MIDWEEK UPDATE Cornerstone hearing postponed to July

POLSON — Montana State Auditor's office officials confirmed on Thursday afternoon that the first  hearing concerning the Cornerstone Financial Corporation fraud investigations has been postponed for 45 days.

The originally hearing was set for June 9, but late this week a judge granted an extension on request of the respondents.

Keith Kovick and Robert Congdon, partner/owners of Cornerstone Financial Corporation, which operated out of Polson beginning in 2000, have been named in state legal action for their alleged involvement in committing a securities fraud in the form of a Ponzi scheme that included at least 100 investors with investments totaling more than $14.4 million in 181 unregistered securities.

On July 21, the first court proceeding will be held in Helena to begin sorting through the legal side of the alleged involvement of two Polson men in what could become the largest Ponzi scheme in Montana history.

The building that held the once seemingly prosperous Cornerstone Financial Corporation is now in foreclosure. A bright yellow “for sale” sign covers the business’ name. On parking signs in back, the word “Madoff” is angrily scrawled to replace it. Those now in charge of the building are hoping that’s the worst vandalism it’ll see.

Because all the investment notes handed out from Cornerstone are now in default, meaning hundreds of investors from communities across northwestern Montana are hurt, angry, and as of now, out thousands of dollars.

News first emerged of the Montana State Auditor office’s investigation into Cornerstone’s dealings in early March, when the pair was handed a temporary restraining order by a District Court judge out of Helena for their involvement in a $3 million deal with D and D Property Management, operating out of Belgrade. The order alleges Cornerstone put up the money as collateral on four 160-acre tracts of land in Gallatin County, and that the promissory notes were securitized by misrepresented features of the land and inflated land values.

The original order, which prevents the defendants from selling assets and property, includes D and D owners Dan Klemann and Dan Wolsky.

The proceedings next week will look to progress the temporary restraining order to an injunction. Attempts to contact Kovick and Congdon or their legal council to confirm they will attend the hearing were unsuccessful.

Polson resident Bob Stone was a part of one group of investors who pitched in through Cornerstone on the D and D deal. Stone knew the Cornerstone partners from earlier business dealings in Bigfork, and was recruited as an investor by Kovick and Congdon when they began business in Polson.

“For (the D and D deal) they called us and said, ‘We have an investment for you,’” Stone said.

Stone was told the value of the land was determined from two different reports, an appraisal and a market analysis, both of which seemed like sound resources to back the determined land value. D and D promised to make improvements to the land, including installing roads, electricity, water and telephone lines. The value of the land was determined without these improvements, but these improvements were never made.

Stone said he received 13 interest payments from D and D, 12 of which had been escrowed by Cornerstone, but did not ask for or receive progress reports on actual land improvements. The payments stopped in late 2007.

“D and D borrowed $3 million from a lot of different investors, those investors loaned that money with the expectation that the money would be spent for preparing this land for development, and I don’t believe anything was done. When I see that, I have to start getting a little angry because that was our money loaned with the understanding that they would use it to improve the property, which was our security,” Stone said.

From his perspective, it is D and D that is possibly at fault for the deal gone wrong. Cornerstone fulfilled its duties for a year, Stone said, and has had many dealings through the company that were sound on his end. He feels in the reported $14 million “bilked” by the pair is much inflated.

“Fourteen million is the amount of lending and borrowing that went through their office,” Stone said. “If the state thinks they should have had a securities license, the state adds up all the business that was done and comes up with a figure like $14 million.

“Things were absolutely done that shouldn’t have been done, but in this specific case with D and D, Cornerstone did nothing wrong, and this is in my personal experience,” Stone said. “The other people who are involved, and there’s over 11 of them, they may have a different feeling.”

Stone, who is also one of four investors involved in the repossession of Cornerstone office on U.S. Highway 93, said he hopes the state investigation continues to look at more than just Cornerstone’s dealings. He is anxious to find out where the money funneled to D and D ended up.

After the first investor complaint to the Auditor’s office in September 2008, complaints continued to pour in. In early April, a nearly 40-page document was released by the state naming Kovick and Congdon, and additionally K and B Investments LLC owned by the pair, as having committed the Ponzi scheme. Other allegations included the failure to have ever registered with the Montana Securities Department and failing to disclose adverse judgments and insolvencies involving persons issuing the investment notes.

The document lays out evidence of the pair taking more than $1.3 million in commissions are deals that weren’t backed by legitimate notes. Investigations also found that the pair commingled investment and business funds.

Auditor’s office communications director Jessica Rhoades said late last week that through the office’s ongoing investigation, the number of effected investors has held steady at around 100.

For Kovick and Congdon, notices of foreclosure on several personal homes or properties have piled up on top of the allegations. Legal notices including portions of lots and buildings, with payments due back from December 2008, show that many of the parcels are scheduled to be auctioned this fall. Kovick’s lake home was sold at an trustee auction several weeks ago.

As of last week, no action in reference to the restraining order had taken place to stop the auctions. The restraining order filed in March did not name K and B investments, which is the grantor in several parcels listed up for trustee sale.

“Nothing has been filed against any of these properties, as of this day anyway, which would prevent (any auctions) from going forward,” Lake County Abstract and Title Company title officer Kyle Karstens said.

State auditor’s office officials have throughout the investigation reminded investors of the caution and front-end investigation that must be done before investing.

Karstens, too, said he could have warned investors of any unregistered security instruments in “two minutes” if they’d taken the time to ask.

Investor Stone is waiting on the courts for ultimate judgment.

“What made this different from the way everyone else lost money in real estate, that is what is going to be determined through the courts,” he said. “I want to repeat one more time to you, that people are innocent until proven guilty in this country. Our opinions should not be formed yet.

“I have no doubt that mistakes were made, that in retrospect are regretted, greatly regretted. The point is, I don’t know who is going to do the regretting.”