SEC Charges Brookstreet Securities With Defrauding Customers

The Securities and Exchange Commission (SEC) has charged Irvine, Calif.-based Brookstreet Securities Corp. and its president and CEO, Stanley C. Brooks, with fraud for systematically selling risky mortgage-backed securities to customers with conservative investment goals.

The fraud cost many Brookstreet investors their savings, homes, or retirement cushions, and eventually caused the firm to collapse, the SEC says.

The SEC alleges that Brookstreet and Brooks developed an internal program through which the firm's registered representatives sold particularly risky and illiquid types of collateralized mortgage obligations (CMOs) to more than 1,000 seniors, retirees, and others for whom they were unsuitable.

The SEC further alleges that Brookstreet continued to promote and sell risky CMOs to retail investors even after Brooks received numerous indications and personal warnings that these were ‘dangerous’ investments that could become worthless overnight.

Finally, in a last-ditch effort to save Brookstreet from failing during the financial crisis, Brooks allegedly directed the unauthorized sale of CMOs from Brookstreet customers' cash-only accounts, causing substantial investor losses, the SEC says.

‘These were complex mortgage derivative securities with byzantine pricing, valuation and trading characteristics,’ says Robert Khuzami, director of the SEC's division of enforcement. ‘Selling them to retirees and conservative investors was profoundly and egregiously wrong.’

According to the SEC's complaint, filed in federal district court in Santa Ana, Calif., Brookstreet customers invested approximately $300 million through the firm's CMO program between 2004 and 2007. The SEC alleges that Brooks knew, or was reckless in not knowing, that Brookstreet and its registered representatives were selling unsuitable CMOs to retail customers.

SOURCE: Securities and Exchange Commission


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