He used to be known as the charming, affable “Uncle Stan” of Brookstreet Securities Inc., the independent broker-dealer he built. Now, he's facing charges of securities fraud because his brokers sold more than 1,000 investors $300 million in high risk investments linked to mortgages.
Yesterday, the Securities and Exchange Commission charged the now defunct firm and its former chief executive, Stanley C. Brooks, with securities fraud stemming from the sale of “unsuitable” collateralized mortgage obligations of various stripes, according to the complaint.
Mr. Brooks is not the only Brookstreet alumnus to be charged in the matter. In May, the SEC alleged that 10 former Brookstreet reps had made false and misleading statements to clients when they sold CMOs suitable for investors with a high-risk profile.
“Stanley Brooks never made a false statement,” said Thomas Fehn, an attorney for Mr. Brooks. “For three and a half years, these CMOs paid like a clock. Clients did very well.”
Mr. Fehn said Brookstreet's implosion occurred due to the
margin call by its clearing firm, National Financial Services LLC. “We're going to defend this to the end,” he said.
But when asked about what happened at Brookstreet, Vin Loporchio, a spokesman for National Financial and its parent,
Fidelity Investments, pointed to the charges filed on Tuesday by the SEC against the independent broker-dealer and its former CEO. “The complaint speaks for itself,” he said.
According to that complaint, Mr. Brooks failed to heed numerous warnings about the dangers for investors who owned the CMOs.
Rather, from 2004 to mid 2007, when the firm collapsed after margin calls on the CMOs, he promoted the program to the firm's 500 brokers, the complaint said.
Many at Brookstreet were aware of the risk in the CMOs, the SEC complaint details.
For example, one institutional bond trader in a letter in 2006 purportedly told Mr. Brooks that, “from a moral standpoint,” he should not allow the CMO program to continue. Also in 2006, Mr. Brooks “received numerous e-mails from registered representatives stating that [CMOs] were illiquid and that the CMO Bond Group would not execute sell requests,” the complaint states. The latter was the affiliated practice responsible for marketing CMOs at the broker-dealer.
In 2004, Mr. Brooks hired Cliff Popper as its head trader for CMOs “over the objections of two Brookstreet principals and despite concerns raised by a registered representative about the head trader's itinerant employment history,” the complaint states.
Mr. Fehn said that were not multiple warnings about the CMOs, as the complaint states, but just one, which he characterized as a “difference of opinion.”
In early 2007, CMO prices dropped sharply, which resulted in substantial losses for Brookstreet's clients, as well as margin calls for customers who had bought on margin, the SEC said. “Due to the level of margin that Brookstreet had implemented in some of its CMO program customers' accounts, many of these customers did not have sufficient equity to cover the margin calls,” the Commission states.
In an attempt to raise equity for those accounts and prevent Brookstreet from falling under strict net capital requirements, Mr. Brooks liquidated the CMO accounts, according to the complaint.
That move “resulted in the unauthorized sale of fully paid-for CMOs from the cash-only accounts of customers, causing some of them to realize substantial losses on their CMO accounts,” the complaint claimed.
Mr. Fehn said that the accounts had been cleaned out, but it was not clear by whom.
In June 2007, Brookstreet failed to meet its net capital requirements and closed its doors.
