More On Legal & Compliancefrom The Advisor's Professional Library
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
The Securities and Exchange Commission on Friday said that a federal judge has ordered the former chief executive of Brookstreet Securities Corp. to pay a maximum $10 million penalty in a securities fraud case for selling risky and illiquid collateralized mortgage obligations (CMOs) to seniors and retirees during the financial crisis.
The SEC says that it litigated the case beginning in December 2009, when the agency charged CEO Stanley Brooks and Irvine, California-based Brookstreet with fraud for systematically selling risky mortgage-backed securities to customers with conservative investment goals.
According to the SEC, Brookstreet and Brooks developed a program through which the firm’s registered representatives sold particularly risky and illiquid types of 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 SEC says. “The fraud caused severe investor losses and eventually caused the firm to collapse.”
Judge David Carter in federal court in Los Angeles granted summary judgment in favor of the SEC on Feb. 23, finding Brookstreet and Brooks liable for violating Section 10(b) of the Securities Exchange Act of 1934 as well as Rule 10b-5. Carter entered a final judgment in the case on Thursday and ordered the financial penalty sought by the SEC.
Robert Khuzami, director of the SEC’s Division of Enforcement, said in a statement that “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. Those who direct such exploitative practices from the boardroom will be held personally accountable and face severe consequences for their egregious actions.”
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 said it 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 says it has brought enforcement actions stemming from the financial crisis against 95 entities and individuals, including 49 CEOs, CFOs, and other senior officers.