A federal judge in Los Angeles has ordered Stanley C. Brooks, the former CEO of Brookstreet Securities Corp., to pay the maximum civil penalty of $10 million in a securities fraud case that goes back to the financial crisis, the Securities and Exchange Commission (SEC) announced on March 2.
According to the docket, Judge David O. Carter said the maximum penalties were necessary to accomplish “the dual goals of punishment of the individual violator and deterrence of future violations.”
SEC Charged Brooks & Brookstreet Securities With Fraud
In December 2009, the SEC charged Brooks and Brookstreet with fraud for selling risky and unsuitable collateralized mortgage obligations (CMOs) — a type of mortgage backed security — to customers with conservative investment goals. These unsuitable sales were made from 2004 to 2007.
Even after Brooks was warned these were dangerous investments, he and his firm continued to sell them. Eventually these CMOs led to huge losses for investors and the collapse of Brookstreet.
Brooks took part in the creation, promotion and facilitation of the CMO program through which his firm and its brokers sold the risky, illiquid CMOs to retail customers that included retirees and retirement accounts, according to the complaint, filed in December 2009. More than 1,000 customers invested roughly $300 million through Brookstreet’s CMO Program.
When CMO prices plunged in early 2007, Brookstreet customers who had invested in the CMO program suffered heavy losses.
Moreover, customers who had invested on margin were hit with margin calls, the complaint said. Because of the margin level Brookstreet had implemented in some of the accounts, many of these customers did not have enough equity to cover the margin calls, the complaint said.
In an attempt to secure equity for these accounts, and desperate to keep Brookstreet from falling below its net capital requirements, Brooks directed his brokers to liquidate CMO program accounts, the complaint said. As a result, Brookstreet engaged in the unauthorized sale of CMOs from customers’ cash-only accounts. These CMOs were paid in full and their sale caused the customers to sustain substantial losses.
Despite Brooks’ desperate maneuverings, Brookstreet did not meet its net capital requirements and ceased operations in June 2007, the complaint said.
Many of the CMO program’s customers lost their savings or their homes. Many also lost their ability to retire or stay retired. Some of the customers who purchased CMOs on margin ended up with negative account balances, the complaint said.
According to Rosalind Tyson, director of the SEC’s Los Angeles Regional Office, the CMOs that Brookstreet peddled to these customers were among the riskiest of all mortgage-backed securities.
Federal Court Grants SEC’s Motion for Summary Judgment
The federal district court in Los Angeles granted the SEC’s motion for summary judgment on Feb. 23. The court found Brooks and Brookstreet had violated Section 10(b) of the Securities Exchange Act of 1934 as well as Rule 10b-5 thereunder. The final judgment, entered on March 2, ordered the $10 million financial penalty that had been sought by the SEC.
In a statement released after the judgment, Robert Khuzami, director of the SEC’s Division of Enforcement, said that Brooks’ aggressive sales tactics that pushed risky mortgage products onto seniors and other risk-averse investors deserved the maximum penalty.
Brooks was ordered to pay about $111,000 in disgorgement and prejudgment interest, in addition to the $10 million penalty, the SEC release said. He was also permanently enjoined from violating the anti-fraud provisions of the securities laws.
District Court Entered a Default Judgment
According to a March 2 report in Investment News, Thomas Fehn, counsel for Brooks, noted that the district court had entered a default judgment, meaning there was not trial, hearing or weighing of the evidence.
The judge entered a default judgment because Brooks never responded to the SEC’s motion to summary judgment, the report said. Fehn said last week that he planned to file a motion for reconsideration. He said that he and his client were not given sufficient time to prepare their case. If the motion for reconsideration is granted, Fehn said, the judgment will be vacated and the case will go to trial.
A decision in another enforcement action against Brookstreet is pending in Florida, the SEC release said. In that case, the SEC alleged that 10 former Brookstreet brokers misrepresented the risky CMOs they sold to investors. Two of the brokers settled and the case against the remaining eight brokers went to trial in October, the SEC release said.
Guiliano Law Group
Investors suffering losses or damages from such conduct may be able to recover their investment losses. Our practice is limited to the representation of investors in claims, for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to you unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.