Giant Money Mess in San Diego

     SAN DIEGO (CN) – San Diego-based Cornerstone Wealth Management lost nearly $7 million of its clients’ money in a junk mortgage fund that went belly-up when the housing market collapsed, a class action claims.
     Lead plaintiff Sean Berton, of Pennsylvania, sued Cornerstone Wealth Management LLC; its owner-operator Chris L. Meacham; Romero Park P.S., a law firm; and H. Troy Romero, an attorney and partner in the firm.
     In his Superior Court complaint, Berton claims Cornerstone lied to investors, telling them the Scripps Investment Mortgage Fund I was safe because it invested solely in first trust real estate deeds, that investors would be “first in line to recover their investment principal in the event of default by borrowers.”
     But Berton claims Cornerstone knew or should have known that the Scripps fund was a junk mortgage fund consisting of second, third and fourth trust deeds and high-risk construction loans.
     “Investors had virtually no chance of recovering their investment in the event of default. Cornerstone further concealed the fact that the Scripps Fund was highly susceptible to downturns in the economy and there was a very high risk of default. In 2008, the Scripps Fund began to fail and, as of today, the fund is worthless. Investors lost their entire investment,” Berton says in the complaint.
     He claims that when the Scripps fund began tanking, Cornerstone and Meacham tried to take investors’ money out of the fund, and when that failed, concocted a scheme to place the blame on Scripps.
     Scripps is not a party to the complaint.
     Berton claims that Meacham “falsely reported to investors in 2008 that Cornerstone had only just discovered that the Scripps Fund had invested in high risk junior trust deeds. He accused the Scripps Fund of misleading investors and Cornerstone.”
     The complaint continues: “After telling investors that the Scripps Fund had misled them, Meacham knew that investors would likely sue the Scripps Fund to recover their losses. But Meacham had to control the litigation in order to hide the fact that he had known all along that the Scripps Fund was investing primarily in second, third and fourth trust deeds, as well as high-risk construction loans. If investors learned of Meacham’s knowledge, he most certainly would expose himself and Cornerstone to liability.”
     So, Berton claims, Meacham enlisted defendants H. Troy Romero and Romero Park to persuade the investors to give Cornerstone limited power of attorney to settle their claims against the Scripps Fund.
     Berton claims 47 investors retained Romero and agreed to pay a 33 percent contingency fee.
     Cornerstone sued the Scripps fund in November 2009, in San Diego Superior Court. But Berton claims: “Romero did not name any of the investors as plaintiffs in the case. Instead, Cornerstone, Meacham and Romero erroneously claimed that the investors had ‘assigned’ their claims against the Scripps Fund to Cornerstone, despite an express anti-assignment clause each investor signed when they invested in the Scripps Fund.
     “In November of 2011, the Scripps Fund filed a motion for summary judgment challenging the ‘assignments’ as invalid and ineffective. Two days before the hearing on the motion for summary judgment, Cornerstone agreed to settle the case for pennies on the dollar, well below the funds available from the Scripps Fund’s insurance policy. Romero received $500,000 in contingency attorneys’ fees.”
     Berton claims Meacham lied to investors to persuade them to accept the settlement.
     “For example, he falsely represented to them that, if they did not settle, they would have to pay up to $680,000 in attorneys’ fees and costs relating to depositions, even if they were not successful at trial,” the complaint states. “In addition, because they were not named as parties in the lawsuit, there was a risk that investors would recover nothing if they did not accept the settlement. The case ultimately settled.”
     Berton says that this year he began to question Cornerstone about the low value of its settlement with the Scripps Fund, and investigated why Cornerstone settled for a small percentage of its investors’ losses. He says he got transcripts of Meacham’s depositions from Cornerstone’s litigation against the Scripps Fund and discovered what both Meacham and Romero knew.
     “The transcript revealed that Cornerstone knew all along that the Scripps Fund had been investing in second, third and fourth trust deeds. Although Romero was at Meacham’s deposition, he never informed investors of Cornerstone’s knowledge or potential liability. He did not withdraw as the investors’ attorney. Instead, he continued to ostensibly represent the investors,” Berton says in the complaint.
     Even though the Scripps Fund prospectuses that Cornerstone gave its clients indicated that the fund invested only in first trust deeds, which are considered safer in the event of a foreclosure, Berton claims Cornerstone knew better.
     “On several occasions, the Scripps Fund notified Cornerstone that it was investing in ‘junior deeds of trust,’ industry jargon meaning second, third or fourth trustees,” the complaint states. “For example, in his deposition taken in the Scripps action, Meacham admitted that the Scripps Fund regularly reported to him that it had invested in junior deeds of trust. In fact, the Scripps Fund’s quarterly newsletter regularly delivered to Cornerstone disclosed that the Scripps Fund held junior deeds of trust. When asked about it at his deposition, Meacham admitted that ‘we noticed that it said junior deed on the … quarterly newsletter.”(Ellipsis in complaint.)
     Berton claims that Romero “turned a blind eye to the facts that clearly gave rise to a claim by investors against Cornerstone” when he learned that Meacham knew about the junior deeds of trust.
     “Romero did not advise investors that they had potential against Cornerstone or Meacham,” the complaint states. “Romero did not advise investors about the fact that Romero would represent the investors and Cornerstone jointly in the same matter, despite actual or potential conflicts of interest. Romero did not obtain written consent from investors to proceed with the representation despite likely conflicts of interest between the investors and Cornerstone.”
     When the Scripps Fund asked for summary judgment because Cornerstone had no standing and failed to get valid assignments from Berton and the other investors – which Scripps expressly prohibited in its documents anyway – Cornerstone had no choice but to settle for 20 cents on the dollar, Berton says in the complaint.
     “Just three days before the hearing on the motion for summary judgment, scheduled for Feb. 10, 2012, Cornerstone agreed to settle with the Scripps Fund for $1.5 million or twenty cents on the dollar despite the fact that the Scripps Fund had a $5 million insurance policy. Romero received $500,000 in attorneys’ fees, leaving $1 million to distribute to investors. Cornerstone and Romero dismissed the case on Feb. 8, 2012,” the complaint states.
     Berton adds: “A key reason for Cornerstone’s and Romero’s decision to settle was the Scripps Fund’s argument that the so-called ‘assignments’ were not valid. If the Scripps Fund’s motion for summary judgment were successful, Romero and Cornerstone faced additional liability for their carelessness in improperly bringing suit. But even more importantly, Cornerstone knew that, if the case went to trial, it would expose its own knowledge that the Scripps Fund was investing in junior trust deeds and high-risk construction loans.”
     Berton seeks class damages from Cornerstone and Meacham for fraud by intentional misrepresentation and concealment, negligent misrepresentation, breach of fiduciary duty and punitive damages.
     He seeks class damages from Romero and Romero Park for legal malpractice and professional negligence.
     Berton demands at least $5.8 million in actual damages.
     He is represented by Vincent Slavens, with Krause, Kalfayan, Benink and Slavens.

%d bloggers like this: