Texas Moves to Crack Down on Houston Bond Brokers : Finance: The action against Government Securities came after complaints from buyers.

Regulators are moving to rid Houston of bond brokers suspected of fraudulently selling securities to cities, schools and small investors nationwide.

The state this week sued a Houston firm, Government Securities Corp., seeking to bar GSC and five of its employees from doing business in Texas.

The suit alleges that GSC inflated the price and misrepresented the risk of money-losing mortgage securities.

Texas is also seeking $10 million in restitution on behalf of several investors who lost money on mortgage-backed bonds they bought from GSC.

GSC Executive Vice President Frank Klaus said this week that although he had not seen the suit, he did not believe the firm misrepresented the risks of the mortgage bonds it sold.

Klaus was not named as a defendant in the suit.

The regulatory move comes after repeated complaints from buyers who said they were not warned about the inherent perils of buying such securities.

In Ohio alone, 15 school districts, cities, and other local agencies have lost more than $18 million on mortgage derivative investments, mostly purchased from Houston firms.

Houston firms had no link to the Orange County, Calif., fiscal debacle, but the county’s bankruptcy has helped focus regulatory attention on suspect bond deals.

“I’m very concerned about the reputation of the industry in this state,” said Denise Voigt Crawford, the Texas securities commissioner.

Regulators are also pursuing a handful of other Houston-based firms that sold money-losing securities in the last few years to Native American tribal groups, school districts, religious organizations and even a funeral home.

Investors and competitors refer to the Houston firms as “bond daddies” because of their ability to persuade unsophisticated investors to buy some of the most complicated and risky securities available in the credit markets.