Unlike
other firms, the Meissner Firm succeeded in pursuing
several cases involving now defunct Brookstreet
Securiites Corp., involving a combination of
confidential settlements and arbitration awards against
various parties and individuals, which were in fact paid
to its clients long before the SEC took the below
recent action - Liability, including retroactive 9
interest, was found in arbitration against everyone we
went to hearing against, ranging from the owner of the
firm, Mr. Stanley Brooks, his own daughter who was the
Compliance Officer, as well as the broker Troy
Gagliardi.
Wall Street Journal - May 29, 2009
By Suzanne Barlyn
A DOW JONES NEWSWIRES COLUMN
COMPLIANCE WATCH: Why Brookstreet
Investors Were In The Dark
NEW
YORK (Dow Jones)--New details in the Brookstreet
Securities Corp. case support investor advocates' calls
for lifting the curtain higher on details of brokers'
transactions, particularly how brokers are compensated
and their use of margin accounts.
The
Securities and Exchange Commission on Thursday filed
fraud charges against 10 former brokers for Brookstreet,
an Irvine, Calif., brokerage that collapsed in scandal
in 2007. It said the brokers falsely marketed
investments in derivatives of mortgage-backed securities
as safe and appropriate for investors with conservative
goals, including retirees. In many cases, they allegedly
told investors the securities were backed by the U.S.
government. The Financial Industry Regulatory Authority,
or Finra, also charged six Brookstreet brokers in a
parallel enforcement action.
The
brokers raked in more than $16 million in commissions
between 2004 and 2007, the SEC says, while their clients
collectively hemorrhaged almost $40 million in margin
account deficits. Some of the brokers told clients that
margin would be used sparingly, and with little or no
risk to their principal, according to the SEC complaint.
Stuart D.
Meissner
represented three investors in arbitrations against two
of the brokers. He says investors who purchase certain
bonds or exotic instruments are often unaware of
markups, which is the difference between what the broker
pays for the security and what the investor pays.
Many investors only learn of the markup
much too late - when filing an arbitration claim.
"It's certainly something that one is entitled to know,
especially if it's not a traditional investment," says
Meissner.
Furthermore, being told about the markup may not mean
understanding it, notes Theodore G. Eppenstein, a New
York-based attorney who represents investors in
securities arbitrations. "You need a forensic accountant
to take apart the statements. Even a sophisticated
investor can't figure it out," he says.
Deborah
Meshulam, a former SEC assistant chief litigation
counsel who now chairs DLA Piper's SEC practice in
Washington, says brokerages typically comply with
securities laws that require disclosure of their
compensation and conflicts of interest - but the catch
is whether the disclosure is adequate.
The
Brookstreet brokers misrepresented how margin accounts
would be used, the SEC says, and some told clients that
they would be taken off margin but weren't. Many
investors aren't even candidates for margin accounts -
particularly if their goals are conservative.
Jill I.
Gross, director of the Investor Rights Clinic at Pace
Law School in New York, says that, during the last two
decades, margin accounts have been extended to customers
who lack the financial sophistication to use them
prudently. Regulators, she says, should consider
imposing requirements for margin accounts, such as
standards for net worth or knowledge level.
Some
investor advocates say that compensating brokers based
on the performance of client portfolios would prevent
misconduct. But Philip M. Aidikoff, a Los Angeles-based
securities attorney, is concerned the model would push
brokers toward high-risk strategies. "A broker who isn't
making anything on the portfolio may figure he has
nothing to lose," he says.
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