Washington, D.C., Sept. 16, 2008 (LAWFUEL) – The Securities and Exchange Commission today charged San Francisco-area investment adviser Cornerstone Capital Management, Inc. for misrepresenting the value of its clients’ investments in what turned out to be a series of Ponzi schemes.
In an order instituting administrative proceedings against the firm and its president, Laura J. Kent of Redwood City, the SEC’s Division of Enforcement alleges that, despite knowing that certain programs in which they had invested approximately $15 million of their clients’ funds turned out to be scams, Cornerstone and Kent continued to assure their clients that the investments retained their full value. Even after the principals behind some of those investments were convicted of criminal fraud, Kent continued to charge an assets-under-management fee based on the original cost of the failed investments, collecting more than a half-million dollars in inflated fees from her clients.
“This case demonstrates the importance the Commission places on the accurate valuation of illiquid and difficult-to-price securities by investment advisers,” said Marc J. Fagel, Regional Director of the SEC’s San Francisco Regional Office. “Kent became aware of substantial evidence demonstrating she had lost her clients’ money in scams, yet she continued to report false valuations to clients and charge inflated fees based on these valuations.”
In its order, the SEC’s Division of Enforcement alleges that from 1997 to 2004, Kent and Cornerstone invested their clients’ funds in five investments that bore the hallmarks of classic Ponzi or prime bank schemes, each of which produced disastrous results. The promoters in four of the five programs were eventually convicted of fraud, with Kent herself testifying at one of the trials. The order alleges that despite knowing that the value of the investments was substantially impaired, Kent and Cornerstone continued to send clients quarterly account statements that valued the investments at their original cost. They overcharged clients through fees based on an inflated value of assets under management, falsely claiming that the value reflected the “market price” and “total market value” of the failed investments.
The Division of Enforcement alleges that Cornerstone and Kent willfully violated the antifraud provisions of the Investment Advisers Act of 1940, and the Division seeks a cease-and-desist order, recovery of ill-gotten fees, and other remedial actions. An administrative hearing will be scheduled to determine whether remedial actions are appropriate.