SEC Charges Five Brokers with Fraud in Sales of Unsuitable Securities Funded Through Subprime Mortgage Refinancings
FOR IMMEDIATE RELEASE
Washington, D.C., Oct. 3, 2008 — The Securities and Exchange Commission today charged five Los Angeles-area brokers with securities fraud, alleging that they put their customers at risk by refinancing their homes with subprime mortgages that they could not afford in order to fraudulently sell them unsuitable securities. The SEC alleges that the five registered representatives, who worked for World Group Securities Inc., paid themselves high commissions on both the subprime mortgages and the securities purchases. The customers generally were of modest means, had little prior investment experience, and had little or no formal education beyond high school. Some of the investors did not speak English fluently or at all.
The SEC alleges that Guillermo Haro, Kederio Ainsworth, Jesus Gutierrez, Gabriel Paredes and Angel Romo sold unsuitable securities to customers, primarily variable universal life policies (VUL). Most investors who bought these securities lacked the cash or income to do so, but were urged by their brokers to raise the money to pay for the purchases and the monthly payments required for these products by refinancing their fixed-rate mortgages into subprime adjustable-rate negative amortization mortgages.
“This case demonstrates the SEC’s commitment to halting fraudulent sales practices by brokers and others in the securities industry,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “At a time when investors were already losing their homes in record numbers, the SEC alleges that these brokers pushed their customers into risky and unsustainable subprime mortgages as a means of financing a fraud. Not only was the whole scheme fraudulent, but the brokers profited by charging commissions at each stage. The SEC will relentlessly pursue unscrupulous brokers and other securities industry professionals who seek to line their own pockets at their customers’ expense.”
Ken Israel, Director of the SEC’s Salt Lake Regional Office, said, “The defendants’ willingness to take advantage of their customers’ lack of sophistication to fraudulently sell them unsuitable securities products and expose them to possible loss of their homes is egregious misconduct that will not be tolerated by the Commission.”
According to the SEC’s complaint, filed in federal district court in Los Angeles, each defendant was a mortgage broker as well as a registered representative and collected compensation from the mortgage refinancings as well as the sales of securities. In making the sales, the brokers allegedly misrepresented the expected returns from the securities, the liquidity of VULs, the nature of the VULs, and the terms of the new mortgages while failing to disclose material facts about the products. The defendants also allegedly falsified client account forms and order tickets relating to the securities sales.
The SEC’s complaint charges Haro, Ainsworth, Gutierrez, Paredes and Romo with violating the antifraud provisions of the Securities Act of 1933, and the Securities Exchange Act of 1934, and aiding and abetting violations of the broker-dealer books and records provisions of the Securities Exchange Act. The SEC seeks injunctions, disgorgement, and financial penalties.
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For more information, contact:
Kenneth D. Israel
Karen L. Martinez