Big investors aren’t the only ones getting burned by mortgage investments. Some brokerage firms who put their customers in risky mortgage investments now have small investors fighting to get their money back.
That includes customers of Irvine, Calif., brokerage firm Brookstreet Securities Corp., which shut down last month after the value of some of its mortgage securities fell sharply.
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It also includes the Sisters of St. Joseph of Carondelet in California. The nuns thought they were making safe investments when they parked some of their money with Los Angeles-based Wedbush Morgan Securities.
Instead, they allege in documents in an arbitration complaint filed against Wedbush, they ended up with risky investments in mortgage-backed securities tied to mobile-home loans and lost nearly $1 million.
These are among several broker-fraud cases involving risky investments in mortgage securities that have been popping up in the past few years, according to complaints filed with the National Association of Securities Dealers, or NASD.
Ed Wedbush, president of the firm that handled the nuns’ investments, said in an interview that the losses in this and other cases came on the riskier portions of mortgage investments and were the result of “clients being very aggressive and wanting high yields.” They should have understood, he said, that “high yield is high risk.”
Bad investments in securities tied to risky mortgages have shaken up some large hedge funds in the past few months, most notably two Bear Stearns Cos. hedge funds which had big investments in mortgages known as subprime loans. Little guys — even nuns — can get hurt too.
Many of the investments in these cases don’t involve the subprime mortgages that are Wall Street’s main headache today. But they do point to the growing complexity of mortgage securities coming out of investment banks, and the care individual investors must take to understand them when approached by brokers with promises of super returns married with little risk.
In a complaint filed with the NASD, the Sisters of St. Joseph of Carondelet allege Wedbush misled them about the value and risks of investments it made for them starting in 2002. These investments were called collateralized mortgage obligations, a kind of mortgage-backed security, in which mortgages are bundled together and then sliced by investment banks into pieces that bear different levels of risk.
“There’s some scary stuff out there,” says Philip M. Aidikoff, a Beverly Hills attorney who represents the sisters and other small investors who say they’ve lost money on similar products. The case will be heard in August by an NASD arbitrator in California.
Wedbush, a midsized brokerage and investment bank, has been hit with more than 40 complaints over CMO products in the past few years. In one case, an arbitrator awarded more than $1 million to the Narramore Christian Foundation, a nonprofit mental-health organization in Arcadia, Calif. In another case, the firm was ordered to pay roughly $3.8 million in damages and attorney fees to 22 individual investors.
Wedbush has blamed the problems on a single broker who has since the left the firm, an argument that has been rejected by arbitrators in those two cases.
Doyle Bouse was one individual who shared in an arbitration award against Wedbush. “I did not want any risk with my money at all, because this is the money I’m retired on,” said the 74-year-old retired insurance broker who lives in Placentia, Calif.
Wedbush assured him the CMOs it put him in “were very safe and well-secured,” he said. In 2002, when his monthly statements began showing losses, the firm told him not to worry because the money would show up again in later statements, he said. Ultimately, the CMO bets cost him and his wife “a big, big chunk” of their retirement savings — roughly $80,000 — but he won it back thanks to the arbitrator’s ruling.
Investors “have to be careful about even having bonds purchased for them,” Mr. Bouse says. “They have to ask a few questions and know what they’re doing.”
Scott Silver, a Coral Springs, Fla., attorney, said his firm has filed complaints to the NASD on behalf of three Palm Beach County investors who claim Brookstreet brokers assured them the CMO products it placed them in were safe investments that would protect their principal and offer a consistent return.
These included instruments known as “inverse floater” CMOs, which are hard-to-price assets whose values can move sharply based on changes in interest rates and how quickly mortgage borrowers repay their loans. In 1993, the NASD said these “are only for sophisticated investors with a high-risk profile.”
The complaints also allege Brookstreet used borrowed money to boost the size of its investments, in hopes of earning higher returns. One investor, Mitchell Thal, a retired grocer, said in his complaint that he lost at least $300,000 after the firm put his money into CMO products.
Brookstreet officials and the firm’s attorney couldn’t be reached for comment, but firm officials said in earlier public statements that a “pricing disparity” caused the drop in the securities’ value.
After her husband’s death last year from cancer, Bernadette Waisome, a real-estate agent in Davie, Fla., thought about taking a chunk of his $250,000 life-insurance proceeds and paying down her own mortgage, she says in a complaint filed with the NASD against a Phoenix-based securities brokerage, Samco Financial Services. She wanted to protect the home where she and her 8-year-old daughter lived.
Instead Ms. Waisome, then 51, decided to invest the money, giving $100,000 to Samco. She was a “novice investor” and told the firm she didn’t want to put her money into anything risky, according to the complaint.
Unbeknownst to her, her complaint alleges, the firm did just that — using money borrowed in her name, called a margin loan, the broker bought $478,000 in inverse floater CMOs. Her complaint says the securities were actually worth less than $375,000 when she bought them, meaning her $100,000 investment had been wiped out the moment she wrote the check to the brokerage. Ms. Waisome’s attorney said she wouldn’t comment.
The complaint accuses Samco of fraud, and says Ms. Waisome had no idea the firm was buying securities for her on margin or risking her money on “esoteric investments.”
An attorney for Samco said the firm couldn’t comment. The firm gave up its brokerage license near the end of 2006, according to NASD records.