William W. McRae, who spent 40 years in the Navy, runs a Virginia publishing company, dabbles in real estate and says modestly that he does "a little investing."

McRae, 82, invested more than $500,000 in a company that federal regulators now say was a fraudulent operation. "I've lost my rear end on this," he said. "It's the biggest loss I ever had."

McRae was one of hundreds of Washington area residents -- including lawyers and retired school teachers -- who invested millions of dollars in Bennett Funding Group Inc., a staid family firm in Syracuse, N.Y., that leased office equipment and then sold interests in those leases to investors.

This spring, the Securities and Exchange Commission filed a civil securities complaint against BFG and its chief executive, Patrick R. Bennett, alleging that the company was a "massive, ongoing Ponzi scheme," perhaps the largest such scheme in U.S. history, with liabilities exceeding $1 billion.

In a Ponzi scheme, payments to investors come not from profits, but from the contributions of new investors.

BFG filed for bankruptcy court protection a day after the SEC alleged that the firm sold interests in phony leases and sold interests in legitimate leases more than once. More than 12,000 investors across the country have lost $674 million, according to the bankruptcy filing.

Patrick Bennett, the 42-year-old son of the company's founder, also faces criminal charges of fraud and perjury. The U.S. attorney's office in the southern district of New York and the SEC are continuing their investigations, and the Bennett company and family members face numerous civil lawsuits brought by investors.

"We're trying to talk reasonably with the prosecutor to convince him that . . . there was no criminal intent," said Charles A. Stillman, Patrick Bennett's attorney. "Patrick Bennett wasn't looking to cheat anybody, to steal anybody's money." Unanswered Questions

The fall of Bennett Funding, and the allegations of fraud against the Bennett family, stunned residents of Syracuse, and prompted questions that have not been answered. What happened to a family that, by all appearances, succeeded through hard work and entrepreneurial zeal over the past 20 years? Was the parents' success too much for the second generation to follow? Was the entire family part of the alleged scheme? Or were the strings being pulled by outsiders?

And where were the professionals -- the brokers who recommended the investment, the bankers who bought the lease securities, and the attorneys and accountants who sanctioned the financial statements of a firm that the SEC now alleges inflated its income by more than 600 percent in some years?

The big losers are investors, many of them retirees who were attracted by the promise of a safe return that was somewhat better than rates available through other investments such as bank certificates of deposit.

"Retirees loved it," said one Washington broker who sold the lease securities to clients. "It was so in demand, there was a waiting list for it. . . . They would just keep buying and buying and buying."

"The real tragedy here is that so many small investors who could ill afford to lose their money believed they were getting a conservative investment," said Andrew J. Geist, associate director of the SEC's New York regional office. "We've all received telephone calls from people who depended on this as income." Portrait of a Family

In Syracuse, the Bennetts were known as big supporters of cultural and charitable causes. "They were like gods here," a cab driver said. "People thought they could do no wrong."

An old photograph from the archives of the local newspaper shows the Bennett family gathered around the desk in patriarch Edmund T. "Bud" Bennett's office. From interviews with several residents and former employees who knew them, the figures in the picture could be described this way:

There's Bud, now 69, chairman of BFG, standing tall and proud; his wife, Kathleen, 65, the president, a sweet, grandmotherly type who adopted a class at the local school and always had time to talk and joke with the kids when they visited the company. The Bennetts lived in the same neighborhood in which they brought up their two sons.

Patrick Bennett, the elder son, looks uncomfortable in an ill-fitting suit. His eyes typically seem to be at half-mast, and he has a reputation for a quick temper like his father's. Patrick became intensely interested in horse racing and eventually bought the Vernon Downs Racetrack in nearby Oneida.

Michael A. Bennett, 38, an officer of BFG, was the most social family member. When he bought and renovated the historic Hotel Syracuse, he converted a suite for himself and constructed apartments for several close friends. A sports bar, Coach Mac's, was included on the first floor of the hotel, named after another old friend, Dick MacPherson, former coach of the Syracuse University and New England Patriots football teams. Corporate Honey Pot'?

While there are many unanswered questions about what went wrong at BFG, Richard C. Breeden, the court-appointed bankruptcy trustee for Bennett Funding and a former SEC chairman, has sued Bennett family members on behalf of investors and says he has a theory: The family used the company as a personal "honey pot."

Firm funds were used to buy a racetrack, a hotel, gambling casinos and a yacht, Breeden alleges in the lawsuit, in which he seeks $2 billion from the Bennetts and their associates. The titles to the various acquisitions were in the names of individual family members, according to Breeden and attorneys working for him.

"It was reminiscent of some of the S&L guys who were living lavishly, having parties and serving antelope," Breeden said. "The fraud that occurred was not to cover company losses, but to fund these other things. Then, ultimately, to fund the fraud itself. . . . They had to move money around to pay other debts."

Among the items Breeden said were financed through company funds:

Bud and Kathleen Bennett's $600,000 yacht, the 70-foot Lady Kathleen, purchased in 1990. The motorized yacht wintered in Florida and in summer was moored in the Thousand Islands, located in the St. Lawrence River where it flows out of Lake Ontario.

A 238-foot gambling showboat, the Speculator, which was being built in Freeport, Fla., for $13 million.

A $40 million gambling barge in Biloxi, Miss., the Gold Shore Casino. The casino is one of the assets of American Gaming Enterprises Ltd. Michael Bennett's company, Bennett Holding Inc., acquired 41.8 percent of the common stock and all of the preferred stock in American Gaming for $71 million.

A majority stake in Vernon Downs Racetrack, which Patrick Bennett bought in 1992 for an undisclosed sum. He later invested $8.5 million in a Comfort Suites Hotel that was built at the track. The stock in both was transferred to his wife's name in December, according to the complaint.

The Hotel Syracuse, which was bought and renovated by Michael Bennett for $18 million in 1993.

Harold's Club, a broken-down casino in Reno, Nev., that was bought by Michael Bennett for $8 million.

Sioux City Sue, a wrecked riverboat in Kansas City that was purchased in 1994 for $8.5 million.

In addition, Breeden said the Bennetts poured hundreds of millions of dollars into other highly speculative ventures, including a mall, undeveloped land and stocks. Family Denials

In the end, the company's income couldn't cover all of the debts that the family had incurred, Breeden said. The sale of the Bennett securities to investors was bringing in about $13 million a month, while the company was paying out about $30 million a month to investors in recent years, according to Breeden. Lawyers for Bud and Kathleen Bennett, as well as for Michael Bennett, say that their clients knew nothing about the alleged wrongdoing.

"Our position is that Mr. and Mrs. Bennett didn't do anything wrong," said Alan Burstein, their attorney in Syracuse. "Mr. Bennett turned over financial matters to his son, Patrick."

Patrick Bennett was given "virtually unfettered dominion and control" over the company and, since 1992, had transferred more than $1 billion in BFG investor funds into the accounts of a company he owns called Bennett Management and Development Corp., according to the SEC complaint.

In late July, Patrick Bennett agreed to a preliminary injunction that requires him to refrain from securities fraud and freezes many of his assets. In addition, the SEC agreed to limit the investigation in its civil case until the criminal case is completed.

Bud and Kathleen Bennett have left Syracuse for Florida, where sources say they live in a "double-wide" trailer home. Breeden recently cut off the $15,000 a month consulting fee that the Bennetts had been paid, the car and driver they had been provided under their consulting agreement with the company, and their health benefits, according to court records.

Burstein said the senior Bennetts suffer from multiple ailments that preclude their travel to Syracuse to talk to investigators. Kathleen Bennett had a major stroke in 1995 and Bud Bennett has serious heart problems, Burstein said.

"I don't buy for a moment that Patrick did it alone, that the parents and others didn't know about it," said Breeden, who named each of the family members in the lawsuit. "It was Bud's company, and the employees say nothing happened that he didn't know about." How It Worked

Here's how one of the Bennett lease programs worked for one investor, according to officials and investors:

Bennett would lease 30 photocopy machines to a city or federal agency. An investor such as Virginia's William W. McRae would then buy a short-term note backed by the income BFG expected to receive on the leases. BFG would pay him 7 1/2 percent interest, and McRae could reinvest that money in new leases.

On some of the contracts he owned, McRae was getting thousands of dollars a month. "On paper, I was getting rich," he said.

Most of those in the Washington area who invested in BFG did so through Halpert & Co., a New Jersey brokerage with an office here.

Robert M. Bor, an attorney at the Washington law firm of Winston & Strawn, invested about $15,000 in Bennett Funding.

"The broker said it sounded good," Bor said. "He said they were leasing to the federal government, so it shouldn't have any problems."

One Washington resident who asked that his name not be used said he invested more than $500,000 in BFG securities. The investor said he was concerned that too much of his money -- including a good part of his individual retirement account -- was tied up in Bennett securities.

Halpert officials were "shocked and dismayed" to learn of the allegations against BFG, according to Peter Sarasohn, the firm's attorney. "Halpert sold investment products that they believed to be a solid investment for their clients," Sarasohn said.

One Washington brokerage that was unable to get satisfactory answers from BFG about its operations refused to advise clients to invest in it. Trying to Grab a Shadow'

In the summer of 1994, Mary-Jean Hanson, a vice president of Ferris, Baker Watts Inc. in Washington, went to Syracuse to look into BFG at the request of several brokers. Hanson met with Patrick Bennett, who she said gave very oblique answers to her questions.

"It was like trying to grab a shadow," she said. "I couldn't figure out what they were doing."

She wasn't satisfied by the answers, so she wrote a letter asking to speak to the company's bankers and other firms that did business with BFG.

The Bennetts didn't respond.

"That has never occurred in the past," Hanson said, and her firm did not do business with BFG.

The SEC, which investigated BFG for more than two years, said it discovered in March that the company had sold individual investors more than $55 million worth of assignments on fictitious leases for photocopiers for the New York City Transit Authority.

There were also no leases of equipment to the Federal Deposit Insurance Corp., the Federal Reserve Board and other federal agencies, as the Bennetts had claimed to investors, according to Breeden. And at least $95 million worth of genuine leases had been pledged twice, according to the SEC's complaint.

When asked about the leases that were sold twice, Charles Stillman, Patrick Bennett's lawyer, said: "That was just a mistake. Mistakes were made, but they weren't intentional." A Business Unravels In addition to investors, many of BFG's employees were hoodwinked by the family, officials said. Not only are the employees likely to lose their jobs as BFG's business winds down, but they also will lose money they invested in nonexistent BFG leases. In addition, the Bennetts took nearly $2 million from employee pension plans to add to the honey pot, according to the $2 billion civil lawsuit that Breeden has filed against the Bennetts and some of their associates.

In November, all of the family members but Patrick Bennett resigned from the firm as employees raised questions about certain business practices.

Breeden said Patrick Bennett was assisted by a number of other business executives, including Kenneth P. Kasarjian, a Mahwah, N.J., business owner who Breeden alleges was paid $9 million for aiding in the scheme. Also named in court papers are accountants Joseph J. Canino and Charles Genovese. They did not return phone calls seeking comment, but their lawyers denied that they did anything wrong.

It is unclear, Breeden said, how much he and a team of lawyers working with him will be able to squeeze out of BFG's assets, including many of the properties bought by the Bennetts with BFG money.

Washington attorney and investor Bor said he didn't know a thing about the Bennetts or the history of their firm when he invested.

"I'm asking myself, Why aren't I more careful about these things,' " he said. "In the future, I'll want to know a little more about the people I do business with." CAPTION: TO AVOID BEING TAKEN

Securities regulators offer these tips for investors considering putting money into leases: Make sure you fully understand what you are buying. Understand the risks. Ask to see the equipment lease before you buy it. Call the company leasing the equipment to find out whether the lease is real. Ask what happens if the machine breaks or is returned, or the leasor stops paying. Ask what other investments give comparable returns and might be safer or more liquid. Find out how difficult it would it be to sell the lease if you needed the money right away. Ask about the financial condition of the company making the lease payments. Review the insurance policy to make sure you're the beneficiary if the leasor defaults.

SOURCE: Securities and Exchange Commission CAPTION: A 1986 photo shows the Bennett family gathered at the desk in patriarch Edmund T. "Bud" Bennett's office. From left, Patrick R. Bennett, then chief executive of Bennett Funding Group; Kathleen M. Bennett, BFG president at the time; Bud Bennett, then chairman; and Michael A. Bennett, an officer.