The collapse of Brookstreet Securities Corp. last month is likely to spawn dozens of arbitration claims from investors facing losses that, in some cases, run into the millions, according to one plaintiff’s attorney familiar with the matter.
NEW YORK — The collapse of Brookstreet Securities Corp. last month is likely to spawn dozens of arbitration claims from investors facing losses that, in some cases, run into the millions, according to one plaintiff’s attorney familiar with the matter.
Arbitration claims against Brookstreet are likely to focus on promises made by brokers involving investments in pools of debt known as collateralized mortgage obligations.
Some brokers of the Irvine, Calif.-based firm assured clients that CMOs posed “no risk” and that it was “impossible to lose anything” by investing in them, said Scott Silver, a partner with the law firm Blum & Silver LLP in Coral Springs, Fla.
CMO-related losses for some clients range from $50,000 into the millions, he said.
Before Brookstreet’s collapse in June, Mr. Silver already had filed at least one arbitration claim against the firm, but now he has been retained by “dozens” of investors, including Gail Fisher, a 54-year-old widow in Boca Raton, Fla.
In 2001, Ms. Fisher invested $400,000 that she received from her husband’s life insurance policy through Barry Kornfeld, a Coral Springs-based rep who was responsible for marketing CMOs at Brookstreet.
Later, she invested an additional $110,000. Ms. Fisher said that for some time, she received monthly income from her account with Mr. Kornfeld, but after a few years, started to feel leery of the investment, particularly after her accountant questioned the broker’s report.
Mr. Kornfeld “never spoke about margin to me. I couldn’t read the reports he sent me,” Ms. Fisher said.
A few months ago she began working with an adviser who was able to get back between $100,000 and $200,000 of her investment.
Brokers scatter
Brookstreet has all but shut down, with regulators from the Securities and Exchange Commission and NASD of Washington spending a few days during the last week of June at the firm’s California offices to look over its records, according to the Los Angeles Times.
The firm’s 500 or so independent- contractor reps have scattered.
Last month, Brookstreet’s founder and president Stanley Brooks said that the firm could not meet margin calls on the CMOs and that it would be forced to close if it didn’t come up with at least $5 million.
Mr. Brooks, who called himself “Uncle Stan” in some recruiting ads for the firm, said that the margin calls wiped out the firm’s $17 million in capital, according to published reports.
On June 21, Scott Brooks, son of Stanley Brooks, jumped to Wedbush Morgan Securities Inc. of Los Angeles and invited Brookstreet’s representatives to join him. (InvestmentNews, June 25).
Of 650 reps and employees at Brookstreet, Wedbush hopes to land more than 100, said Ed Wedbush, chief executive at Wedbush Morgan. “We’re recruiting, like other firms, some of their brokers and bond traders,” he said.
Wedbush Morgan already has about 40 independent-contractor reps out of 260 total brokers, Mr. Wedbush said.
But many Brookstreet reps don’t know much about Wedbush, said Larry Papike, a Jamul, Calif.-based recruiter, “so I think [Brookstreet] brokers really started looking around for other solutions,” he said.
Securities America Inc. of Omaha, Neb., and J.P. Turner & Co. LLC of Atlanta have picked up a number of Brookstreet reps,
Mr. Papike said.
Julie Mains, an attorney for Brookstreet, did not return a phone call last Monday about the firm’s status.
As recently as February, Mr. Kornfeld attempted to reassure his clients about their portfolios, telling them their investments were of high quality.
“With a lot of negative press lately surrounding the trouble in the subprime-mortgage market, we thought it would be appropriate to write you to reassure you about the high-credit-quality bonds you invest in with us through Brookstreet,” according to a bond market update sent by his practice, the CMO Bond Group.
“The vast majority of the bond investments held across our entire book of bonds are either expressly triple-A rated by Standard and Poor’s [of New York] or ‘implied’ triple-A rated because of the Fannie Mae, Freddie Mac or Ginne Mae government agency backing,” according to the note to clients, which was signed by Mr. Kornfeld and Al Rubin, another registered rep with the CMO Bond Group.
“As such, credit quality, which is the premise of the subprime problem, is not of concern to us.”
Not registered
According to Washington-based NASD’s records , Mr. Kornfeld and fellow adviser Clifford Popper, who was instrumental in creating the strategy, currently are not registered with a broker-dealer. But the two have worked at the same broker-dealers since 2001, jumping firms four times before landing at Brookstreet in January 2004.
One of those broker-dealers was Archer Alexander Securities Corp. of Overland Park, Kan., where Mr. Kornfeld and Mr. Popper were affiliated from April to December 2003.
A rep with Archer Alexander at the same time recently drew regulators’ attention due to trades in CMOs.
Last year, the SEC sued a former rep with Archer Alexander, Jamie Solow, alleging that during 2003, he “engaged in a fraudulent trading scheme involving inverse floating-rate collateralized mortgage obligations, a highly complex, risky and volatile type of mortgage-backed security.”
Mr. Kornfeld did not return a message left for him last Monday, and Mr. Popper’s office referred calls to his attorney, Lionel Tashkoff, who also did not return a call.
Dan Jamieson contributed to this article.
