UNITED STATES OF AMERICA 

 Before the 

 SECURITIES AND EXCHANGE COMMISSION 

INVESTMENT ADVISER ACT 

Release No. 2855 / March 20, 2009 

ADMINISTRATIVE PROCEEDING 

File No. 3-13199 

In the Matter of 

CORNERSTONE CAPITAL 

MANAGEMENT, INC., and 

LAURA JEAN KENT, 

Respondents. 

ORDER MAKING FINDINGS AND 

IMPOSING REMEDIAL SANCTIONS 

AND A CEASE AND DESIST ORDER 

PURSUANT TO SECTIONS 203(e), 203(f), 

AND 203(k) OF THE INVESTMENT 

ADVISERS ACT OF 1940 

I. 

On September 16, 2008, the Securities and Exchange Commission (“Commission”) 

instituted public administrative and cease-and-desist proceedings pursuant to Sections 203(e), 

203(f), and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”) and Section 9(b) of 

the Investment Company Act of 1940 (“Investment Company Act”) against Cornerstone Capital 

Management, Inc. (“Cornerstone Capital”) and Laura Jean Kent (“Kent”) (together, 

“Respondents”).

 II. 

In response to these proceedings, Respondents have submitted an Offer of Settlement 

(“Offer”) which the Commission has determined to accept. Solely for the purpose of these 

proceedings and any other proceedings brought by or on behalf of the Commission, or to which 

the Commission is a party, and without admitting or denying the findings herein, except as to the 

Commission’s jurisdiction over them and the subject matter of these proceedings, which are 

admitted, Respondents consent to the entry of this Order Making Findings and Imposing 

Remedial Sanctions Pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers 

Act of 1940 (“Order”), as set forth below. 
 

 

 

III. 

On the basis of this Order and Respondents’ Offer, the Commission finds that: 

Summary 

1. From 1997 to 2004, Respondent Laura Kent and her investment advisory firm, 

Respondent Cornerstone Capital, invested approximately $15 million of client funds in five 

investments. Over time, Respondents became aware of substantial evidence demonstrating that the 

value of each of the investments was severely impaired. 

2. Despite this knowledge, Respondents have continued to issue periodic client account 

statements in which they list the “market price” and “total market value” of these investments as 

remaining unchanged from their original cost. Respondents also have made numerous material 

misrepresentations and omissions about the status of the investments, including the fact that some of 

the promoters were subsequently convicted of fraud. Respondents knew, or were reckless or 

negligent in not knowing, that the values of the investments had been impaired, yet they continued to 

charge a 1%-assets-under-management fee based on the initial cost of the investments, collecting 

hundreds of thousands of dollars more than they would have had the investments been properly 

valued. 

3. By failing to properly value impaired investments, and by misrepresenting and 

failing to disclose material facts about the investments, Respondents have willfully violated Sections 

206(1) and 206(2) of the Advisers Act. 

Respondents 

4. Cornerstone Capital is a California corporation providing investment advisory 

services to individual clients and three pooled investment vehicles. Cornerstone Capital 

registered with the Commission on July 3, 1996 and with California on July 10, 1996. 

Cornerstone Capital withdrew its Commission registration on July 18, 1997, and re-registered on 

May 31, 2006, after its purported assets under management surpassed $25 million. Today, 

Cornerstone Capital claims to have nearly $34 million in assets under management. It provides 

direct, personal advice to clients, who are invested in a combination of domestic and foreign 

stocks, bonds, and mutual funds, REITs, futures, commodities, and cash, as well as the pooled 

investment vehicles managed by Kent and Cornerstone Capital described below. 

5. Kent, 59, owns and is president of Cornerstone Capital. She resides in Redwood 

City, California. Kent graduated from Michigan State University with a major in Economics, 

received a Masters in Economics from Wayne State University, and obtained an MBA from 

Stanford University. She holds Series 3, 7, 24, 63, and 65 securities licenses. From 1983 to 

1994, she was a registered representative with the broker-dealer Kidder, Peabody & Co. 

Between 1994 and 1996, she was a registered representative of Cornerstone Investments, a 

2
 
branch of a Bay Area-based broker-dealer, Investment Architects, Inc. She founded Cornerstone 

Capital in 1996. In 2000, Washington state securities regulators sued Kent and Cornerstone 

Capital, alleging they misrepresented themselves as a Commission-registered investment adviser 

and defrauded clients by offering and selling fictitious securities. In 2004, without admitting or 

denying the allegations, Kent and the firm settled the Washington state proceeding, agreeing to 

cease and desist from violating state antifraud provisions and acting as an unregistered securities 

broker. 

Other Relevant Entities 

6. Cornerstone Investment Circle, LLC (“CIC”) is a Wyoming limited liability 

company formed by Kent in August 1996. Respondents use CIC as a vehicle for Cornerstone 

Capital clients to invest in certain alternative private investments. Since 2004, CIC has been 

invested in two private placement programs described in detail below – the Precious Metals and 

Mining Program and the Promissory Note Program. 

7. Cornerstone Investment Circle I & II, L.P. (“the Partnerships”) are Delaware limited 

partnerships formed in April 2004. They began operations in July 2004 as vehicles for Cornerstone 

Capital clients to invest in certain alternative private investments. The Partnerships are invested in a 

number of programs described below, including the Costa Rican Currency Exchange Program, the 

Indemnity Bond Bridge Program, and the Cogeneration Project Financing Program. 

8. Cornerstone Management Company, LLC (“Cornerstone Management”) is a 

Delaware limited liability company controlled by Kent and is the general partner of the Partnerships. 

Cornerstone Management formed in July 2004 with Cornerstone Capital as the managing member. 

Background 

9. In 1996, Kent formed Cornerstone Capital and registered it as an investment 

adviser in California. Soon afterwards, she established a limited liability company, CIC, for the 

purpose of investing clients in alternative private investments. Only Cornerstone Capital clients 

were eligible to become members of CIC. Thus, Cornerstone Capital has a direct client 

relationship with all investors in CIC. 

10. The Investment Advisory Agreement between Cornerstone Capital and each client 

states that “[f]ees for Investment Management are computed as a percentage of assets under 

management at the rate of 1% annualized, subject to the minimum fee.” Each Cornerstone 

Capital client receives a quarterly account statement that summarizes the performance of that 

client’s portfolio for that quarter, lists the client’s total assets under management, identifies the 

“market price” and “total market value” of each investment, and calculates a rate of return from 

the initial investment. In the quarterly account statements, Cornerstone Capital provides “market 

price” and “total market value” for all investments, regardless of whether the investment is a 

3
 
 

publicly traded stock or bond or an illiquid security, such as interests in CIC and the 

Partnerships. 

11. Around June 30, 2004, Respondents reorganized CIC. Respondents formed the 

Partnerships and transferred to the Partnerships all investments but the Promissory Note Program 

and the Precious Metals and Mining Program, both of which remained as portfolio investments 

in CIC. Only Cornerstone Capital clients were eligible to become limited partners of the 

Partnerships. Thus, as with CIC members, Cornerstone Capital has a direct client relationship 

with all Partnership investors. 

Respondents Failed to Properly Value Investments That Had Been Impaired. 

12. As described above, from 1997 to 2004 Respondents placed more than $15 

million in client funds into five investments, the values of which have become impaired. 

Respondents knew, or were reckless or negligent in not knowing, that the value of the 

investments had been impaired. Despite this, Respondents continued to issue client account 

statements that listed the market value of these investments at the original cost, and 

misrepresented and omitted other material information about the status of the investments. 

Through this misconduct, Respondents collected hundreds of thousands of dollars more in 

management fees than they would have had the investment programs been properly valued. The 

five impaired investment programs are described below. 

The Costa Rican Currency Exchange Program. 

13. In 1999, CIC, on Respondents’ advice, started the Costa Rican Currency 

Exchange Program. The program consisted of debt and equity investments in the foreign 

currency exchange business. Debt investors were to receive monthly interest payments, while 

equity investors were to have their monthly returns reinvested in the program. The investments 

allegedly provided working capital for the currency exchange and other related businesses. By 

mid-2002, Respondents had invested nearly $7.8 million in funds from a total of 70 clients in the 

program. 

14. In July 2002, Costa Rican authorities raided the currency exchange business, 

seized all of its assets, and froze its bank accounts totaling $7 million (out of an estimated total 

of $88 million invested by numerous investors, including CIC) while investigating a deposit in 

the currency exchange program allegedly made by a Canadian drug cartel. Within six months of 

the raid, one of the two promoters of the currency exchange program was arrested and charged 

4
 
 

by Costa Rican authorities with financial fraud. The other promoter fled. In May 2007, one 

promoter was found guilty of fraud, while the other promoter remains missing. 

15. By at least December 2002, Respondents had clear indications that the value of 

their clients’ investment in the currency exchange program was impaired. In October 2002, the 

currency exchange ceased operation and one month later stopped making or accruing interest 

payments, and has made no payments to investors since that time. The Respondents learned in 

December 2002 that one of the promoters had been arrested and charged with fraud and the other 

forced into hiding and facing a warrant for his arrest. At about the same time, Respondents 

learned of reports from reputable news agencies that described the currency exchange investment 

as a classic Ponzi scheme, including a December 13, 2002 Wall Street Journal article that Kent 

read at or near the time of publication. 

16. Despite their knowledge of these problems, from December 2002 to the present, 

Respondents have continued to send their clients account statements showing the value of the 

currency exchange investment at its original cost plus accrued interest. For example, in four 

quarterly account statements to clients in 2007, Kent and Cornerstone Capital stated that the 

“market price” of the Costa Rican Currency Exchange Program had remained the same (and was 

the same “market price” as it was in 2002). Since January 2003, Cornerstone Capital has 

collected at least $213,981 in investment management fees based on this impaired investment. 

The Promissory Note Program and Precious Metals and Mining Program. 

17. Between 1997 and 1999, Cornerstone Capital clients, through CIC, invested a 

total of $6.6 million in two programs referred to as the Promissory Note Program and the 

Precious Metals and Mining Program. Funds invested in these programs were loaned to a 

private company that had three separate divisions: a European bank financing group, a 

California-based technology group, and a group that owned mineral rights in New Mexico. The 

loans were evidenced by promissory notes issued by the company, which were secured by the 

company’s technology and mineral rights, and were guaranteed by the company’s promoters. 

Under both programs, the company was required to make monthly interest payments to 

Cornerstone Capital clients. 

18. In 2000, the company defaulted on the loans and declared bankruptcy soon 

thereafter. In April 2001, the company’s two promoters pled guilty to charges they had 

defrauded investors in other unrelated investments through prime bank and Ponzi schemes. On 

August 14, 2002, the promoters were sentenced to 18 months in federal prison for the fraud. 

5
 
 

 

 

19. Respondents learned of the promoters’ guilty pleas in 2001. In early 2002, 

Respondents started foreclosure proceedings to secure the company’s mineral rights. On 

February 4, 2003, Respondents filed a lawsuit against the company and the promoters alleging 

that the promoters defrauded Respondents in their investment dealings. Respondents obtained 

summary and default judgments against the promoters in October and November 2004 and 

foreclosed on the company’s New Mexico mineral rights in September 2004. However, to date, 

Respondents have been unable to collect on the judgments or to develop, sell or otherwise realize 

any value from the foreclosed property. 

20. In May 2002, Respondents disclosed to their clients that they had started 

foreclosure proceedings on the mineral rights. Respondents, however, waited until August 2004 

to disclose to clients the promoters’ guilty plea, when Respondents wrote to clients that the 

principals “entered into a plea bargain with Federal authorities regarding a suit filed by a 

different investor group.” Additionally, Respondents did not disclose the lawsuit against the 

company and the promoters until February 2006, and then stated that Respondents “obtained a 

Summary Judgment against the two managers.” Respondents have never disclosed that they 

alleged fraud in the legal action against the company and the promoters. 

21. By at least February 2003, when they filed a fraud action against the company’s 

promoters, Respondents had substantial information indicating that the value of client 

investments in the Promissory Note Program and the Precious Metals and Mining Program was 

impaired. Despite this information, Respondents have continued to value the investments in the 

Promissory Note Program and the Precious Metals and Mining Program at their original cost in 

client account statements. Since February 2003, Cornerstone Capital has collected at least 

$111,797 in investment management fees based on these impaired investments. 

The Indemnity Bond Bridge Program. 

22. In June 2004, Cornerstone Capital clients, at the direction of the Respondents, 

invested $500,000 in CIC’s Indemnity Bond Bridge Program. A majority of these clients 

invested in the program by redeeming certificates of deposit issued by a large, FDIC-insured 

bank. Under the program, CIC loaned money to two start-up companies through a promoter. 

The two start-up companies had applied for lines of credit with the promoter of the program, 

who in turn had purportedly secured bank loans to fund the lines of credit. The $500,000 was to 

be used to purchase insurance policies from unnamed insurance companies guaranteeing that the 

bank loans would be repaid and allowing the banks to release funds for the lines of credit. 

23. Unbeknownst to Cornerstone Capital clients, CIC used $250,000 of the $500,000 

investment in an effort to obtain a $2,500,000 line of credit for CIC’s own benefit. Respondents 

6
 
 

intended to use the proceeds from the line of credit in connection with another ailing investment 

program. Respondents did not disclose to clients before they invested that Respondents intended 

to use client funds to help CIC obtain a line of credit for its own benefit. 

24. Respondents wired the $500,000 in client funds to a lawyer for the promoter on 

June 10 and 15, 2004. On or about June 30, 2004, Respondents created a disclosure document 

regarding the Indemnity Bond Bridge Program that materially misrepresented a key aspect of the 

investment. Respondents claimed that a respected 150-person California law firm served as 

escrow agent for the funds CIC was investing and was “authorized to release those funds upon 

issuance of [an] insurance binder representing the commitment of the insurance company to 

issue the bond.” In truth, the law firm was not involved in the transaction and had no role in 

determining whether any insurance policy was properly issued. 

25. Although CIC was to be repaid the full amount of client funds invested (i.e. 

$500,000) plus interest by August 2004, by December 2005 it still had received no payments, 

and Respondents’ inquiries to the promoters throughout 2004 and 2005 met with vague excuses. 

26. In December 2005, Federal Bureau of Investigation (“FBI”) agents informed 

Respondents that the promoters had been indicted for fraud and questioned Kent about CIC’s 

investment in the Indemnity Bond Bridge Program. Prosecutors subsequently amended the 

indictment in August 2006 to name CIC as a defrauded investor. On June 22, 2007 Kent 

testified at the criminal trial of the promoters, who were convicted one month later. They were 

both sentenced to lengthy prison terms of 7 and 13 years. 

27. To this day, Respondents have not informed clients about the information 

regarding the CIC investment revealed to Respondents in the FBI interview or the indictments. 

Instead, Respondents continually represent to clients that the investment will pay off soon. 

28. From at least December 2005, Respondents have had substantial evidence that the 

value of their clients’ investment in the Indemnity Bond Bridge Program is impaired. 

Respondents, however, continue to value the investment at its original cost (the initial 

investment amount) on account statements to clients. Respondents have collected at least $6,796 

in fees on this investment since January 2006. 

The Cogeneration Project Financing (Grain Mill) Program. 

29. Between May and August 2003, Cornerstone Capital, on Respondents’ advice and 

through CIC, provided $235,000 in client funds to two small California energy companies for the 

installation and operation of a power cogeneration unit at a grain mill in Central California. The 

investment consisted of a promissory note to be paid back in seven years with 12% interest. 

Under the terms of the note, payment was to begin upon the installation and operation of the 

power generator. 

7
 
 

 

30. From its inception, this program ran into delays and difficulties. After a year with 

no payments from the principals of the energy companies, Respondents renegotiated the 

contract, affording the principals more time to repay the loan. Under the terms of the new 

contract, the principals were to begin payment in October 2004 and continue with monthly 

payments through September 2011. In this contract, the promoter stated that the power generator 

had been installed and was fully operational. However, Respondents learned in early 2005 from 

a third party that the promoters’ statements in the contract were false and that the generator had 

not been installed and was not operational. Since entering the renegotiated contract, 

Respondents have received only two interest payments, in December 2004 and May 2005, and 

one payment of principal of $32,500 in June 2005. 

31. From at least June 2005, Respondents faced clear indications that the value of 

their clients’ investment in this program was impaired. Despite this, until June 2007, 

Respondents valued the investment at its original cost in client account statements. From June 

2005 to June 2007 (when Respondents reduced the value of the investment to 50% of cost), 

Respondents collected at least $3,724 in fees based on this investment. 

Violations 

32. As a result of the conduct described above, Respondents willfully violated 

Sections 206(1) and 206(2) of the Advisers Act, which make it “unlawful to employ any device, 

scheme, or artifice to defraud any client or prospective client; and to engage in any transaction, 

practice, or course of business which operates as a fraud or deceit upon any client or prospective 

client.” 

Disgorgement and Civil Penalties

 33. Respondents have submitted a sworn Statement of Financial Condition dated 

October 30, 2008 and November 6, 2008 and other evidence and have asserted their inability to 

pay prejudgment interest and a civil penalty. 

Undertakings

 34. Respondents undertake: 

a. To hire, at the expense of Cornerstone Capital, an Independent Consultant 

not unacceptable to the Commission’s staff to review and establish the valuations of any 

Cornerstone Capital alternative private investments for the next twelve quarters from the date of 

this Order and make a report on the valuations on a quarterly basis to the San Francisco Regional 

Office of the United States Securities and Exchange Commission; 

8
 
b. To submit all contemplated future valuation changes regarding any 

Cornerstone Capital alternative private investment to an Independent Consultant in advance for a 

period of three years; 

c. To refrain from making any valuation changes of any Cornerstone Capital 

alternative private investment until after the investment or valuation changes have been approved 

by the Independent Consultant for a period of three years; 

d. To require the Independent Consultant to enter into an agreement that 

provides that for the period of the engagement and for a period of two years from completion of 

the engagement, the Independent Consultant shall not enter into any employment, consultant, 

attorney-client, auditing or other professional relationship with Respondents, or any of its 

present or former affiliates, directors, officers, employees, or agents acting in their capacity. The 

agreement will also provide that the Independent Consultant will require that any firm with 

which he/she is affiliated or of which he/she is a member, and any person engaged to assist the 

Independent Consultant in the performance of his/her duties under this Order shall not, without 

prior written consent of the San Francisco Regional Office of the United States Securities and 

Exchange Commission, enter into any employment, consultant, attorney-client, auditing or other 

professional relationship with Respondents, or any of its present or former affiliates, directors, 

officers, employees, or agents acting in their capacity as such for the period of the engagement 

and for a period of two years after the engagement; 

e. To mail a copy of this Order to each existing investment advisory client 

and to investors in pooled investment vehicles within 30 days following the entry of this Order. 

This Order shall be sent by certified mail, along with a cover letter in a form not unacceptable to 

the staff of the Commission. Respondents shall notify Marc J. Fagel, Regional Director of the 

San Francisco Regional Office when this undertaking is completed; 

 f. To provide, from the effective date of this Order until the expiration of 12 

months, a copy of this Order to all prospective investment advisory clients not less than 48 hours 

prior to entering into any written or oral investment advisory contract (or no later than the time 

of entering into such contract, if the client has the right to terminate the contract without penalty 

within five business days after entering into the contract). Within one month after expiration of 

the 12-month period, Respondents shall notify the staff of the Commission by mail directed to 

Marc J. Fagel, Regional Director of the San Francisco Regional Office, when this undertaking is 

completed; and 

g. To provide, from the effective date of this Order, a hyperlink from the 

website www.cornerstonecap.com and any other websites maintained by Respondents for the 

purpose of soliciting and communicating with investment advisory clients to the Commission 

website’s posting of this Order. 

35. In addition, Respondents undertake, pursuant to Rule 1101 of the Commission’s 

Rules on Fair Fund and Disgorgement Plans [17 C.F.R. 201.1101], and in consultation with the 

staff of the Commission, to develop a plan to distribute the disgorgement ordered herein as 

9
 
 

 

 

provided for in the distribution plan (“Distribution Plan”), which shall be submitted to the 

Commission within 60 days of the entry of this Order for notice in accordance with Rule 1103 

[17 C.F.R. 201.1103]. Following a Commission order approving the Distribution Plan, as 

provided in Rule 1104 [17 C.F.R. 201.1104], Respondents shall take all necessary and 

appropriate steps to assist the Commission-appointed Administrator in carrying out the final 

Distribution Plan. 

IV. 

In view of the foregoing, the Commission deems it appropriate to impose the sanctions 

agreed to in Respondents’ Offer. 

Accordingly, it is hereby ORDERED that: 

A. Respondents shall cease and desist from committing or causing any violations and 

any future violations of Sections 206(1) and 206(2) of the Advisers Act; 

B. Respondents are censured; 

C. Respondents shall comply with the undertakings enumerated in Section III 

Paragraphs 34(a) through (g) and 35, above; 

D. Respondents shall pay disgorgement of $335,758.00 and prejudgment interest of 

$80,000.00, for a total of $415,758.00, but payment of such amount except for $335,758 .00 is 

waived based upon Respondents’ sworn representations in their Statements of Financial 

Condition dated October 30, 2008 and November 6, 2008 and other documents submitted to the 

Commission. The payment required by this Order shall be made in the following installments: 

Payment Date Amount 

Within 30 days from the entry of the Offer $40,000.00 

June 30, 2009 $20,000.00 

September 30, 2009 $20,000.00 

December 31, 2009 $20,000.00 

March 31, 2010 $23,000.00 

June 30, 2010 $23,000.00 

September 30, 2010 $23,000.00 

December 31, 2010 $23,000.00 

March 31, 2011 $26,000.00 

June 30, 2011 $26,000.00 

September 30, 2011 $26,000.00 

December 31, 2011 $26,000.00 

10
 
March 31, 2012 $39,758.00 

TOTAL $335,758.00 

If any payment is not made by the date the payment is required by this Order, the entire 

outstanding balance of disgorgement, prejudgment interest, and any additional interest accrued 

pursuant to SEC Rule of Practice 600, shall be due and payable immediately, without further 

application. Payments shall be: (A) made by United States postal money order, certified check, 

bank cashier's check or bank money order; (B) made payable to the Securities and Exchange 

Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities 

and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, 

VA 22312; and (D) submitted under cover letter that identifies Laura Kent and Cornerstone 

Capital Management, Inc. as Respondents in these proceedings, the file number of these 

proceedings, a copy of which cover letter and money order or check shall be sent to Marc Fagel, 

Regional Director, San Francisco Regional Office, Securities and Exchange Commission, 44 

Montgomery Street, Suite 2600, San Francisco, CA 94104; 

D. Based upon Respondents’ sworn representations in their Statements of Financial 

Condition dated October 30 and November 6, 2008 and other documents submitted to the 

Commission, the Commission is not imposing a penalty against Respondents; and 

E. The Division of Enforcement (“Division”) may, at any time following the entry of 

this Order, petition the Commission to: (1) reopen this matter to consider whether Respondents 

provided accurate and complete financial information at the time such representations were 

made; and (2) seek an order directing payment of the maximum civil penalty allowable under the 

law. No other issue shall be considered in connection with this petition other than whether the 

financial information provided by Respondents was fraudulent, misleading, inaccurate, or 

incomplete in any material respect. Respondents may not, by way of defense to any such 

petition: (1) contest the findings in this Order; (2) assert that payment of a penalty should not be 

ordered; (3) contest the imposition of the maximum penalty allowable under the law; or (4) 

assert any defense to liability or remedy, including, but not limited to, any statute of limitations 

defense. 

By the Commission. 

Elizabeth M. Murphy 

Secretary 

11