A federal judge has ordered the former chief executive of Brookstreet Securities Corporation, a now-defunct brokerage that was based in Irvine, CA, to pay a $10 million penalty as the result of a securities fraud case related to mis-selling in the run up to the financial crisis.

The Securities and Exchange Commission brought the case in December 2009, charging Stanley Brooks and Brookstreet with fraud for systematically selling risky mortgage-backed securities to customers with conservative investment goals.

The case is an example of the regulator bringing a brokerage firm to bear over the suitability of investment products. The judge opted to impose the maximum possible penalty, in addition to $110,713.31 in disgorgement and prejudgment interest.

In this case the Commission alleges Brookstreet and former CEO Brooks developed a program whereby the firm’s representatives sold “particularly risky and illiquid” collateralized mortgage obligations to retirees, seniors and others for whom they were unsuitable.  

“Brookstreet and Brooks continued to promote and sell the risky CMOs even after Brooks received numerous warnings that these were dangerous investments that could become worthless overnight. The fraud caused severe investor losses and eventually caused the firm to collapse,” the SEC’s statement said.

Separately, the agency is awaiting a court decision over a Brookstreet-related enforcement action filed in federal court in Florida. The SEC charged 10 former registered representatives of the company with making misrepresentations to investors in the sale of risky CMOs. Two representatives settled the charges and the Commission tried the case against the other eight last October.