A Los Angeles federal judge last week ordered the former CEO of Brookstreet Securities Corp. to pay a maximum $10 million penalty in a securities fraud case related to the financial crisis.
The SEC litigated the case in December 2009 when the agency charged Stanley C. Brooks and Brookstreet, the now defunct Irvine, Calif.-based securities firm, with fraud for systematically selling risky mortgage-backed securities to customers with conservative investment goals.
Brookstreet and Brooks devised a program where 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 the securities were unsuitable. Brooks and the firm continued to promote and sell risky CMOs even after receiving numerous warnings that they were dangerous investments that could become worthless overnight. The fraud caused severe investor losses and eventually caused the firm to collapse.
On Feb. 23, the Honorable David O. Carter in federal court in Los Angeles granted summary judgment in favor of the SEC, finding Brookstreet and Brooks liable for violating sections of the Securities Exchange Act. The court entered a final judgment in the case on March 2 and ordered the financial penalty sought by the SEC.
"Brooks' aggressive promotion and sale of risky mortgage products to seniors and other risk-averse investors deserves the maximum penalty possible, and that is what he got," said Robert Khuzami, director of the SEC's division of enforcement. "Those who direct such exploitative practices from the boardroom will be held personally accountable and face severe consequences for their egregious actions."
"The CMOs that Brookstreet sold its customers were among the most risky of all mortgage-backed securities," said Rosalind Tyson, director of the SEC's Los Angeles regional office. "This judgment highlights the responsibility of brokerage firm principals to ensure the suitability of the securities they sell to customers."
In addition to the $10 million penalty, Brooks was ordered by the court to pay $110,713.31 in disgorgement and prejudgment interest.
The SEC is awaiting a court decision in a separate Brookstreet-related enforcement action filed in federal court in Florida. In this case the SEC charged 10 former Brookstreet registered representatives with making misrepresentations to investors in the purchases and sales of risky CMOs. Two representatives settled the charges, and the SEC tried the case against the remaining eight representatives last October.