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The commander of the Bowling Green Veterans of Foreign Wars Post and his girlfriend have been charged federally with arson and running an illegal gambling business. Donald Mudd, 65, and Martha Towe, 53, both of 600 Fairway St., also are accused of money laundering, illegal structuring of monetary transactions and mail fraud. The couple was indicted Wednesday by a U.S. District Court grand jury in Bowling Green, following a three-year investigation. Mudd was taken into custody Thursday at VFW Post 1268 on Ky. 185. Towe was at home when she was arrested. Mudd has worked a long time in the community supporting veterans' causes and is innocent, said his attorney John L. Caudill, of Louisville. "We vehemently deny the charges," Caudill said. "There's a big difference between an indictment and proving someone guilty in court. We'll see if the government cases holds up in court and under rigorous cross examination." Following the investigation, it was determined that Mudd was responsible for the Aug. 13, 2003, fire that destroyed the Lt. Harold R. Cornell VFW Post No. 1298, said Kevin Kelm, resident agent in charge at the Bureau of Alcohol, Tobacco, Firearms and Explosives in Bowling Green. After determining the fire at the post was arson, the question then became why, Kelm said. "The signs at the fire that it was intentionally set were pretty obvious," Kelm said, but declined to provide any detail. The ATF then worked with the Bowling Green Fire Department, the Office of Charitable Gaming and Internal Revenue Service Criminal Investigations Division, said ATF Louisville Special Agent in Charge Paul Vido.

"The ATF Arson Task Force developed a lead indicating illegal gambling appeared to be the motive behind the arson," he said.

The fire was started five days before a scheduled audit of the charitable gaming records by the state Office of Charitable Gaming, Kelm said.

Investigators said Mudd and Towe operated an illegal gambling business at the post, while they were managing semi-weekly legal bingo games at the post. There were also pull tabs and video slot machines, which both were for the sole financial benefit of Towe and Mudd.

The video slot machines are illegal in Kentucky, according to the indictment.

Kelm said after causing the fire, Mudd created a personal account in the name of the post and diverted at least part insurance proceeds from the fire for his own benefit, Kelm said. Westport Insurance Corp. issued a check for $246,688 to the VFW post after the fire.

The indictment lists a total of $16,822.16 from the insurance settlement that Mudd put into an money market account for himself under the post's name.

The money from the insurance proceeds was used to purchase a John Deere riding lawn mower, a 42-inch plasma television and a Browning Gun Safe, he said.

Mudd and Towe illegally structured their financial transactions so the bank would not have to report them. Federal reporting requires that banking activities over $10,000 be reported.

They had on several occasions purchased cashier's checks from between $8,000 to $9,500 in value and most were purchased by Towe. There was also $31,000 spent in 2001 to build an addition on the Fairway Street home and another $45,305.63 payment to build the home in 2000 - money which was from illegal gambling proceeds, according to the indictment.

Federal agents from the ATF and IRS went through the Fairway Street residence on March 15 and the search warrant said they were looking for documents relating to an attempt to evade income tax, fraud and false statements, money laundering and structuring transactions to avoid federal reporting requirements.

The statutes being used to prosecute this case are some of the harshest and most punitive in the federal legal code, Caudill said. They were designed for the major criminal investigations, not against people like Mudd and Towe.

"This is a questionable use of federal law enforcement resources," he said.

There was barely enough gaming at the VFW post to keep it going and definitely not enough to justify these charges, Caudill said.

Mudd and Towe appeared Thursday before a U.S. District magistrate judge in Owensboro.

The U.S. Attorney did not seek detention of Mudd or Towe during Thursday's hearing, Caudill said. There was no answer at their home this morning.

The two are scheduled to be arraigned Nov. 22 in Bowling Green.

Mudd and Towe were indicted on the last session of a grand jury that had been seated for 18 months, Kelm said.

Prosecutors decided they didn't want to take this complex a case before a new grand jury panel, he said.

If convicted, Mudd and Towe are each facing maximum potential penalties of 25 years in prison, a $750,000 fine and supervised release for a period of six years.

In addition, the U.S. Attorney's Office in Louisville is also seeking forfeiture of the couple's Fairway Street home, a 2002 Mercedes Benz convertible, a 2004 Harley-Davidson motorcycle, a 2006 Chevrolet HHR, a 2003 Toyota Camry and $31,718, according to the indictment.

The indictment states that Mudd and Towe conspired in their efforts with other persons known to the grand jury. The indictment said the conspiracy involved five or more people, but did not name those people.

Kelm said he could not comment about whether others would be charged or have been targets in the investigation.

"The investigation continues," he said.

The issues with Mudd and Towe do not extend to the rest of the VFW post and members, Kelm said.