In December 2009, the SEC litigated a case against an Irvine, CA, broker-dealer and its CEO who were charged with fraud for systematically selling risky mortgage-backed securities (MBSs) to customers with conservative investment goals.  On Friday, the SEC announced that a federal judge ordered Stanley C. Brooks, former CEO of Brookstreet Securities Corp., to pay the maximum penalty in a securities fraud case related to the financial crisis, $10 million. In the case, the SEC Brooks and the firm with having developed a program through which the firm’s RRs 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. They continued to promote and sell the risky CMOs even after Brooks received numerous warnings that these were dangerous investments that could become worthless overnight, and that's just what happened.  The fraud caused severe investor losses and eventually caused the firm to collapse.

"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." -- Robert Khuzami, SEC Enforcement Director.

Court Decision. Federal Judge David Carter in Los Angeles had granted summary judgment in favor of the SEC on 2/23/12, finding Brookstreet and Brooks liable for violating Section 10(b) of the Securities Exchange Act of 1934 as well as Rule 10b-5.  In rendering a final judgment in the case, the court order a $10,010,000 penalty, and Brooks was ordered to pay nearly$111,000 in disgorgement and prejudgment interest. Still pending is the court decision in a separate Brookstreet-related enforcement action filed in federal court in Florida.  In that case, the SEC charged 10 former Brookstreet RRswith making misrepresentations to investors in the purchases and sales of risky CMOs. Two RRs already settled with the SEC, and the SEC tried the other 8 RR in trial in October 2011. To date, the SEC has brought enforcement actions stemming from the financial crisis against 95 entities and individuals, including 49 CEOs, CFOs, and other senior officers. For further details, go to:     [SEC PR 12-37, 3/2/12].