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SEC Charges New York Real Estate Investor with Securities Fraud

On December 12th, the U.S. Securities and Exchange Commission charged a New York man with securities fraud in connection with his now-bankrupt real estate investment company. The SEC claims David L. Fleet, former owner of Cornerstone Homes, Inc., cheated over 300 “mostly elderly, unsophisticated investors” out of more than $16 million. The SEC is seeking civil penalties against Fleet from a federal judge in New York.

SEC v. Fleet

Fleet began his business in 1997. Eventually known as Cornerstone, Fleet sold unsecured notes to investors. The SEC said these notes were never registered with the Commission, as is required by federal law. Fleet offered two types of notes: One with a 15-year term that promised annual returns of 10%; the other had no set term, allowed the holder to withdraw up to $3,000 per month, and guaranteed an 8% return.

Cornerstone promised to use investor funds to purchase, refurbish and sell homes at a profit. What investors did not know, according to the SEC, is that starting around 2006, Fleet was mortgaging the properties he purchased through Cornerstone in order to maintain his cash flow. By 2009, Cornerstone carried more than $25 million in debt, much of it used to make “guaranteed” interest payments to the note holders.

When Cornerstone’s financial situation continued to deteriorate, the SEC said Fleet simply started investing millions of dollars of company funds in the stock market. Fleet apparently never told investors about this move, which only led to millions more in losses. By March 2010, Cornerstone stopped accepting new investors and in 2013, the company filed for bankruptcy. Cornerstone admitted it owed more than $14.5 million to 315 unsecured creditors. Fleet then proposed a bankruptcy settlement whereby investors would only receive about $1 million. A federal bankruptcy judge rejected this attempt and instead appointed a trustee to oversee Cornerstone’s assets.

The SEC has charged Fleet with failing to register his 8% and 10% notes as securities, as required by the federal Securities Act. He has also been charged with fraud in connection with the sale of the notes, primarily through making false and misleading statements to investors about the true state of Cornerstone’s business. The SEC wants a federal court to issue a permanent injunction against Fleet, preventing him from violating securities laws in the future.

Doing Your Due Diligence

Fleet has not been charged criminally, and it is important to remember an SEC complaint does not constitute a final judgment. But the SEC’s allegations in this case highlight how consumers, especially the elderly,may be misled by promises of high yield, risk-free, guaranteed investments. Fleet allegedly touted his home construction business as a safe alternative to the stock market, only to prove his own point by losing millions of investor dollars in the market.

You should always do your due diligence before making any investment. If you believe you made an investment decision based on potentially false or misleading statements from a financial advisor or company, it is important to know your rights under the law. An experienced Florida securities and stockbroker fraud attorney can advise you of your options. If you have any questions or concerns, contact attorney Gregory Tendrich, P.A., today.

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