Charged for Misleading Investors as the Subprime Mortgage Crisis Began to Deepen
The interplay of federal judges, the SEC and the Residential Mortgage Backed Securities disaster continues (and probably will for a long time to come). In Los Angeles, U.S. District Judge David Carter fined former Brookstreet Securities Corp CEO, Stanley Brooks, the sum of $10,000,000. The penalty is one of the largest penalties imposed by the SEC against a corporate executive for activities related to the mortgage crisis.
At the time of its collapse in June of 2007 – just as the financial crisis was beginning to deepen – Brookstreet had approximately 500 affiliated registered representatives, making it one of the earliest and most sizable independent broker-dealers in the country to collapse due to the sale of illiquid securities. As alleged by the SEC, Mr. Brooks and Brookstreet preyed upon retirees and other senior citizens, by selling them unsuitable illiquid collateralized mortgage obligations (CMOs), and continued to promote CMOs even after they had become worthless.
The penalty, one even Dr. Evil of the Austin Powers movies would be impressed with, is one of the largest by the SEC against an individual executive for activities related to the mortgage crisis, though dwarfed by Countrywide’s CEO, Angelo Mozilo’s record $22.5 million penalty to settle charges that he and two other Countrywide executives misled investors as the subprime mortgage crisis emerged.
Mr. Brooks was also ordered to pay $110,713 in restitution and interest, and to refrain from future violations of securities laws. Adding insult to injury, the order was issued as a default judgment because Mr. Brooks never responded to the SEC’s motion for summary judgment filed this past December. Unsurprisingly, Mr. Brook’s attorney, Thomas Fehn, has publicly stated his objection to the judgment and said he plans to ask for reconsideration.
Judge Carter obviously was none too impressed with the man known as “Uncle Stan” (an ironic nickname for a man who bilked Uncle Sam). Entry of a judgment of this magnitude on a default basis, and then adding amounts for restitution and interest on top of the penalty, indicates that Judge Carter had no sympathy for Brooks, whose actions the Judge apparently believed had cost many investors their homes and retirement savings.
Ramifications from Brookstreet’s collapse went far beyond financial ruin: last month Cliff Popper, a broker who was at the center of the CMO sales at Brookstreet, committed suicide. Mr. Brooks himself was not personally unscathed either, suffering a heart attack in December.
As a small consolation for Mr. Brooks, he in effect settled with the government without having to admit guilt. In that respect, a default judgment is much cleaner than going to trial in light of the trend begun by Judge Rakoff in the SDNY Citigroup matter in which he refused to approve a settlement that he thought did not have enough detail about the alleged wrongdoing by Citigroup. But if an alleged wrongdoer is also facing serious criminal charges, in order to avoid having to make incriminating disclosures to gain a civil settlement perhaps it might be advantageous to purposely allow a default judgment to be entered in the civil matter.