POLSON — The scope of the alleged securities fraud scheme involving Polson business Cornerstone Financial Corporation exploded last week,  as partner/owners and Polson residents Keith Kovick and Robert Congdon were named in the legal action documents for their alleged involvement in what could become the largest Ponzi scheme in Montana state history.

Action filed by Montana State Auditor and Commissioner of Securities Monica Lindeen’s office is alleging two companies, under the pair, committed a securities fraud in the form of a Ponzi scheme that involved at least 100 investors, with investments totaling more than $14.4 million on 181 unregistered securities.

From Libby, to Bigfork and across Lake County, the number of affected investors from the Northwest, now holding defaulted notes and looking back in shock at millions of dollars lost, has continued to grow since the news of a potential securities fraud scheme broke in early March. Details from the 37-page action  now show a wide-reaching net of close to 20 investments that were allegedly misrepresented in a variety of ways by Kovick and Congdon.

“A vast majority (of investors), at least 90 percent, live in the couple county area, Lake and Flathead,” deputy Securities Commissioner Lynne Egan said in an interview on Friday.

Some investors put up as little as $11,000, others put millions into the scheme, she said. The scam does have the potential to devastate area residents involved, Egan said. 

Both Cornerstone Financial Corporation and K and B Investments LLC , along with Kovick and Congdon as individuals, are named on the filed state Securities Department notice of proposed disciplinary action as “unregistered broker-dealer and securities issuer(s).”

Included in the department’s action is a list of seven Montana Securities Act fraud provision violations allegedly committed by Kovick and Congdon. These violations include allegations that the company commingled investor funds with Cornerstone’s operating funds rather than escrowing investor funds as promised, and the company’s alleged failure to disclose to investors how the proceeds of their investments would be used.

The paper service on Wednesday begins a 15 period of which the men have to request a hearing on the findings.

The Cornerstone office in the middle of downtown Polson has remained dark since the news of the pair’s involvement in the alleged scheme in early March.

A Ponzi scheme, like the billion-dollar “Madoff scandal” making national headlines recently, involves an unsustainable cycle where earlier investors are paid with funds given by subsequent investors.

“When you don’t have new money your scheme collapses, and that’s what happened here,” Egan said

In the fall of 2008, Egan said, poor economic times dried up new investors and prior investors began to see late payments trickle to nothing.

The department received its first complaint of defaulted notes from Cornerstone investors in September 2008.

Beginning in November 2008, the action document states, the department began receiving additional complaints from Cornerstone investors as the Ponzi scheme collapsed.

“By November 2008, Kovick and Congdon stopped making payments to investors because the new stream of investors in Cornerstone’s notes had ceased. If Kovick and Congdon had funds to pay investors at this time, it was sporadic, payments were 2-3 months late and many of the checks written to investors were returned ‘NSF,’” the action document said. Investors have since continued to step forward with complaints.

The company was pleading a 15 percent average rate of return, Lindeen said. That’s seven times the rate of bank returns, and taking a huge risk, she said.

The Auditor’s office is seeking fines and restitution, and Montana law allows fines to be stacked, Lindeen said.

In Montana, Ponzi scheme fines can run at $10,000 per violation, with other Securities Act violations carrying a $5,000 fines. With 100 investors and 181 unregistered securities, “the math could be staggering with the fines,” Lindeen said. On top of the restitution for investors, which Lindeen said is a priority, the fines could add millions and millions of dollars.

In early March, the Auditor’s office issued a temporary restraining order to the pair as it investigated the company for scamming millions of dollars from Montana seniors. The order restricts the corporation from selling assets and property. At that phase of the investigation, the Auditor’s office had determined Cornerstone loaned $3 million of investors funds to D and D Property Management. The featured tracts of land used in that deal to secure investors promissory notes were allegedly misrepresented.

D and D owners were named in the initial restraining order, but officials with the Auditor’s office would not comment on the status of its investigation into D and D’s involvement in Wednesday’s actions. The particular investment is listed among the other 37 pages of the action and investigated investments.

The action states that the property involved in the D and D deal is in foreclosure and the investors are not receiving monthly interest payments, and have not received a return of their principal.

The hearing pertaining to the assets restraining order is scheduled for 9 a.m. on June 8 at the Lewis and Clark County District Court.

Although the action filed this week is purely administrative, Lindeen said the investigation is ongoing. The department may find it pertinent to recommend criminal charges to the county attorney or federal agencies as it continues.