SEC sues Brookstreet Securities and its founder over sale of high-risk instruments
Federal regulators sued Irvine brokerage Brookstreet Securities Corp. and its founder Tuesday, accusing them of systematically selling high-risk mortgage securities to customers with conservative investment goals.
Brookstreet and its chief executive, Stanley C. Brooks, allegedly developed a program that offered the mortgage investments to more than 1,000 retirees and others for whom they were unsuitable, according to the lawsuit filed by the Securities and Exchange Commission.
Through his attorney, Brooks denied wrongdoing and said he would contest the allegations.
The SEC said Brookstreet promoted and sold the securities to retail investors even after Brooks received numerous indications and personal warnings that they were dangerous. “Selling them to retirees and conservative investors was profoundly and egregiously wrong,” said Robert Khuzami, the SEC’s director of enforcement.
The lawsuit, filed in U.S. District Court in Santa Ana, said Brookstreet customers invested about $300 million from 2004 through half of 2007 in the collateralized mortgage obligations, or CMOs -- bonds backed by flows of payments on pools of loans.
It said losses totaled more than $36 million. Some investors not only lost everything, the SEC said, but also ended up owing money because they had taken out loans to buy the CMOs.
Brookstreet, founded in 1990, operated through a nationwide network of hundreds of brokers, many of whom worked from their homes.
As the firm collapsed in June 2007, one of the brokers told The Times that a Brookstreet bond division had set up a website allowing wealthy investors to buy the securities on margin; that is, by using borrowed money. The broker said the site allowed investors to purchase CMOs with as little as 10% down and the remaining 90% borrowed, rather than the 50% down that is typically required on such margin accounts.
Brooks’ attorney, H. Thomas Fehn of Los Angeles, said the company had instructed its brokers to provide the investors with written warnings that the CMOs were appropriate only for those able to take high risks. Fehn attributed the losses to the failure of a trade-processing firm to screen investors properly and reject high-margin transactions.
Fehn said the lawsuit was filled with mischaracterizations. Last May, the SEC sued 10 of Brookstreet’s brokers, alleging that they made millions of dollars at the expense of retirees by misrepresenting complex and illiquid mortgage investments as safe and suitable for conservative investors.
The brokers have denied those accusations. The suit, filed in federal court in West Palm Beach, Fla., is pending.
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