Ruling May Aid Cheated Retirees

Max B. Baker, Star-Telegram Staff Writer For the McGees, it was going to be the golden years.

W.C. and Rose McGee worked hard all their lives, raised five children and socked away what money they could for retirement.

Then W.C. McGee got sick, so sick he was put on dialysis. In the past five months, he has had five surgeries, including a heart bypass. W.C. and Rose McGee, 70 and 65, need their life savings now more than ever.

The only hitch is that most of their money disappeared in a fraudulent investment scheme.

But this week, a Fort Worth appeals court ruled that a Waco trust company owes the McGees, and more than 60 other retirees, almost $7 million in damages because they were defrauded by broker Norman Cornelius in the 1990s.

The 2nd Court of Appeals agreed with a jury verdict in 2000 that Sterling Trust Co. didn't do enough to protect the investments of Cornelius' clients. However, the court eliminated a $250,000 judgment for punitive damages.

"I'm so ecstatic. I just heard about it. Words can't express how I feel," Rose McGee said. "It is something that we have been praying for."

Donald Herrmann, a Fort Worth attorney representing Sterling, said his clients have "a great deal of sympathy for the plaintiffs" and conceded that they had been duped by Cornelius, who died in 1999.

But Herrmann said Sterling Trust is considering whether to ask the appeals court to rehear the case or to file an appeal with the Texas Supreme Court.

"We didn't think the trial court decision was correct, and our opinion hasn't changed," Herrmann said. "We were disappointed, and we had hoped for a reversal of the entire [trial court] judgment."

The suit against Sterling and Cornelius was filed in 1997 and involved 69 investors who lost $4 million that they put into Avalon, a real estate company that Cornelius operated while working for the Sunpoint Securities brokerage firm.

Avalon built homes in places such as Fort Worth's posh Mira Vista development and in Southlake, North Richland Hills, Hurst and Arlington.

Investors said they didn't know their money was at risk until the Securities and Exchange Commission sued Cornelius in 1997, accusing him of selling unregistered securities and improperly mixing investment funds.

Cornelius' operation was essentially a Ponzi scheme, in which earlier investors are paid off with money put up by later investors.

Cornelius persuaded the McGees and others to invest their savings and retirement funds in return for promissory notes or company stock.

The SEC eventually forced Cornelius' companies into receivership in 1997 and Sunpoint into receivership in 1999.

Because Cornelius was investing money from IRAs or lump-sum pension distributions, he had to get a third-party trustee like Sterling involved so the investments could maintain their tax-qualified status.

The jury found that while Sterling might not have known about everything that was going on, it aided and abetted Cornelius in committing securities fraud and breached its fiduciary duty to investors.

The jury awarded the retirees $6.7 million in actual damages and $250,000 in punitive damages.

Because Sterling appealed the verdict, the McGees and others have not been able to recoup their losses, said Rickey Brantley of Fort Worth, the plaintiffs' attorney.

Some of the plaintiffs died not knowing whether their money was lost forever.

"I've been to five funerals," Brantley said. "It is not a great windfall; they've been without their money for years now."

Donna Rains said her father, Buck Pigg, died in February at 71 after losing $130,000 of his pension money in Cornelius' con game. Constantly worried about his finances, he had mowed yards for extra money.

"My mom was glad to hear they won the appeal but really wishes it could have happened earlier so my dad could have enjoyed it instead of worrying about it," she said.

In a 26-page opinion release Thursday, appeals court Chief Justice John Cayce wrote a synopsis of the case in which he largely agreed with the trial court's decisions.

" Sterling knew that Cornelius was on both sides of the transaction, acting as the investment counselor and owning the companies in which he advised [clients] to invest," Cayce wrote.

Sterling also knew that Cornelius was commingling funds between the companies despite its duty to keep the funds segregated, which the company's own expert called a "classic warning" of a Ponzi scheme, Cayce said.

Sterling had even written, but failed to follow, rules for holding and handling securities to protect the beneficiaries, Cayce wrote.

He said the court was denying the plaintiffs punitive damages because they collected the $6.7 million under violations of the Texas Securities Act and the punitive award under other statutes because the company simply failed to honor its duty to account holders.

Brantley said he hopes the thoroughness of Cayce's opinion will discourage Sterling from appealing.

"It's been a hardship on these folks," Brantley said.

Rose McGee said she and her husband lost about $125,000, most of it from pension funds her husband got after working at Mrs Baird's Bakeries for more than 40 years. They now live off Social Security.

"We thought we'd be able to travel some," Rose McGee said. "We spoke about going on a cruise or something -- none of that ever came to pass."

Still, she said her husband keeps a positive attitude and waits for the day that their money is returned.

Copyright 2003 Star-Telegram, Inc.
Record Number: 11174766