Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, March 23, 2009

SEC Censures Cornerstone Capital Management

The SEC issued anOrder Making Findings and Imposing Remedial Sanctions Pursuant to Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 (Order) against Cornerstone Capital Management, Inc. (Cornerstone Capital), a registered investment adviser, and its sole principal, Laura Jean Kent (Kent), of Redwood City, California.  In the Order, the Commission finds that from 2003 through 2007 Cornerstone and Kent, despite knowing that the value of certain illiquid securities (also referred to as alternative private investments) in which they had invested approximately $15 million of their clients' funds were severely impaired, 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 $335,758 in inflated fees from her clients.

Based on the foregoing, the Order finds that Cornerstone and Kent willfully violated Sections 206(1) and 206(2) of the Advisers Act, which make it unlawful to employ any device, scheme, or artifice to defraud any client or prospective client; and to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.

The Order censures Cornerstone and Kent, and requires them to cease and desist from committing or causing any violations and any future violations of Sections 206(1) and 206(2) of the Advisers Act. The Order also requires Cornerstone and Kent to disgorge improper management fees of $335,758 and prejudgment interest of $80,000, for a total of $415,758, but waives payment of such amount except for $335,758 and declines to impose a penalty based on Cornerstone's and Kent's sworn representations concerning their financial condition. The Order directs Cornerstone and Kent to pay their disgorgement quarterly over a three-year period, and also requires Respondents to develop a plan to distribute the disgorgement ordered.

In addition, the Order requires Cornerstone and Kent to comply with undertakings to retain an independent consultant to value all of Cornerstone's alternative private investments, if any, for a three-year period. Cornerstone and Kent agreed to the issuance of the Order without admitting or denying its factual findings. (Rel. IA-2855; File No. 3-13199)

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