SEC PREVAILS ON SUMMARY JUDGMENT IN MARKET CRISIS CASE

The Commission prevailed on its motion for summary judgment in a market crisis case based on the sale of risky collateralized mortgage obligations or CMOs to unsuitable retail customers. Ultimately investors suffered significant losses from the purchases and the broker’s firm collapsed as the market crisis unfolded. SEC v. Brookstreet Securities Corp., Case No. SA 8:09-cv-1411 (C.D. Cal.).

The action centered on the sale of high risk collateralized mortgage obligations by defendant Stanley Brooks and his firm, broker dealer/investment adviser Brookstreet Securities Corporation. Specifically, from 2004 through 2007 the two defendants promoted what was called the “CMO Program.” As part of the program high risk and illiquid CMOs were sold to retail customers with conservative investment goals. Purchasers included retirees and retirement accounts. Eventually over 1,000 Brookstreet customers put about $300 million into the securities as part of the program.

As the market crisis unfolded in 2007 CMO prices plummeted. This precipitated margin calls for investors in the CMO Program. Many did not have sufficient equity in their accounts to cover the calls. To secure equity for the accounts and avoid falling under its required net capital level, Mr. Books directed the liquidation of CMO Program accounts. This resulted in part in the unauthorized liquidation of fully paid CMOs from cash only accounts of customers.

In the end many CMO Program customers suffered loses including of their savings, homes and ability to retire. Some customers ended up with negative account balances.

Despite his efforts Mr. Brooks failed to save his firm. Brookstreet failed to meet its net capital requirements by mid-2007 and ceased operations. The Commission’s complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b).

The Court granted the Commission’s motion for summary judgment as to each defendant. On March 1, 2012 the Court entered a judgment against the defendants, enjoining them from future violations of each of the Sections cited in the complaint. The order also requires Mr. Brooks to pay $110,713.31 in disgorgement and prejudgment interest and a civil penalty of $10,010,000, the maximum for each violation. A related action is pending in Florida against ten former Brookstreet registered representatives.