Securities Law Prof Blog

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

Friday, March 2, 2012

Former Brookstreet Ordered to Pay $10 Million Penalty for CMO Fraud

The SEC announced that a federal judge in Los Angeles has ordered Stanley C. Brooks, the former CEO of Brookstreet Securities Corp., to pay a $10 million penalty in a securities fraud case related to the financial crisis.

The SEC charged Brooks and Brookstreet with fraud for systematically selling risky mortgage-backed securities to customers with conservative investment goals. Brookstreet and Brooks developed a 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 the securities were unsuitable. Brookstreet and Brooks continued to promote and sell the risky CMOs even after Brooks received numerous warnings that these were dangerous investments that could become worthless overnight. The fraud caused severe investor losses and eventually caused the firm to collapse.

The judge granted summary judgment in favor of the SEC on February 23, finding Brookstreet and Brooks liable for violating Section 10(b) of the Securities Exchange Act of 1934 as well as Rule 10b-5.

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