# UNITED STATES OF AMERICA

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URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3Acd83a5f20bdc4a8e

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
ADMINISTRATIVE PROCEEDING
File No. 3-13199
In the Matter of
CORNERSTONE CAPITAL
MANAGEMENT, INC., and
LAURA JEAN KENT,

PROPOSED PLAN OF DISTRIBUTION

Respondents.

Background
This Plan of Distribution (the “Distribution Plan”) proposes a methodology for distributing
the disgorgement paid by Cornerstone Capital Management, Inc. (“Cornerstone Capital”) and Laura
Jean Kent (“Kent”) (collectively “Respondents”), in settlement of the administrative proceeding
captioned above.
On March 20, 2009, the Respondents consented to the entry of an 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 (“Order”). In the Matter of Cornerstone
Capital Management, Inc., and Laura Jean Kent, Investment Advisers Act Rel. No. 2855, Admin.
Proc. File No. 3-13199 (Mar. 20, 2009). The Order found that from 1997 to 2004, Kent and her
investment advisory firm, 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. Despite this knowledge,
Respondents continued to issue periodic client account statements in which they listed the “market
price” and “total market value” of these investments as remaining unchanged from their original
cost. These statements were mailed to the investors in the impaired programs (the “Harmed
Investors”).
Respondents also 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. The Order found that the values of the investments were 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. The Order found that, by failing to properly value impaired investments, and by

misrepresenting and failing to disclose material facts about the investments, Respondents willfully
violated Sections 206(1) and 206(2) of the Advisers Act. Respondents consented to the entry of the
Order without admitting or denying the Order’s findings.
As required by the Order, Respondents are to pay to the Securities and Exchange
Commission (the “Commission”) disgorgement, jointly and severally, in the amount of $335,758.00
(“Settlement Amount”). Pursuant to the Order, Respondents will make thirteen quarterly payments
beginning 30 days from the entry of the Order. These payments will be made to the Commission,
deposited at the U.S. Treasury Bureau of Public Debt for investment in government obligations (the
“Distribution Fund”), and will be distributed to the Harmed Investors in three annual payments.
Pursuant to the Order, Respondents undertook to develop a Distribution Plan for the
distribution of the Settlement Amount in consultation with the staff of the Commission assigned
to this matter (the “Staff”) and subject to the approval of the Commission. Upon Commission
approval of the Distribution Plan and appointment of a Plan Administrator, as provided in Rule
1104 of the Commission’s Rules on Fair Fund and Disgorgement Plans, Respondents will assist the
Commission-appointed Plan Administrator in the distribution of the disgorgement to the affected
investors. The assets of the Distribution Fund are subject to the continuing jurisdiction and control
of the Commission. The Distribution Plan is subject to approval by the Commission, and the
Commission retains jurisdiction over the implementation of the Plan.
Administration of the Distribution Plan

1.
Purpose. The Distribution Plan has been developed pursuant to the Order and the
SEC Rules on Fair Fund and Disgorgement Plans, 17 C.F.R. § 201.1100, et seq. (the “Rules”).
The purpose of the Distribution Plan is to distribute the disgorgement paid by Respondents in
settlement of the above-captioned Administrative Proceeding.
2.
Plan Administrator. Rule 1105 provides that the Commission “shall have the
discretion to appoint any person, including a Commission employee, as administrator of a plan of
disgorgement or a Fair Fund and to delegate to that person responsibility for administering the
plan.” Respondents have proposed appointing Commission Trial Counsel, Robert L. Mitchell as
Plan Administrator. The Plan Administrator will be responsible for, among other things:
overseeing the administration of the Distribution Fund, obtaining accurate mailing information
for the Harmed Investors, preparing accountings, cooperating with the Tax Administrator in
providing the information necessary to accomplish income tax compliance, distributing money
from the Distribution Fund to the Harmed Investors in accordance with this Plan, and preparing a
final accounting.
3.
Bonds. Because the Plan Administrator is a Commission employee, no bond is
required pursuant to Rule 1105(c).
Distribution Plan and Procedures
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4.
Receipt of Additional Funds. Rule 1101(b)(l) provides, among other things, that a
distribution plan shall include “[p]rocedures for the receipt of additional funds.” The Distribution
Fund will be deposited at the U.S. Treasury Bureau of Public Debt for investment in government
obligations as each payment is received. Other than interest from these investments, it is not
anticipated that the Distribution Fund will receive any additional funds.
5.
Identifying the Harmed Investors. Rule 1101(b)(2) provides that a distribution
plan shall include a “[s]pecification of categories of persons potentially eligible to receive
proceeds from the fund.” The Harmed Investors are the individuals and entities that invested
with Respondents in the impaired programs (as described in the Order) and paid assets-under
management fees on the impaired investments. Respondents, in consultation with the Staff, have
already identified the seventy-two Harmed Investors and calculated the distribution amounts to
be paid to each Investor. If an individual or entity believes it is a Harmed Investor but has not
received notice in the mail of their status, they can contact the Plan Administrator at the United
States Securities and Exchange Commission, San Francisco Regional Office, 44 Montgomery
Street, Suite 2600, San Francisco, CA 94104.
6.
Methodology for Determining Distribution Amounts. Respondents have
calculated the amounts to be distributed to each Harmed Investor (the “Distribution Amounts”)
by first calculating the total amount of management fees paid to the Respondents by the Harmed
Investors for each impaired investment (as described in the Order). Second, Respondents
calculated the pro rata share for each Harmed Investor based upon the amount each Harmed
Investor paid in management fees for the impaired investments. Finally, Respondents took the
Settlement Amount and applied the pro rata calculation to determine the amount of disgorgement
paid to each Harmed Investor. In the view of the proposed Plan Administrator, this method
constitutes a fair and reasonable allocation of the Distribution Fund.
7.
Locating and Notifying the Harmed Investors. Rule 1101(b)(3) provides that a
plan shall include “[p]rocedures for providing notice to [potential claimants – here, the Harmed
Investors] of the existence of the fund and their potential eligibility to receive the proceeds of the
fund.” In this case, Respondents and the Staff have already identified the Harmed Investors and
calculated the Distribution Amounts to be paid to each. Respondents propose that the Plan
Administrator, on behalf of Respondents, provide each Harmed Investor with (a) a notification of
the posting of the Distribution Plan, (b) the proposed amount of disgorgement to be paid to the
Harmed Investor, and (c) a description of the methodology used to calculate that amount. The
Plan Administrator, on behalf of Respondents, will provide such notice by United States Postal
Service and will request at that time from the Harmed Investor information necessary to
accomplish the distribution, including confirmation of (i) Social Security and Tax Identification
number(s), (ii) the payment address, (iii) contact information, and/or (iv) wiring instructions. If
the Harmed Investor fails to respond to such notice within twenty-one (21) days from the mailing
of the notice, the Plan Administrator will send a second written notice by mail. If the Harmed
Investor does not respond to the second notice within twenty-one (21) days, the Plan
Administrator will make two attempts to contact the Harmed Investor telephonically.
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8.
No Claims Process. Rule 1101(b)(4) provides, among other things, that a plan
shall include “[p]rocedures for making and approving claims, procedures for handling disputed
claims, and a cut-off date for the making of claims.” The Distribution Fund is not being
distributed according to a claims-made process, so the procedures for providing notice and for
making and approving claims are not applicable.
9.
Checks/Electronic Transfers. The Plan Administrator will make three annual
payments to the Harmed Investors. The payments will be made by March 31 of each year. The
first payment is to commence on or before March 31, 2010. The Plan Administrator may elect to
make payment of any Distribution Amount to a Harmed Investor by check or electronic transfer.
All checks shall bear a stale date of one year. All payments shall be preceded or accompanied
with a communication that includes, as appropriate: (a) a statement characterizing the
distribution; (b) a description of the tax information reporting and other related tax matters; (c) a
statement that checks will be void (non-negotiable) after one year; and (d) the name of a person
to contact with questions concerning the distribution. Distribution checks, on their face, or in the
accompanying communication will clearly indicate that the money is being distributed from a
Distribution Fund established by the Commission pursuant to the Order in this case. Checks that
are not negotiated prior to the stale date shall be voided. Electronic credits will be made only to
cash equivalent accounts (e.g., checking or savings accounts).
10.
Implementation of the Distribution Plan; Financial Management Service;
Validation and Approval of Disbursement of the Fair Fund. The Fair Fund disbursement to
investors will be implemented through the United States Department of the Treasury’s Financial
Management Service (“FMS”), which will electronically transfer funds through the Automated
Clearing House (“ACH”) or mail a check to each payee. The Plan Administrator will compile
the information to be submitted to FMS in the required file format, and Commission staff will
then obtain authorization from the Commission to disburse pursuant to SEC Rule 1101(b)(6).
When the order to disburse is entered, the Commission will transmit the electronic file to FMS
for the transfer of funds in accordance with this plan.
11.
Returned Checks/Electronic Transfer Procedures. Within 24 to 48 hours of
receipt by FMS, funds will be transferred by the ACH or checks will be mailed. FMS will notify
the Commission, which, in turn, will notify the Plan Administrator of any returned items due to
non-delivery, insufficient addresses, and/or other deficiencies. The Plan Administrator is
responsible for researching and reconciling all errors that result in non-delivery and shall submit
a supplemental electronic file for payment of the returned items. The Plan Administrator also is
responsible for accounting for all payments. In the event that any distribution is in the form of a
paper check in lieu of an electronic transfer, each check will state on its face that it is valid for
one year. After one year from the date on the distribution check, FMS shall notify the
Commission staff of all uncashed checks. FMS will credit the SEC account for the Distribution
Fund for the amount of all uncashed checks.

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12.
Accountings. Once all funds are disbursed through FMS, the Plan Administrator
will submit a final accounting for approval by the Commission prior to termination of the
Distribution Fund and the discharge of the Plan Administrator.
13.
Undisbursed Amounts. Rule 1101(b)(5) requires that the distribution plan make
“provision for the disposition of any funds not otherwise distributed.” Upon exhaustion of all
procedures to identify and locate the Harmed Investors and to reconcile all errors that result in
non-delivery, if any portion of the Distribution Fund remains undisbursed (whether because a
Harmed Investor has failed to supply identifying information, because the Plan Administrator
was unable to locate a Harmed Investor or its successor, because a Harmed Investor or its
successor no longer exists, because a check becomes stale, or for some other reason), it will be
remitted to the U.S. Treasury after the final accounting is approved by the Commission.
14.
Termination of the Distribution Fund. Rule 1101(b)(5) requires that a distribution
plan include a “proposed date for the termination of the fund.. ..” Upon distribution of the funds,
the Plan Administrator shall make arrangement for the final payment of taxes and Tax
Administrator fees, and shall submit a final accounting to the Commission. The Fair Fund shall
be eligible for termination, and the Fund Administrator shall be discharged, after all of the
following have occurred: (1) a final accounting, in an SEC standard accounting format provided
by the staff, has been submitted by the Fund Administrator for approval of, and has been
approved by, the Commission, (2) all taxes, fees and expenses have been paid, and (3) any
amount remaining in the Fair Fund has been received by the Commission. When the
Commission has approved the final accounting, the staff shall seek an order from the
Commission to approve the transfer of any amount remaining in the Fair Fund to the U.S.
Treasury, and shall arrange for the termination of the Fair Fund and discharge of the Fund
Administrator.
15.
Fees and Costs of Administering the Distribution Plan. Fees and other expenses
of administering the plan shall be paid first from the interest earned on the funds, and if the
interest is not sufficient, then from the corpus.
16.
Tax Administrator. The Commission has appointed Damasco & Associates as the
tax administrator for the Distribution Fund (the “Tax Administrator”) In the Matter of
Cornerstone Capital Management, Inc., and Laura Jean Kent, Securities Exchange Act Rel. No.
60327, Admin. File No. 3-13199 (July 17, 2009). The Plan Administrator will cooperate with the
Tax Administrator in providing information necessary to accomplish the income tax compliance,
ruling and advice work assigned to the Tax Administrator by the Commission. The Tax
Administrator shall be compensated first from the interest earned on the funds, and if that interest is
not sufficient, then from the corpus.
17.
Qualified Settlement Fund. The Distribution Fund constitutes a Qualified
Settlement Fund ("QSF") under Section 468B(g) of the Internal Revenue Code, 26 U.S.C. §
468B(g), and related regulations, 26 C.F.R. §§1.468B-1 through 1.468B-5.
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18.
Amendment. The Plan Administrator will obtain approval from the Commission
prior to the implementation of any material changes to the Distribution Plan. If material changes
are required, this Distribution Plan may be amended upon the motion of the Plan Administrator
or upon the Commission's own motion and receipt of Commission approval.
19.
Review of Procedures and Computations by Cornerstone Capital. The
Commission retains the right to appoint a consultant or firm, at Cornerstone Capital’s expense, to
review, on the Commission’s behalf, Cornerstone Capital’s function, procedures, and
computations in the distribution process should such a review be deemed necessary.
20.
Distribution Timing. The Plan Administrator will use its best efforts to make the
first distribution as soon as practicable, but no later than March 31, 2010. The second
distribution will be made on or before March 31, 2011. The third and final distribution will be
made on or before March 31, 2012.
21.
Deadline Extensions. The Staff may extend any procedural deadline contained in
the Distribution Plan for good cause shown.
Notice of Proposed Distribution Plan

22.
In accordance with Rule 1103, notice of the Distribution Plan shall be published in
the SEC Docket, on the Commission's website at www.sec.gov/litigation/fairfundlist.htm, and on
Cornerstone Capital’s website at www.cornerstonecap.com. Any person or entity wishing to
comment on the Distribution Plan must do so in writing by submitting their comments to the
Commission within thirty (30) days of the publication date of the Notice of Proposed Plan of
Distribution: (a) by sending a letter to the Office of the Secretary, United States Securities and
Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090; (b) by using the
Commission's internet comment form (available at www.sec.gov/litigation/admin.shtml); or (c) by
sending an e-mail to rule-comments@sec.gov. Comments submitted by e-mail or via the
Commission's website should include the Administrative Proceeding File Number (Admin. Proc.
File No. 3-13199) in the subject line. Comments received will be available to the public.
Commenters should therefore only submit information that they wish to make publicly available.

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