Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, December 8, 2009

SEC Charges Brookstreet Securities and CEO with Unsuitable Sales of CMOs

The SEC today charged 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. 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 previously charged 10 Brookstreet registered representatives with making misrepresentations to investors related to the sale of risky CMOs.

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