If you were a victim who was sold Cornerstone Ministries Bonds please contact attorney Lars Soreide to file your claim today

In the bankruptcy report of Cornerstone Ministries, inc., the Court has asked the Examiner to investigate "whether and to what extent purchasers of Debtor’s bonds may have causes of action against brokers and others related to sale of the bonds." The key brokerage firms who sold Cornerstone bonds were include American Heritage Church Finance, Inc., Cambridge Legacy Securities, Inc., Commonwealth Church Finance, Inc., G.A. Repple & Company, Huntleigh Securities Corporation, and MMR, Inc. The bankruptcy Examiner sent letters to each of these firms seeking information about its insurance coverage. Most responded, claiming that they had no errors and omissions coverage. In light of the evidence described above, the Examiner believes that bondholders have valid causes of action against broker-dealers, Cornerstone directors, and others. The Examiner has evaluated possible causes of action under a "motion to dismiss" standard. That is, in deciding whether such a cause of action exists, the Examiner has asked whether the facts uncovered, taken in the light most favorable to the prospective plaintiff, could make out any set of provable facts that would entitle them to relief.

Account opening documents at brokerage firms include a clause by which every customer "agrees" to submit any dispute to binding arbitration, rather than the civil justice system. The Supreme Court has upheld the validity of such pre-dispute arbitration clauses. Bondholders who first bought Cornerstone bonds after opening an account at a registered broker-dealer, therefore, will have to pursue their claims in FINRA arbitration.

Several potential claim investors may have who bought Cornerstone Ministries Investment, Inc., bonds (“Cornerstone bonds”) against American Heritage Church Finance, Inc., Cambridge Legacy Securities, Inc., Commonwealth Church Finance, Inc., G.A. Repple & Company, Huntleigh Securities Corporation, MMR, Inc., include:

Suitability Claims

A stockbroker must have a reasonable basis to believe that a recommendation or strategy is suitable for a customer in view of the customer’s resources and sophistication. NASD Conduct Rule 2310(a). This is commonly referred to as the "Know Your Customer" rule. The information the Examiner received from bondholders convinces him that many of the registered representatives10 who sold Cornerstone bonds disregarded their obligations under that rule. Whether any particular registered representative is liable for making an unsuitable recommendation will depend on the financial circumstances and expertise of the investors and the specific representations made in connection with the sale of the bonds.

The "Know Your Customer" rule is designed to prevent, among other things, an unwise concentration of investor assets in a single security. Those investors who had more than half of their life savings invested in Cornerstone bonds, therefore, especially have reason to complain about the unsuitability of the recommendation.

Other Claims Against Registered Representatives

Both Georgia and federal law prohibit any act, practice, or course of business that operates as a fraud or deceit. 15 U.S.C. § 78j(b); 17 C.F.R. 240.10b-5; O.C.G.A. § 10-5-12. The registered representatives who sold Cornerstone bonds owed investors a fiduciary duty to exercise loyalty and the utmost good faith in handling their affairs. Minor v.. E.F. Hutton Co., Inc., 200 Ga. App. 645, 409 S.E.2d 262, 264 (1991); Harrison v. Harrison, 214 Ga. 393, 105 S.E.2d 214 (1958). The Georgia Supreme Court11 and Legislature have provided a number of remedies for people who find themselves injured by those who have promised to protect them. Cornerstone bondholders may, therefore, be able to recover from those registered representatives for negligence, breach of fiduciary duty, breach of contract, and general fraud (O..C.G.A. § 51-6-1). Investors can also pursue claims for misrepresentations or omissions, whether intentional, reckless, or merely negligent. Robert & Co. Assoc. v. Rhodes-Haverty Partnership, 250 Ga. 680, 300 S.E.2d 503 (1983).

If the registered representative making the sale is liable, the broker-dealer employing that registered representative will likely also be liable: [W]here…the erring salesman completes the transactions through the employing brokerage house and the brokerage house requires a commission on the transactions, the burden of proving good faith is shifted to the brokerage house . . . and requires it to show at least that it has not been negligent in supervision . . . and that it has maintained and enforced a reasonable and proper system of supervision and internal control over sales personnel. Marbury Management, Inc. v. Kohn, 629 F.2d 705, 716 (2d Cir.), cert. denied, 449 U.S. 1011 (1980). As the entity responsible for supervising the individual registered representative, the broker-dealer with whom he is associated will be subject to liability under the common law doctrine of respondeat superior. In addition, the firm will likely be liable as a "controlling person," under section 20(a) of the Securities Exchange Act of 1934 and/or the state law equivalent of that provision, which provides that the broker-dealer is jointly and severally liable for the acts of the person controlled (the registered representatives) unless the former acts in good faith and does not directly or indirectly induce the acts constituting the violation.

Apart from respondeat superior and control person liability, the employing firms may also be separately liable for "failure to supervise" the registered representative making the sale. Securities laws make broker-dealers responsible for supervising registered representatives who – by the nature of what they do – are subject to the temptation to ignore customers’ best interests in pursuit of commissions.

Section 12(2) of the Securities Act of 1933

Section 12(a)(2) of the Securities Act of 1933 ("Securities Act") (15 U.S.C. § 77l(a)(2)) provides for civil liability of "any person" who offers or sells a security with a prospectus that includes an untrue statement of material fact or a material omission. Section 12(a)(2) of the Act is a strict liability law; it does not require proof of reliance or scienter. Broker-dealers who sell securities are subject to liability under section 12(2). Pinter v. Dahl, 486 U.S. 622, 680 (1988) (holding that "the applicability of section 12 liability to brokers and others who solicit security purchases has been recognized frequently since the passage of the Securities Act."). Lewis v. Walston & Co., 487 F.2d 617, 621 (5th Cir. 1973); Securities and Exchange Commission v. Manor Nursing Centers, 458 F.2d 1082, 1098 (2nd Cir. 1972); Miller v. Thane, 519 F.3d 879, 886 (9th Cir. 2008). To successfully bring a section 12(a)(2) claim, bondholders must show that there, (1) was an offer or sale of a security, (2) through interstate commerce, (3) using a prospectus or oral communication, and (4) that the prospectus included an untrue statement of material fact or failed to state a material fact that was necessary to make the statement not misleading. Miller, 510 F.3d at 885. Cornerstone bondholders will likely meet all four requirements, shifting the burden of proof to the broker-dealers.

The Securities Act provides that, "No action shall be maintained to enforce any liability created under section 11 or section 12(a)(2) unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, or, if the action is to enforce a liability created under section 12(a)(1), unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to enforce a liability created under section 11 or section 12(a)(1) more than three years after the security was bona fide offered to the public, or under section 12(a)(2) more than three years after the sale." 15 U.S..C. § 77m.

Officers and Directors of Cornerstone

Under O.C.G.A. §§ 14-2-830 and 14-2-842, officers and directors owe a duty of good faith and due care and are required to act "with undivided loyalty" in the best interests of the corporation. See, Super Valu Stores, Inc. v. First Nat’l. Bank of Columbus, 463 F. Supp. 1183, 1194 (N.D. Ga. 1979); In re: Corporate Jet Aviation, 45 B.R. 629, 638 (N. D. Bankr. 1985). Officers and directors of a company must only take action based "on an informed basis, in good faith, and in the honest belief that the action taken was in the best interest of the company." In re: Intercat, Inc., 247 B.R. 911, 923 (S.D. Ga. 2000). Corporate officers and directors violate fiduciary duties owed to the corporation when they appropriate a business opportunity rightfully owed to the corporation. See, Southeast Consultants v. McCrary Engineering Corp., 246 Ga. 503, 507-10 (1980); Mau, Inc. v. Human Technologies, 274 Ga. App. 891, 894 (2005) (citing Southeast). A legal doctrine called the "business judgment rule" protects corporate officers and directors from liability for decisions they make in good faith. Officers and directors can, however, by their actions or inactions, lose that protection.

While shareholders or creditors must ordinarily make demand on the corporate directors to commence the lawsuit to recover from the offending directors before pursuing a derivative action, they may avoid such a demand if they can show the futility of such a demand for reasons including control of the board by one of the offending directors. In re: Friedman, Inc, 386 F. Supp. 2d 1355, 1361 (N.D. Ga. 2005). Courts have held that self-dealing by directors can negate application of the business judgment rule or, at least, shift the burden of proof to the defendant director. HMG/Courtland Properties, Inc. v. Gray, 749 A.2d 94 (Del. Ch. 1999). Likewise, "[d]irectors that appear on both sides of a transaction, derive personal benefit from the transaction, or fail to inform themselves of all material information available to them" will not be able to hide behind the business judgment rule. In re: Intercat, Inc., 247 B.R. 911, 923 (S.D. Ga. 2000). Some, if not all, of Cornerstone’s officers and directors – in light of the evidence outlined below – may, therefore, have lost the benefit of the business judgment rule.

Derivative Claims

Ordinarily, corporate shareholders may bring actions against corporate officers and directors only in a "derivative action" on behalf of the corporation, rather than for themselves individually. Phoenix Airlines Services, Inc. v. Metro Airlines, Inc. et al., 397 S.E. 2d 699, 701 (Ga. 1990). Actions for breach of fiduciary duty, actions to recover for misappropriation of corporate opportunity, and actions for mismanagement, must, ordinarily, be pursued as derivative actions. Where a corporation is insolvent, creditors, rather than shareholders, are the proper constituency to pursue derivative actions. Production Resources Group, L.L.C. v. NCT Group, Inc., et al., 863 A.2d 772, 794 (Del. Ch. 2004).

Direct Actions

Section 11 of the Securities Act of 1933 ("Securities Act") 15 U.S.C. § 77k provides for civil liability of any director of a company that sells securities pursuant to a registration statement that includes material misrepresentations or omits material information.15 Section 11 is a strict liability provision and purchasers of securities can, therefore, recover even for "innocent" misstatements or omissions in registration statements. See Krim v. BancTexas Group, 989 F.2d 1435 (5th Cir. 1993) (defining a material fact as one which a reasonable investor would consider significant in making the decision whether to invest). Every Cornerstone director, serving when the company issued a registration statement including a material misrepresentation or omission, may face liability under section 11 of the Securities Act (15 U.S.C. § 77k). See, Carlon v. NationsMart, 130 F.3d 309, 315 (8th Cir. 1997) (citing Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983)). To successfully bring claims under section 11 of the Securities Act, bondholders must show that the prospectus: (1) contained an untrue statement of a material fact, (2) omitted to state a material fact required to be stated therein, or (3) omitted to state a material fact necessary to make the statements therein not misleading. 15 U.S.C.. § 77k. In order to survive a motion to dismiss on these claims, the bondholders must establish that the prospectus had a material misrepresentation or omission on the date it was issued.