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Brookstreet CEO fined $10 million for securities fraud

The Securities and Exchange  Commission today announced that a federal judge has ordered the former CEO of  Brookstreet Securities Corp. to pay a maximum $10 million penalty in a  securities fraud case related to the financial crisis.

The SEC litigated the case beginning in December 2009, when the agency  charged Stanley C. Brooks and Brookstreet with fraud for systematically selling risky mortgage-backed securities to customers with conservative investment goals. Brookstreet and Brooks developed a program through which the firm’s registered representatives sold particularly risky and illiquid types of  Collateralized Mortgage Obligations (CMOs) to more than 1,000 seniors, retirees,  and others for whom the securities were unsuitable. Brookstreet and Brooks  continued to promote and sell the risky CMOs even after Brooks received numerous  warnings that these were dangerous investments that could become worthless  overnight. The fraud caused severe investor losses and eventually caused the  firm to collapse.

The Honorable David O. Carter in federal court in Los Angeles granted summary  judgment in favor of the SEC on February 23, finding Brookstreet and Brooks  liable for violating Section 10(b) of the Securities Exchange Act of
1934 as  well as Rule 10b-5. The judge entered a final judgment in the case yesterday and  ordered the financial penalty sought by the SEC.  “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, Director of the SEC’s Division of  Enforcement. “Those who direct such exploitative practices from the
boardroom  will be held personally accountable and face severe consequences for their  egregious actions.”

Rosalind Tyson, Director of the SEC’s Los Angeles Regional Office, added,  “The CMOs that Brookstreet sold its customers were among the most risky of all  mortgage-backed securities. This judgment highlights the responsibility
of  brokerage firm principals to ensure the suitability of the securities they sell  to customers.” 

In addition to the $10,010,000 penalty, Brooks was ordered to pay $110,713.31  in disgorgement and prejudgment interest. The court’s judgment also enjoins both  Brookstreet and Brooks from violating Section 10(b) of the
Exchange Act as well  as Rule 10b-5. 

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 SEC tried the case against the  remaining eight representatives in October 2011.
The SEC has brought enforcement actions stemming from the financial crisis  against 95 entities and individuals, including 49 CEOs, CFOs, and other senior  officers.