Brookstreet CEO Fined $10 Million for Selling Risky CMOs to Seniors

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.