|Thursday, May 28, 2009
Nancy Condon (202) 728-8379
Herb Perone (202) 728-8464
Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) today announced charges against six brokers formerly associated with Brookstreet Securities Corporation, a now-defunct nationwide brokerage firm based in Irvine, CA, including fraud and making unsuitable recommendations to retail customers in the sale of collateralized mortgage obligations (CMOs).
FINRA's complaint alleges that from June 2004 through May 2007, the brokers sold CMOs to retail customers when the brokers themselves lacked a basic understanding of these complex and illiquid securities. CMOs are mortgage-backed securities, collateralized by pools of private home mortgages. The complaint alleges that the brokers failed to adequately investigate the CMO investments prior to selling the products and misrepresented or failed to disclose important information about the risks associated with an investment in CMOs. As a result, many customers were unaware of the speculative nature of the CMOs and suffered considerable losses. In a parallel action, the Securities and Exchange Commission filed a complaint in federal district court in West Palm Beach, FL today, lodging similar charges against 10 additional Brookstreet brokers.
The former Brookstreet brokers named in FINRA's complaint are:
The complaint alleges that these brokers led their customers to believe that the CMOs were safe, government-backed securities. Customers were also told that they could achieve consistently high annual returns, in some cases up to 15 percent, regardless of market conditions. In fact, the complaint alleges that the CMOs purchased for the respondents' customers were generally not guaranteed by the government and were subject to uncertain cash flows and maturities, based on changes in interest rates.
According to the complaint, the customers generally acquired small "odd-lot" positions that could not be easily sold in the marketplace unless sold at a substantial discount or combined with other positions as part of a larger block. Moreover, the complaint charges that the respondents recommended the CMOs to their customers, many of whom were retired and/or unsophisticated, without carefully assessing whether these were suitable investments in light of the customers' investment objectives, financial situation and other factors. Many of the respondents' customers were seeking a safe, secure investment, including those who used retirement funds to invest in the CMOs. Instead, many suffered substantial losses to their retirement savings.
In addition to alleging fraud and unsuitable recommendations, the complaint charges the respondents with exercising discretionary authority in customer accounts without obtaining prior written authorization and failure to adhere to high standards of commercial honor and just and equitable principles of trade. Gest is also charged with failing to timely amend his Form U4 to disclose material information.
Under FINRA rules, a firm or individual named in a complaint can file a response and request a hearing before a FINRA disciplinary panel. Possible remedies include a fine, censure, suspension or bar from the securities industry, disgorgement of gains associated with the violations, and payment of restitution. The issuance of a disciplinary complaint represents the initiation of a formal proceeding by FINRA in which findings as to the allegations in the complaint have not been made and does not represent a decision as to any of the allegations contained in the complaint. Because this complaint is unadjudicated, interested persons may wish to contact the respondents before drawing any conclusions regarding the allegations in the complaint.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2008, members of the public used this service to conduct 11.6 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through comprehensive regulation. FINRA touches virtually every aspect of the securities business -- from registering and educating all industry participants to examining securities firms; writing and enforcing rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and firms.
For more information, please visit our Web site at www.finra.org.