his certification. Scott also faces a bank swindling indictment in Kaufman County. Mrs. Katherine Kessner Glass-cox Smith is living in Belton, refusing to talk to reporters. Dr. Lowell Dale Kramer has a new office on Turtle Creek.

What is currently known about Kramer and his activities comes from Kramer’s own sworn testimony and that of 25 other Challenge employees before the SEC. Although Kramer claims the Challenge affair is merely another example of the U.S. government’s plan to harass the Church in America, he hasn’t produced his story for reporters. Kramer has a record of endlessly postponing interview appointments, which he did with D Magazine, knowing full well that his postponements went beyond press time. Today Kramer is still flying around the country, trying to raise enough money for a group of his friends to buy back the Challenge empire. Kramer says, “We have a loan commitment now, and I can tell you this. We can buy back Challenge and find a way to pay off every penny owed to the bondholders.” So far Kramer hasn’t come forward with the offer. When and if he does, those 1,500 bondholders are going to be very interested to hear what he has to say this time.