10 brokers hit with SEC fraud lawsuit
Alleging that 10 brokers made millions of dollars at the expense of retirees, federal regulators accused them Thursday of misrepresenting complex and illiquid mortgage investments as safe and suitable for conservative investors.
The Securities and Exchange Commission, in a civil fraud lawsuit filed in West Palm Beach, Fla., federal court, said the brokers worked for Brookstreet Securities Corp. of Irvine, which went out of business in 2007. More than 600 independent brokers nationwide had represented the firm.
The suit contends that the brokers did not clearly define the risks to customers before investing their money in high-risk, collateralized mortgage obligations, or CMOs.
“These brokers took customers primarily interested in protecting their money and pushed them into risky derivative investments through blatant misrepresentations,” said a statement from Rosalind R. Tyson, director of the SEC’s Los Angeles regional office.
In a parallel civil complaint, also filed Thursday in West Palm Beach federal court, the securities industry’s self-regulatory arm accused six brokers formerly associated with Brookstreet of fraud and making unsuitable recommendations to retail customers.
The complaint by the Financial Industry Regulatory Authority alleged that the brokers sold CMOs that they did not understand themselves.
The defendants in the SEC case are accused of portraying particularly risky types of CMOs as secure investments, allegedly defrauding more than 750 customers who lost more than $36 million. The 10 brokers received $18 million in commissions and salaries from their customers’ investments in CMOs, the SEC said.
Defense attorneys said the brokers named in the complaints would contest the accusations. H. Thomas Fehn of Los Angeles, a lawyer representing Russell M. Kautz of Medford, Ore., said that despite being described as high-risk, most of the CMOs had continued to pay interest.
The losses, Fehn said, were caused when the credit crunch struck in 2007, resulting in margin calls for additional cash to back up the securities purchased with borrowed money.
“It was the same problem that brought down Lehman Bros. and Bear Stearns,” he said, adding that none of the defendants, nor any regulators, had been able to see the meltdown coming.
Attorney Gary Victor Dubin of Honolulu, representing broker Travis A. Branch of Kailua, Hawaii, said his client also denied wrongdoing. Branch believed so much in the CMOs that he and his family invested heavily in them and lost $1 million, Dubin said.
“The government is looking for scapegoats here,” he said.
Robert N. Gest Jr. of Fort Lauderdale, Fla., denied any personal wrongdoing, saying he and the others had used Brookstreet’s descriptions of the CMOs in marketing them to clients.
“All the documents said they were triple-A-rated,” Gest said, “with the primary goal of preservation of capital and income. I trusted the company to do their due diligence.”
The SEC complaint names as defendants Florida residents William Betta Jr., James J. Caprio, Troy L. Gagliardi, Barry M. Kornfeld, Clifford A. Popper, Alfred B. Rubin and Steven I. Shrago. Additional defendants are Branch, Kautz and Shane A. McCann of Florence, Mont.
The Financial Industry Regulatory Authority complaint names Gest; Thomas J. Brough and Jonathan J. Sheinkop of Chicago; Kevin M. Browne, who worked in Northern California; Eric R. Elliott of Fort Lauderdale; and Brian J. Falabella of Long Island, N.Y.
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