Wites & Rogers today announced that Judy Schulman, a Boca Raton resident who suffered substantial losses in a risky portfolio of Collateralized Mortgage Obligations (CMOs) sold to her as a safe and conservative investment by Brookstreet Securities Corporation, received an arbitration award of $523,300. After a 4-day hearing, the Financial Industry Regulatory Authority (FINRA) Arbitration Panel found Brookstreet and its President, Stanley Brooks, jointly and severally liable for Ms. Schulman’s losses.
Ms. Schulman, who was 53 when the account was opened, argued that Brookstreet failed her by recommending a risky, complex portfolio comprised almost entirely of CMOs, which Brookstreet marketed to her as a conservative investment that would yield income and was as safe as a bank CD. Ms. Schulman had very limited investment experience, and clearly told her broker that she wanted only very conservative investments and did not want to lose any money.
Ms. Schulman’s lawyer, Marc A. Wites of Wites & Rogers, in Lighthouse Point, Florida, argued that Stanley Brooks should be held jointly and severally liable because Brooks’ directed his firm to engage in a company-wide scheme to misrepresent and promote CMOs as safe, conservative investments, and that Brooks and the firm knew that they were volatile, risky and suitable only for sophisticated investors.
CMOs are highly complex and volatile investments suitable only for sophisticated investors. In a 1993 notice to its members, FINRA (which was then known as the National Association of Securities Dealers or NASD) pronounced that CMO positions like the ones sold to Ms. Schulman are volatile, and suitable only for sophisticated investors with high risk profiles. Ms. Schulman’s Brookstreet account declined in value within months after it was opened in September 2005, and it never recovered.
According to Mr. Wites , the case was the first in the nation concerning Brookstreet’s CMO Program to reach the final arbitration hearing, which is the equivalent of a trial. He added, though, that unlike Mrs. Schulman’s case, the dozens of other cases against Brookstreet were brought by investors who allege that they were fraudulently induced to purchase unsuitable CMOs and suffered losses caused, in part, by margin calls that led to the ultimate demise of Brookstreet in June 2007. Ms. Schulman’s account was not subject to any margin calls, and was closed before Brookstreet went under.
The Arbitration Panel also found that Brookstreet and Mr. Brooks failed to comply with discovery requests and orders of the Panel, and sanctioned them $15,000. As additional sanctions, the Panel ordered them to pay Ms. Schulman’s attorney’s fees, and to pay all of the hearing session fees charged by FINRA to run the arbitration, which totaled $20,400.
