U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21328 / December 8, 2009
SECURITIES AND EXCHANGE COMMISSION v. BROOKSTREET SECURITIES CORP., Civil Action No. SACV 09-01431 DOC (ANx) (C.D. Cal.)
SEC CHARGES CALIFORNIA FIRM AND CEO WITH DEFRAUDING CUSTOMERS IN SALES OF RISKY MORTGAGE-BACKED SECURITIES
The Securities and Exchange Commission today 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 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. One trader even called Brookstreet’s program a “scam.” Finally, in a last-ditch effort to save Brookstreet from failing during the financial crisis, Brooks directed the unauthorized sale of CMOs from Brookstreet customers’ cash-only accounts, causing substantial investor losses.
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.
The SEC’s complaint specifically alleges that the defendants violated the antifraud provisions of Section 17(a) of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 thereunder. The Commission seeks permanent injunctive relief against both defendants, and disgorgement of ill-gotten gains with prejudgment interest, and financial penalties against Brooks.
The SEC previously charged 10 Brookstreet registered representatives with making misrepresentations to investors related to the sale of risky CMOs.
For additional information, see Litigation Release No. 21061 (May 28, 2009).