NEW YORK — In an attempt to save a semblance of his family’s broker-dealer, Scott Brooks, scion of the founder of Brookstreet Securities Corp., last Thursday jumped to Wedbush Morgan Securities Inc. and then immediately invited Brookstreet’s 500 affiliated representatives to join him.
Hammered by exposure to a risky type of mortgage-backed security, Irvine, Calif.-based Brookstreet a day earlier hadtold reps and advisers that “disaster” had struck, igniting speculation that the firm would close or be acquired.
Wedbush Morgan of Los Angeles doesn’t have an independent-
contractor brokerage arm, and Mr. Brooks, executive vice president at Brookstreet, will “substantially build and staff” that part of the business, he told financial advisers in an e-mail.
“I understand that you have options,” he told the reps. “I believe this is an optimal solution for you.”
Mr. Brooks stands to have some stiff competition from other
independent-contractor broker-dealers for those reps, with Securities America Inc. of Omaha, Neb., making particularly aggressive offers, said one industry source, who asked not to be identified.
On Wednesday, Brookstreet Securities told its advisers that it could be forced to close if it didn’t come up with at least $5 million, according to an internal e-mail.
In that unsigned note to its advisers, the firm blamed its misfortune on its clearing firm, National Financial Services LLC of New York, and an excess of margin accounts.
“Today, the pricing system used by National Financial has reduced values in all collateralized mortgage obligations,” according to the e-mail.
Margin accounts
“Many of those accounts were on margin and suffered horrendous markdowns and unrealized as well as realized losses. National Financial and the regulators expect Brookstreet to pay for realized liquidated losses and take a capital charge for unrealized [mark to] market losses.”
“It would take a capital infu-
sion of at least $5,000,000 to keep the company in compliance with no additional guarantee that
additional markdowns will no be forthcoming,” according to the e-mail. Julie Mains, an attorney for Brookstreet, who is Scott Brooks’ sister, did not respond to a phone message asking which of the parties ultimately is responsible for the $5 million shortfall.
Brookstreet Securities, a midsize independent-contractor broker-dealer, last year generated about $70 million in gross revenue, according to one industry observer, who asked not to be identified.
Fidelity Investments of Boston, which owns National Financial Services, “can’t comment specifically about Brookstreet’s claims, but we are not responsible,” said Adam Banker, a company spokesman.
“National Financial has clear margin agreements in place and uses reputable firms to price securities held in brokerage accounts,” he said.
According to NASD records, the Brooks Family Trust owns more than 75% of the firm, and founder Stanley Brooks is the trustee.
