SEC sues head of defunct Brookstreet Securities

AP News
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Posted: Dec 08, 2009 7:12 PM

Federal regulators have sued a defunct California investment brokerage and its former CEO, accusing them of fraud in selling more than $300 million worth of risky mortgage-backed securities to unsophisticated investors.

The Securities and Exchange Commission said in the lawsuit filed Tuesday that Brookstreet Securities Corp. and ex-CEO Stanley C. Brooks cost many investors their homes or retirement savings.

The SEC said Brookstreet and Brooks deliberately sold risky mortgage obligations to retirees and others with conservative investment goals and continued to promote them even after learning they could quickly become worthless. In an effort to save the company, the SEC charged, Brooks directed the unauthorized sale of obligations from customers' cash-only accounts, leading to large losses.

Irvine, Calif.-based Brookstreet closed in 2007. The SEC earlier sued 10 Brookstreet representatives and accused them of misrepresenting the mortgage obligations to investors.

"These were complex mortgage derivative securities with Byzantine pricing, valuation and trading characteristics," said Robert Khuzami of the SEC's enforcement division. "Selling them to retirees and conservative investors was profoundly and egregiously wrong."

Brooks' lawyer, H. Thomas Fehn, said Tuesday the SEC "identified the wrong villain" in suing the firm and Brooks, whom he said is "involuntarily retired" and no longer selling securities.

Fehn blamed Brookstreet's clearing firm, National Financial Services, which he said extended loans to Brookstreet customers to buy securities, then "got nervous" and called in the loans when credit markets tightened.

National Financial, an arm of Fidelity Investments, denied wrongdoing.

"The SEC filed charges of fraud against Brookstreet and its former CEO. The complaint speaks for itself," said the National Financial spokesman, Vincent Loporchio. In the past, Loporchio has said that the decision to take margin loans is made by investors and their brokers, not clearing firms, which handle settlement of transactions.

The SEC lawsuit was filed in federal district court in Santa Ana, Calif.