Corporate & Securities Law

The Securities and Exchange Commission has charged Brookstreet Securities, its President and CEO Stanley 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. Previously, the SEC had charged 10 Brookstreet registered representatives with making misrepresentations to investors related to the sale of risky CMOs (Collateralized Mortgage Obligations).

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 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. One trader even called Brookstreet's program a "scam." Finally, in a last-ditch effort to save Brookstreet from failing during the financial crisis, Brooks allegedly directed the unauthorized sale of CMOs from Brookstreet customers' cash-only accounts, causing substantial investor losses. 

The SEC's complaint specifically alleges that the defendants violated the antifraud provisions of Section 17(a) of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 thereunder.  The Commission seeks permanent injunctive relief against both defendants, and disgorgement of ill-gotten gains with prejudgment interest, and financial penalties against Brooks.

Source:  SEC Press Release 2009-260