Last October, Tony Hesson, who works for a doughnut company, did something he felt was right: He paid off his mortgage with a counterfeit money order.

Mr. Hesson is one of many thousands of people who have bought kits that include blank money orders and instructions on how to use them to pay off mortgages and other debts.

The kits, which include many citations of court cases that purportedly support the legality of the money orders, were sold initially by antigovernment groups that contend the Federal Reserve System is illegal.

Now, however, copycat groups are believed to be involved, and distribution of the kits seems to be accelerating. More than 500 banks have received the spurious money orders, and their total face value so far is said to be $40 million.

A Growing Practice

While direct losses by lenders have been small, recoveries can require expensive and protracted litigation. Preventive measures could also be costly. And the practice appears to be spreading rapidly.

"This is a pain in the rear for a lot of lenders who have to be on guard for this," said Geoff Cooper, a spokesman for the Wisconsin Commissioner of Banking.

Mr. Hesson's story is fairly typical. He says executives at Mellon Mortgage, his lender, were not pleased when they discovered the problem. "It was a big stink," he said. And the Lubbock, Tex., resident, who sometimes umpires Little League games, knows why.

"It's just paper," said Mr. Hesson. With such money orders, "You are just trading paper for paper," he says.

Counterfeit Money Orders

A low-income borrower with a $50,000 FHA mortgage, Mr. Hesson had been scrambling to make his monthly mortgage payments. He still says the counterfeit money orders are legal, based on Supreme Court cases.

"The Federal Reserve is illegal, all Federal Reserve money is fraudulent," he explained.

And why? "They lend credit and that's illegal," he said.

He heard about the money orders from a friend who used one to pay off a credit card debt. The friend directed him to a group called Family Farm Preservation in Tigerton, Wis., an address on many counterfeit money orders. The group sent him literature on past court cases. "It all looked good to me."

Homeowners have been buying kits, for $200 to $650 each, that include "certified money orders."

And the distributors of the kits appear to be making a bundle. An Iowa official investigating the fraud said some $140,000 passed through an account held by one of the distributors, We the People, in five days. Most of the money is believed to have come from the sale of the kits.

Antigovernment Line

The antigovernment line of thinking has been espoused in the past by an extremist group known as the Posse Comitatus, and now it has been picked up by We the People, which appears to be a successor group.

Another group, USA First, based in Waxahatchie, Tex., is also said to be involved.

While the groups are known to be antisemitic, racist, and antigovernment, there is no indication that the people who submit the money orders are anything more than customers, perhaps even gullible victims.

Many of the homeowners are so convinced the money orders are legitimate that they are taking to the courts to prove their cases.

The roots of the scam stretch from rural Texas to northern Wisconsin and have now poked into Arizona and Rhode Island. We the People and USA First appear to be spurring copycat operations.

$40 Million in Orders

Robert Baumann, an inspector for the U.S. Postal Inspection Service in Wisconsin, said the number of banks nationwide that have received counterfeit money orders exceeds 500, and that the face values cumulatively exceed $40 million, most of it for mortgage payoffs.

"Each day we get additional complaints from financial institutions and businesses about the money orders," Mr. Baumann said.

A Family Farm Preservation representative quoted "certain laws" to explain to Mr. Hesson how the money orders work. The man told him Citicorp and other banks had accepted the money orders.

He bought the kit for $200 regardless. It contained, along with three blank money orders and a "two-and-a-half-inch stack of literature."

Mr. Hesson used one of the money orders to try to pay off his $50,000 mortgage, serviced by Mellon Mortgage. According to a Mellon spokeswoman, Mr. Hesson's money order was initially credited as a payoff. The U.S. government apparently commenced procedures to refund insurance fees on Mr. Hesson's mortgage.

Mellon tried to send the money order back to "L.A. Pethahiah," the name listed as the check's drawee. "L.A. Pethahiah" appears on a great portion of the counterfeit money orders. Authorities believe Mr. Pethahiah is Leonard Peth of Tigerton, Wis., purportedly one of scam's kingpins. Mr. Peth could not be reached for comment.

Within a week, Mellon realized the money order was a sham and returned it as nonnegotiable. The loan was reclassified as unpaid.

Mellon initially "assumed the borrower was giving us good funds," the spokeswoman said.

Mr. Hesson is still fighting Mellon. "I'm fixing to take them to court," he said.

Law enforcement officials say participants could be guilty of mail fraud, banking fraud, or wire fraud, along with countless local fraud violations.

The Federal Bureau of Investigation, the Secret Service, the U.S. Postal Inspection Service, and many local law enforcement agencies are investigating the scheme. The FBI conducted searches of operations in Wisconsin and Texas.

So far, no arrests have been made. Enforcement has been difficult because the individual cases of bad money orders are widely scattered and so many jurisdictions are involved.

As early as last September, We the People began selling fake money orders with kits that explain how to use them, according to documents from the Wisconsin Office of the Commissioner of Banking.

According to documents supplied by the Texas Department of Banking, Jerry Henson and Spirit Press, Dell City, Okla., print and sell counterfeit money orders. Mr. Henson denies any connection with USA First or We the People.

Jodi Haire, a library assistant at the University of Idaho Law Library, has gotten a close-up look at Mr. Henson's operating method. A friend of Ms. Haire, whom she declined to identify, bought a money order kit from Mr. Henson for $350, Ms. Haire says. The friend gave a copy of the kit's contents to Ms. Haire for her impression.

"I looked it over and decided it was a big scam," Ms. Haire said. "Once I spoke to [Mr. Henson], I realized he was one of those weird people who hates the government."

Ms. Haire said her friend sent the kit back to Mr. Henson for a refund. He never responded.

Mr. Henson, reached by telephone, said the money orders are "as legal as they can be." They are backed by USA First in Texas, he said. USA First could not be reached.

"All bankers want to steal from the American public," he said. "One of these days we are going to bring it down."

He would not elaborate.

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