Keith B. Kovick, 61, Williston, North Dakota, pled guilty to mail fraud, wire fraud, and money laundering on April 25, 2012, before U.S. District Judge Donald W. Molloy. Sentencing has been set for July 26, 2012. He is currently released on special conditions.
In an Offer of Proof filed by Assistant U.S. Attorney Kris A. McLean, the government stated it would have proved at trial the following:
Kovick and Robert Congdon incorporated Cornerstone Financial Inc. on May 16, 2000. Cornerstone is not now nor has it ever been registered with the Montana State Securities Department. Cornerstone‘s website stated that Cornerstone was a hard money/private money broker located in Polson that had been actively brokering loans since 2000. Cornerstone‘s website advertised brokerage of hard money loans for borrowers interested in purchasing commercial, industrial, land and investment real estate property that were unable to obtain funding from banks because of credit ratings, legal obstacles or conditions related to the property itself (such as liens, unfinished building, damage, etc.)
Kovick and Congdon received substantial commissions for placing borrowers with investors. When a borrower contacted Cornerstone with a need for funding, Kovick and Congdon marketed the potential investment opportunity to investors through verbal and/or written communications. When the investment transaction was completed, the investors placed their funds with Cornerstone. Cornerstone would take a 10 percent commission, withhold first year interest payments owed to the investors (which were required by the promissory notes to be placed in an escrow account) and then remit the remaining funds to the borrower. The borrower would then issue a promissory note created and provided to the borrower by Cornerstone. In some cases, the notes were secured with real property.
The State of Montana prohibits any person from selling or offering any security for sale unless the security is registered. Montana’s registration process protects potential investors by requiring the full disclosure of all material information.
The promissory notes offered and sold by Cornerstone, Kovick, and Congdon are securities as defined by Montana law. None of the notes offered and sold by Congdon or Kovick were registered or eligible for exemptions under Montana law.
Investigation by the FBI determined that Kovick and Congdon told investors that an amount of their investment funds equal to the first year’s interest payments would be reserved with an escrow service. Instead, Kovick and Congdon commingled these funds with other Cornerstone operating funds. Many of the notes were not secured by real property, even though investors were promised the notes would be so secured. The investigation also documented mailings and the use of the wires in furtherance of obtaining investor money. An FBI financial analyst examined bank records relating to Kovick, Congdon, and Cornerstone.
This examination revealed the deposit of investor funds into accounts controlled by Kovick and Congdon. This examination also revealed that Kovick and Congdon were using these commingled investor funds to operate Cornerstone, to pay prior investors’ interest payments, and for personal expenses.
By 2008, Cornerstone was having financial difficulties. During this time of financial difficulties, Kovick and Congdon continued their fund-raising efforts without disclosing material information such as the company’s dire financial condition, that they were using the investors’ funds to pay prior investors, and that they were using investors’ funds for their own personal expenses.
By the fall of 2008, the scheme collapsed. Kovick and Congdon began to pledge their assets as well as Cornerstone assets to secure investor money, often misrepresenting the status of the title for the properties involved, the available equity in the property and the position of other investors in the property. By November 2008, Kovick and Congdon were unable to make interest payments to investors because the stream of new investors in Cornerstone‘s notes had ceased.
Congdon pled guilty to federal charges and is awaiting sentencing.
Kovick faces possible penalties of 20 years in prison, a $250,000 fine and 3 years supervised release on each of 19 counts.
The United States Attorney’s Office announced the guilty plea.
The investigation was a cooperative effort between the Federal Bureau of Investigation and the Criminal Investigation Division of the Internal Revenue Service.