Montana Auditor Files Legal Action Alleging $14 Million Ponzi Scheme

Montana State Auditor and Commissioner of Securities Monica Lindeen has announced that her office has filed a legal action against two Polson, Mont., business owners alleging the men committed securities fraud and conducted a “Ponzi” scheme involving at least 100 investors with an aggregate investment of more than $14,330,902.

Named in the Notice of Proposed Agency Disciplinary Action are Robert Congdon and Keith Kovick of Polson and their companies Cornerstone Financial Corporation and K&B Investments LLC.

According to the complaint, Congdon and Kovick sought investment opportunities and investors, taking millions of dollars in commissions and investor reserve funds. They also sold fraudulent investment opportunities on their own behalf.

In addition, the action alleges that Cornerstone, Congdon and Kovick:

• Began operating a Ponzi scheme, using investment proceeds received from new investors to pay investment returns to old investors,
• Commingled investor funds with Cornerstone’s operating funds rather than escrowing investor funds as promised.
• Have never been registered with the Montana Securities Department to offer and sell their investment opportunities, in the form of notes, to investors.
• Failed to disclose to investors how the proceeds of their investment would be used.
• Failed to disclose adverse judgments and insolvencies involving persons issuing the investment notes.
• Failed to provide investors with a prospectus regarding the notes.
• And failed to provide investors with a balance sheet.

The Auditor’s complaint charges all respondents with violating the fraud provisions of the Montana Securities Act. The Auditor’s office previously sought and received a temporary restraining order from Lewis & Clark County District Court that temporarily freezes the assets of the respondents and is currently seeking the appointment of District Judge Loren Tucker as a receiver of assets owned by the named respondents. The Auditor’s Office is seeking fines and restitution.

Cornerstone raised more than $14.3 million from at least 100 investors, mostly Montana residents, by offering and selling notes with a high rate of return, typically 15 percent annually, and touting the notes as safe because they would be secured by real property having a value equal to or greater than the note, the Auditor’s office said. The complaint alleges Cornerstone, Kovick and Congdon told investors that at least $1.6 million of their investment funds would be reserved with an escrow service for disbursement back to them at a later date but, instead, commingled these funds with other Cornerstone operating funds. The complaint further alleges that many of the notes were not secured by real property, even though investors were promised the notes would be.

According to the complaint, by at least 2008 the investment opportunity was operated as a Ponzi scheme with the money paid to the older investors from the cash invested by the new investors. The complaint reports that by January 2009, the notes were all in default and nearly all of the property securing the investment notes was in foreclosure.

Source: DOI