A federal judge in Los Angeles has ordered the former chief executive officer of Brookstreet Securities Corp to pay $10 million for his role in selling risky mortgage products that led the firm to collapse at the height of the financial crisis.
Continue Reading Below
The Irvine, California-based firm and former CEO Stanley Brooks were charged by the U.S. Securities and Exchange Commission with fraud in December 2009. The SEC had alleged that Brooks and his firm had regularly sold risky mortgage-backed securities to customers with conservative investment goals.
District Judge David O. Carter in Los Angeles ruled in favor of the SEC on Feb. 23 and signed the judgment on Tuesday, but it was not made public until Thursday. Besides the $10 million penalty, the SEC said Brooks would also pay more than $110,000 in disgorgement and prejudgment interest.
In his order, Carter said the civil penalty reflects the maximum amount for each violation.
A lawyer for Brooks did not immediately respond to a request for comment.
"Brooks' aggressive promotion and sale of risky mortgage products to seniors and other risk-averse investors deserves the maximum penalty possible, and that is what he got," said Robert Khuzami, the director of the SEC's Division of Enforcement.
Continue Reading Below
"Those who direct such exploitative practices from the boardroom will be held personally accountable and face severe consequences for their egregious actions."
The SEC's lawsuit alleged that Brookstreet and Brooks sold the unsuitable collateralized mortgage obligations to retail customers, many of which were retirees, from 2004 to 2007.
In 2007, CMO prices dropped sharply, causing significant losses and subjecting many investors to margin calls they could not afford.
To prevent the firm from falling below regulatory net capital requirements, the SEC alleged that Brooks oversaw the liquidation of the CMO program accounts. That in turn led to the unauthorized sale of fully paid-for CMOs from cash-only accounts, and many investors suffered substantial losses.
In June 2007, Brookstreet failed to meet its capital requirements and it shut down.
The SEC is awaiting a court decision in a separate Brookstreet-related enforcement action filed in federal court in Florida.
In that case, the SEC charged 10 former Brookstreet registered representatives with making misrepresentations to investors in the purchases and sales of risky CMOs.
Two representatives settled the charges, and the case against the remaining eight representatives was tried in October 2011.