SEC Describes Collapse of a NY Business

ROCHESTER, N.Y. (CN) - A western New York businessman targeted "elderly, unsophisticated investors" to sell $16.75 million in unregistered notes of his wholly owned company through misstatements and omissions of facts, the SEC claims in court.

The SEC sued David L. Fleet on Dec. 12 in Federal Court.

It accuses him of "fraudulently selling approximately $16.75 million in unregistered and uncertificated notes of his wholly-owned company to more than 300 mostly elderly, unsophisticated investors between 1997 and March 2010."

About $15.5 million of the sales came between January 2006 and March 2010, the SEC says.

Fleet, 50, of Beaver Dams, owned Cornerstone Homes, Inc., which sold and rented distressed homes to low-income people. It sold unsecured investments to finance the business, the SEC says.

Before 2005, Cornerstone mostly sold notes secured by mortgages on single-family homes. But in 2006, it "made a concerted effort to increase sales of its unsecured investments" and advertised them as a way "to easily begin earning above-market 8%-10% annual interest," according to the lawsuit.

Then he began mortgaging properties purchased with investors' money to banks, and failed to tell his investors that he was doing it, and that Cornerstone's balance sheet "was saddled with senior, secured bank debt," the SEC says.

By 2009, he knew the business was "becoming unsustainable" but continued to advertise, falsely, that it was making money, according to the SEC.

In July 2009, he tried to make money to pay investors' interest by putting $6 million of Cornerstone's money in the stock market and "frequent options trading," and lost $3 million of it, the SEC says.

Unable to continue the charade, in April 2010, Fleet sent a newsletter to customers, felling them he would "seek to implement an out-of-court restructuring of its bank debt with the goal of returning the approximately $14.5 million in principal unsecured investments to investors," the SEC says.

But he didn't, according to the SEC. He filed a "fast-tracked 'prepackaged' bankruptcy case in July 2013 with the goal of substantially discharging his unsecured investors' principal and releasing Cornerstone and himself from liability to Cornerstone's investors," according to the lawsuit.

That was "derailed" when a Chapter 11 trustee was appointed in January this year.

The SEC seeks disgorgement, fines and an injunction.

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