Home Restoration Company Allegedly Tricked Investors By Investing In the Stock Market

from the Securities and Exchange Commission

The Securities and Exchange Commission today announced securities fraud charges against the owner of a home restoration business in upstate New York who sold unsecured notes to investors to finance his real estate operations.

The SEC alleges that David Fleet misrepresented or failed to disclose a number of key facts to investors in Cornerstone Homes Inc., which was in the business of buying and restoring distressed single family homes to sell or rent to low-income customers. For example, investors were told that the company did not use bank financing during time periods when Fleet was heavily reliant on mortgaging to banks virtually all of the homes that Cornerstone was purchasing with investor money.

The SEC further alleges that as the business began to deteriorate during a downturn in the real estate market, Fleet failed to inform his investors as he decided to secretly invest Cornerstone’s funds in the stock options market in an effort to keep the company’s finances afloat. Fleet lost between $3 million and $4 million of the approximately $6 million that he invested. Ironically, this allegedly occurred soon after Fleet sent newsletters to investors, many of them senior citizens, warning that investing in the stock market was risky and they would be better off investing their money in Cornerstone. Fleet continued to raise money from investors without telling them that he was using their investments in his company to unsuccessfully invest in the stock market. Cornerstone eventually filed for bankruptcy. Said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

Fleet concealed the true state of finances at Cornerstone Homes and essentially tricked investors into funding his efforts to save his company by investing in the stock market that he had otherwise told them was too risky.

The SEC’s complaint, which was filed in U.S. District Court for the Western District of New York, alleges that Fleet violated the registration and antifraud provisions of the federal securities laws. The complaint seeks financial remedies and a permanent injunction against Fleet, who resides in Beaver Dams, N.Y.

The SEC’s investigation was conducted by Neal Jacobson and Patricia Schrage of the New York Regional Office, and they will lead the litigation. The case is supervised by Alistaire Bambach. The SEC appreciates the assistance of the Office of the United States Trustee for Region 2.