Every Major Wall Street Firm
Brokers’ Wrong Bets Cost South Florida Seniors Millions
July 2007
Dozens of South Florida senior citizens have lost millions of dollars of their savings because their brokers bet wrong on risky mortgage-backed securities after promising them a stable investment.
Coral Springs lawyer Darren Blum said Tuesday that his firm, Blum Law Group, is representing about 25 investors who had invested $20 million with Brookstreet Securities, a California firm that has brokers in at least a half-dozen South Florida offices. Many investors are planning legal action to recover their losses, and for damages and attorney’s fees.
The Securities and Exchange Commission and brokerage regulator NASD are reviewing Brookstreet’s financial records and the firm has started shutting down its operations.
“We’ve had people in their 80s in here in tears,” Blum said. “These people are devastated.”
The seniors invested in securities called collateralized mortgage obligations, or CMOs. Some independent brokers working in Brookstreet offices pitched the CMOs to wealthy seniors at dinner seminars and condominium meetings.
“They presented these as very safe, like a bond, paying 7 to 8 percent,” Blum said. The CMOs the brokers invested in, however, were complex and highly speculative, he said. Investors also received inaccurate brokerage statements that overstated how much they had in their accounts, Blum said.
Brookstreet executives could not be reached for comment Tuesday. Brookstreet’s CEO and Chairman Stanley Brooks said last week that he had fired 80 employees at the firm’s Irvine, Calif., headquarters and left about 15 people to wind down operations.
Brookstreet has said the money was lost in part because of too much securities trading on margin, or borrowed money. The value of the CMOs declined, Brookstreet said, as the so-called subprime mortgage market worsened. The firm that administers Brookstreet’s accounts, National Financial Services, then demanded to be paid for the investments bought on margin.
The margin losses mean that investors not only lost their funds, but could owe money that was borrowed to trade in their accounts. Blum said he talked with one client Tuesday who has about $12 million in margin losses.
One of Blum’s youngest clients is Gail Fisher of Boca Raton. After her husband died in 2001, Fisher, 54, was looking for a safe investment that would give her steady income to help pay for expenses, including college education for two children.
Several months later, she heard a Brookstreet broker based in Coral Springs give a seminar at the Boca Raton condo development where her 87-year-old father lives. She was told that the investment was a mix of CMOs and mutual funds designed to work like a seesaw.
“Basically if one goes down the other would go up, so it was supposed to be very safe,” Fisher said.
Fisher initially invested $410,000, then $50,000 and later $60,000. Her father invested $50,000. She was receiving monthly income of about $4,000. Fisher now thinks that money was being paid out of her principal and that the vast majority of her investment is gone.
She said she received brokerage statements that, while somewhat confusing, indicated that her investment was safe. Last year, Fisher’s accountant told her he was troubled by the statements and urged her to have another financial specialist study them. That specialist “took one look and said, ‘You have to see a lawyer,'” Fisher said, sobbing as she spoke. “He couldn’t believe what [investments] they had me in.”
The SEC does not confirm or deny whether it is investigating a firm, and the NASD declined to comment. Blum said he was aware the SEC was looking into Brookstreet and had offered to make his clients available to talk with SEC investigators.
Blum and partner Scott Silver have filed four NASD arbitration cases against Brookstreet and individual brokers, and plan to file 25 more in the next month. They said they have received at least 50 phone calls from Brookstreet clients, most of them in South Florida.
A spokesman for Fidelity Investments, the parent company of National Financial, said Brookstreet customers can make withdrawals from their accounts as long as the securities in those accounts have been paid for.