Almost two years after their firm imploded, 16 brokers from Brookstreet Securities may have come to justice. The SEC today charged 10 brokers from the now defunct firm with fraud for marketing risky mortgage-backed derivatives as conservative investments to over 750 customers--and margined them to the hilt while claiming they were using little leverage. FINRA lodged similar charges against an additional six brokers.
The SEC complaint alleges that the 10 brokers named in its case earned $18 million in commissions and salaries from the sales while investors suffered over $36 million in losses on their investments.
According to the SEC, the Brookstreet brokers claimed that the derivatives, several types of CMOs that were highly sensitive to changes in interest rates, were all guaranteed by the U.S. government, when they were not. Meanwhile, FINRA alleges that the brokers charged lacked a basic understanding of what they were selling to customers.
“It’s very possible there were brokers in here who were good people, who were mislead,” says Sam Edwards, a Houston attorney with Shephard Smith & Edwards, who represented 30 to 40 clients of Brookstreet Securities in a suit against Brookstreet’s clearing firm that has since been resolved. One broker, in fact, sold some of the securities to his parents, but did not intend to mislead them. “A lot of people were shown stuff by what they thought was a reputable firm and they bought it. It’s like Madoff. That was the problem with this strategy. For a long time it worked.”
Brookstreet, formerly one of the largest 25 independent b/ds in the business, was felled at least in part by the brokers' investments in the CMOs. The firm collapsed under the weight of margin calls on the instruments in June of 2007.
Edwards says that while complaints to his firm about investments and securities cases nearly doubled in October through April, Brookstreet was an unusual case. “You’re not going to see a lot more Brookstreet scenarios,” he says. “Nobody else would let you sell this stuff to retail investors. Not Merrill Lynch.”
The SEC’s complaint, filed in federal district court in West Palm Beach, Fla., charges Florida residents William Betta, Jr., James J. Caprio, Troy L. Gagliardi, Barry M. Kornfeld, Clifford A. Popper, Alfred B. Rubin, and Steven I. Shrago as well as Travis A. Branch of Kailua, Hawaii, Russell M. Kautz of Medford, Ore., and Shane A. McCann of Florence, Mont. FINRA, meanwhile, charged Thomas J. Brough, Kevin M. Browne, Eric R. Elliott, Brian J. Falabella, Robert N. Gest, Jr., and Jonathan J. Sheinkop, four of whom now work for other firms.
"These brokers disguised the risks of investing in these derivatives of mortgage-backed securities, exposing their customers to substantial losses as the subprime crisis emerged,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “They disregarded their customers’ needs and used deceptive and misleading tactics to enrich themselves at their clients’ expense.”