Uncle Stan must pay Uncle Sam a whopping $10M fine

The founder of Brookstreet Securities Corp, Stanley C. Brooks, has been ordered by a judge to pay a maximum penalty of $10 million due to violations he made while selling mortgage-backed securities from 2004 to 2007. This is one of the largest penalties given out by the SEC to any individual related to the mortgage crisis.

By Bruce Kelly
March 2, 2012 3:09 pm ET
Investment News

Stanley C. Brooks, the affable founder of the now-defunct Brookstreet Securities Corp., has been ordered to pay a maximum penalty of $10 million due to violations in the sale of mortgage-backed securities from 2004 to 2007.

The penalty is one of the largest by the Securities and Exchange Commission against an individual executive for activities related to the mortgage crisis. In 2010, the SEC said that Countrywide Financial Corp. chief executive Angelo Mozilo would pay a record $22.5 million penalty to settle charges that he and two other former Countrywide executives misled investors as the subprime-mortgage crisis emerged.

U.S. District Judge David O. Carter in the Central District of California on Tuesday issued the final judgment in the matter involving Mr. Brooks. This morning, the SEC issued a statement that said Brookstreet and Mr. Brooks “developed a program through which the firm's registered representatives sold particularly risky and illiquid types of collateralized mortgage obligations — CMOs —– to more than 1,000 seniors, retirees and others for whom the securities were unsuitable.”

The firm and Mr. Brooks, who was commonly called “Uncle Stan,” “continued to promote and sell the risky CMOs even after [Mr. Brooks] received numerous warnings that these were dangerous investments that could become worthless overnight,” the SEC said. “The fraud caused severe investors losses and eventually caused the firm to collapse.”

Mr. Carter also ordered Uncle Stan to pay $110,000 in disgorgement and interest.

Thomas Fehn, an attorney for Mr. Brooks, said the court's decision was a “default judgment,” meaning it was made without a trial, hearing or consideration of the evidence. “No one has had their day in court here,” he said.

Mr. Carter entered the judgment because Mr. Brooks didn't respond to the SEC's motion to summary judgment, which it filed at the end of December, Mr. Fehn said. Mr. Fehn added that he expects to file the motion for reconsideration today.

The SEC gets “months to prepare [their case] and we get 20 days to respond,” Mr. Fehn said. “We asked for more time and we were denied. Our next step is filing a motion for reconsideration, and if it's granted, the judgment will be vacated and we'll be back in trial.”

At one time, Brookstreet had 500 affiliated registered reps, making it one of the most sizable independent broker-dealers to collapse due to sales of illiquid securities prior to the financial crisis.

In December 2009, the SEC alleged that Brookstreet and Mr. Brooks sold the risky mortgage obligations to retirees and others with conservative investment goals and continued to promote the CMOs even after learning they could quickly become worthless.

The fallout from the collapse of Brookstreet Securities, which closed its doors in June 2007 after first failing to meet margin calls for the notes and then failing to meet net-capital requirements, has had severe implications for investors and brokers alike.

Last month, the once-high-living broker who was at the center of the CMO sales at Brookstreet, Cliff Popper, committed suicide in South Florida. Clients who had margin accounts and worked with Mr. Popper and his team of brokers lost over $36 million, according to the SEC.

The SEC has also sued about a dozen brokers in the matter, including Mr. Popper.

Meanwhile, Mr. Brooks' attorney says the Brookstreet founder suffered a heart attack in December.

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