December 8, 2009 / 7:54 PM / 10 years ago

UPDATE 3-U.S. SEC charges Brookstreet, CEO with fraud

* SEC says promoted risky CMOs to retirees, others

* Lawyer for firm, CEO blames Brookstreet’s clearinghouse (Adds Fidelity Investments comment)

WASHINGTON, Dec 8 (Reuters) - U.S. securities regulators charged Brookstreet Securities Corp and its former President and Chief Executive, Stanley Brooks, with fraud on Tuesday for promoting risky mortgage-backed securities to retirees and other customers of the now defunct brokerage.

The Securities and Exchange Commission alleged the Irvine, California-based company’s registered representatives sold collateralized mortgage obligations, or CMOs, to more than 1,000 customers, even though traders at Brookstreet warned they were dangerous, illiquid and inappropriate for retail investors.

“These were complex mortgage derivative securities with byzantine pricing, valuation and trading characteristics,” Robert Khuzami, director of the SEC’s Division of Enforcement, said in a statement. “Selling them to retirees and conservative investors was profoundly and egregiously wrong.”

The suit filed in federal court in California seeks disgorgement and other penalties.

The SEC previously accused 10 Brookstreet registered representatives of making misrepresentations to investors in connection with the CMOs.

Brookstreet collapsed in June 2007 after failing to meet margin calls on the CMOs. The firm had about 600 registered representatives and advisers.

Thomas Fehn, an attorney for Brookstreet and Brooks, said the SEC action was misguided and blamed Brookstreet’s clearing broker, the National Financial unit of Fidelity Investments.

“The villain here is not Brookstreet,” he said.

A spokesman for Fidelity Investments, Vin Loporchio, said the SEC complaint spoke for itself.

The SEC’s Brookstreet action comes a day after the agency charged three former executives of now-bankrupt New Century Financial Corp with fraud. The SEC accused the three of trying to hide the company’s deteriorating financial performance, linked to subprime mortgage defaults, from investors while releasing weekly internal reports entitled “Storm Watch.” [ID:nN07172880]

Brooks founded Brookstreet in 1990. The broker-dealer closed its doors after its clearing broker made heavy markdowns in the value of CMOs held in margin accounts, according to Brookstreet.

The case is Securities and Exchange Commission v. Brookstreet Securities Corp. and Stanley C. Brooks, U.S. District Court, Central District of California. (Reporting by Dan Margolies; editing by Tim Dobbyn and Andre Grenon)

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