Investors Say a Trust Company Shares Blame for Their Losses

Linda P. Campbell, Star-Telegram As Sadye Barbee tells it, she and her late husband put $490,000 of their savings into Norman Cornelius' companies after he "told us his dream of building nice quality homes."

They didn't count on losing it all.

Nor did Buck Pigg, who gave $130,000 of his retirement payment from Mrs Baird's bakery to Cornelius and told him to "do the best he could with it."

James E. Hill asked Cornelius to split his $120,000 retirement check from Mrs Baird's into two low-risk investments. About $70,000 of it ended up in Cornelius' real estate development companies jointly known as Avalon.

These clients, and hundreds of others, didn't learn that their Avalon investments were at great risk until the Securities and Exchange Commission sued Cornelius in 1997, accusing him of selling fake securities and misusing investors' money.

Their money had been spent, they were told. No returns were forthcoming.

Cornelius, who denied violating any laws when the SEC made its allegations, died nearly a year ago. A court-appointed receiver has been selling Avalon's property.

Now, investors are suing the trust company that held their accounts, hoping to recoup some of their losses. The defendant, Waco-based Sterling Trust Co., insists that it knew nothing about Cornelius' shenanigans and that it bears no responsibility.

Since the start of March, about two dozen retirees who invested with Cornelius have filled the seats of 236th State District Court in downtown Fort Worth. Several wear hearing aids; one walks with a cane. Many have learned to bring cushions for comfort as they sit through hours of testimony.

"I was always a happy person and fun person, always in the middle of the practical jokes," Barbee, 79, who lives in Granbury, testified. "All the fun has been taken out of my life."

The testimony indicates that Cornelius took in all sorts of investors at his office on Merrimac Circle, a quiet commercial area that overlooks the Trinity River near Forest Park and the Fort Worth Zoo.

They included maintenance workers at Mrs Baird's, who recommended the broker to friends as they neared retirement. One of them was Pigg, 68, who said he completed the third grade and doesn't read or write.

Cornelius also won over Marjorie McDonald, 75, a nurse, and her husband, Arthur, who has a master's degree in electrical engineering.

The clients, from around Tarrant County and beyond, put their money into a group of Avalon ventures that were buying property and building homes in places such as Fort Worth's posh Mira Vista development and in Southlake, North Richland Hills, Hurst and Arlington.

The investors were promised interest payments at rates from 10 to 18 percent, according to court documents and testimony.

Although a former Avalon employee warned investors as far back as 1992 that Cornelius' business practices seemed suspect, his clients dismissed the accusations and believed Cornelius' assurances.

But the SEC's 1997 suit against Cornelius claimed that he was selling unregistered securities, improperly mixing funds from his various companies and diverting investors' money to personal use.

In court papers filed at the time, Cornelius denied the allegations and denied violating the Securities Act.

Now, the clients say they believe Cornelius swindled them. The 69 plaintiffs in the suit say they collectively lost $7 million.

The 12-member jury must decide whether Sterling Trust, which held accounts for more than half the plaintiffs from 1994 to 1997, can be held responsible for the losses.

Sterling's role is hotly disputed.

The plaintiffs say Sterling was so closely aligned with Cornelius that some investors believed that he worked for the trust company or was its direct representative.

"They were his back door," argued Tom Farrier, one of the plaintiffs' lawyers, during opening statements in the trial.

Sterling insists that it neither employed Cornelius nor controlled his actions.

"There's no evidence that Sterling Trust Co. ever authorized Norman Cornelius to recommend any Avalon investments," Jacob Marshall, a lawyer for the trust company, said during opening statements.

"We don't control what the broker says," Marshall said. "If they are recommending us to their clients, we are glad of that. ... But it doesn't mean that Norman Cornelius or any other broker is our agent."

The plaintiffs also argue that Sterling should have warned the investors about the risks of investing in "highly speculative start-up entities" like Avalon.

Several retirees testified that Cornelius had them sign account agreements without showing them the details, and that Sterling never sent them full follow-up copies of the documents.

Sterling insists that it wasn't responsible for warning investors or investigating the viability of their investments.

Kelli Click, a Sterling vice president, testified that the company didn't review the wisdom or legitimacy of investors' choices, but only made sure that the paperwork was manageable - that the trust wasn't being asked to hold an airplane or an emu, for instance.

Click said the company made clear in its account agreements that " Sterling didn't give investment advice."

Marshall said, "Sterling Trust Co. performed the services that it promised to perform, and it didn't violate any of the duties that it had in performing those services."

"Sterling did not know and Sterling did not have information that reasonably would lead them to believe anything was going on, much less that he was stealing $7 million," said Marshall, who is representing the company along with Elizabeth Kellow and Brent Brown.

But Farrier told jurors they would "have to decide whether they [ Sterling] made clear the limitations on their duties."

He said the fundamental issue is whether Sterling officials significantly assisted Cornelius and "were they on notice of facts showing something was wrong."

"We believe they clearly did and they clearly were," said Farrier, who is representing the plaintiffs along with Rickey Brantley.

While some plaintiffs had money left after Avalon, others said they lost their entire savings and are living on Social Security. Several have health problems that prevent them from working.

Martha Pigg testified that Cornelius told her and her husband "we'd live off the interest and the money would be there for our children when we were gone." Instead, they're living on Social Security.

Marjorie McDonald said her husband has many ailments, including diabetes, high blood pressure, heart problems and Parkinson's disease. But she said she can't afford to hire someone to help care for him.

Barbee said she had to sell her house and move into an apartment.

Plaintiff testimony is continuing before state District Judge Tom Lowe.

The SEC settled its federal court suit against Cornelius in 1998. He did not admit wrongdoing, but was permanently barred from selling securities.

U.S. District Judge Terry Means also ordered a payment totaling about $795,000 with interest, but waived it because of Cornelius' inability to pay, according to the court file.

Most of Avalon's properties have been sold by a court-appointed receiver, Fort Worth lawyer Melody Wilkinson. The money will go to Avalon's creditors, including investors, but those payments will be "extremely nominal," Wilkinson said.

Copyright 2000 Star-Telegram, Inc.
Record Number: 1018191