Five brokers at the center of the collapse of Brookstreet Securities Corp. have filed a $36 million arbitration complaint against Brookstreet’s former clearing firm, National Financial Services LLC.
The brokers of the firm, which folded last summer, allege that hundreds of millions of dollars that its clients lost in highly leveraged collateralized mortgage obligations were “directly attributable to [National Financial Services’] wrongful conduct.”
The complaint, filed with the New York and Washington-based Financial Industry Regulatory Authority Inc. on April 2, also claims that National Financial “acted irrationally, in bad faith and fraudulently when it engaged in the wide-scale, fire sale, forced liquidation” of CMOs from client accounts in June 2007.
The five brokers tried to prevent National Financial from selling the CMOs at that time, according to an e-mail from May 31 that one of the brokers sent to Brookstreet Securities.
“Since we are now emerging from such an extreme and highly compressed market environment, it is highly advisable to allow client bond positions to continue their path toward maturation,” the broker wrote in the e-mail.
“We therefore ask for a time extension until July 10, 2007, to re-evaluate the necessity of acting on house calls created by a totally subjective pricing model.”
The broker-dealer then forwarded the e-mail to National Financial, according to the brokers’ attorney, Jeffrey Kaplan of Miami-based Dimond Kaplan & Rothstein PA.
“It’s important to note decisions with respect to margin calls were entirely appropriate both under the terms of the margin agreement and in light of circumstances presented in the market at that time,” said Vincent Loporchio, a spokesman for National Financial and its parent company, Boston-based
Fidelity Investments.
“National Financial used reputable third-party firms to price securities held in brokerage accounts.”
National Financial is a powerhouse in the clearing and custody business, serving 330 broker-dealers and registered investment advisers, and holding in custody $709 billion in client assets.
Irvine, Calif.-based Brookstreet Securities, with about 500 independent-contractor reps at the time, closed last June and in a message to brokers placed the blame for its misfortune squarely on National Financial’s pricing of CMOs, as well as an excess of margin accounts (
(InvestmentNews, June 25).
The claim of $36 million is the income the five brokers will lose until they can build a comparable book of business in the coming years, according to the complaint.
The claim states that the ex-Brookstreet brokers collectively made $9 million per year.
Clients have also filed arbitration complaints against National Financial in this matter.
For the full report, see the upcoming April 14 issue of InvestmentNews.
