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.
