Court Finds Two Brokers Liable for Fraud Involving Mortgage Backed Securities
Litigation Release No. 24112 / April 13, 2018
Securities and Exchange Commission v. William Betta, Jr., Travis A. Branch, James J. Caprio, Troy L. Gagliardi, Russell M. Kautz, Barry M. Kornfeld, Shane A. McCann, Clifford A. Popper, Alfred B. Rubin, and Steven I. Shrago, Case No. 09-80803-CIV-MARRA (United States District Court for the Southern District of Florida)
The Securities and Exchange Commission announced that on March 29, 2018, Judge Kenneth A. Marra of the United States District Court for the Southern District of Florida issued a final judgment in a bench trial conducted in 2011 against eight former Brookstreet Securities Corp. brokers. The SEC had alleged that the brokers committed fraud related to their sale of Collateralized Mortgage Obligations ("CMOs"), which are created from mortgage backed securities. The SEC's complaint alleged that the brokers misrepresented the CMOs to their customers as safe, secure, liquid investments that guaranteed by the United States government and suitable for retirees, retirement accounts, and investors with conservative investment goals. In fact, according to the complaint, many of the CMOs purchased for Brookstreet customer accounts carried no government backing, were largely illiquid, and were only suitable for sophisticated investors with a high-risk investment profile.
The court ruled in the SEC's favor against two of the brokers, William Betta, Jr. and Travis A. Branch, and issued an injunction permanently restraining them from violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The court declined to impose civil penalties, but retained jurisdiction to conduct further proceedings to determine the amount of disgorgement against Betta and Branch. The court also issued final judgments in favor of defendants Troy L. Gagliardi, Alfred B. Rubin, Steven I. Shrago, Russell M. Kautz, and Shane A. McCann. Clifford Popper, the Brookstreet broker who selected the CMOs for Brookstreet investor accounts, died after trial and before the judgment was issued.
Before trial, Barry M. Kornfeld and James J. Caprio, two brokers who worked with Popper in Brookstreet's Boca Raton office, had reached settlements with the SEC, which resulted in them being permanently enjoined from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder. Pursuant to his settlement, Caprio disgorged $81,673, paid $130,000 in civil penalties, and agreed to be barred from associating with any broker, dealer, or investment adviser for a period of ten years. Kornfeld entered into a bifurcated settlement in which he agreed to be barred from barred from associating with any broker, dealer, or investment adviser, with monetary relief to be determined at a later date.
The SEC's investigation was conducted by Morgan B. Ward Doran, DoHoang T. Duong, and Rabia Cebeci. The SEC's trial team included Mr. Ward Doran, Ms. Duong, and Ramy Kassabgui.