SEC sues brokers for fraud; investors lose $175 million

By Palm Beach Business.com

WEST PALM BEACH — Derivatives can spin the head of the most sophisticated investor, yet brokers for a now-defunct California brokerage routinely sold them to retirees and other conservative investors by labeling the complex securities as risk-free, the Securities and Exchange Commission charged Thursday in a suit filed in federal court in West Palm Beach.

As many as 750 investors nationwide poured $175 million into a type of collateralized mortgage obligation known as inverse floaters sold by a group of 10 brokers at Brookstreet Capital, a now-defunct brokerage then based in Irvine, Calif.

Not only did the investors lose their principal — the amount they had invested — 80 actually ended up collectively owing $36 million because the brokers had borrowed against their accounts to buy additional securities.

Meanwhile, the brokers combined made $18 million in salary and commission for their efforts.

The suit names 10 former Brookstreet brokers as defendants, six of whom worked in South Florida. They are:

— William Betta Jr., 36, of Boca Raton who worked in the Boca office. Presently, he is a broker with Workman Securities.

— James J. Caprio, 36, of Weston, a former Boca branch manager. Caprio, who now works as a commercial real estate broker, has a history of securities law violations, according to the SEC suit.

— Troy Gagliardi, 37, of Boca Raton, also a former Boca office manager. Gagliardi is working for Newbridge Securities.

— Barry M. Kornfeld, 46, of Parkland, a broker in the Coral Springs office. He is now a commercial real estate broker.

— Clifford A. Popper, 51, of Highland Beach, another former Boca office broker, described in the suit as the “architect” behind the CMO sales program. He is unemployed.

— Alfred B. Rubin, 55, of Pompano Beach, who worked in Brookstreet’s Coral Springs office. He is also unemployed, according to the SEC.

Also charged in the suit: Steven I. Shrago of St. Petersburg, Travis A. Branch of Kailua, Hawaii, Russell M. Kautz of Medford, Ore., and Shane A. McCann of Florence, Mont.

“These brokers disguised the risks of investing in these derivatives of mortgage-backed securities, exposing their customers to substantial losses as the subprime crisis emerged,” said Robert Khuzami, director of the SEC’s division of enforcement. “They disregarded their customers’ needs and used deceptive and misleading tactics to enrich themselves at their clients’ expense.”

According to the SEC’s complaint, the defendants portrayed particularly risky types of CMOs as secure investments. Brokers called the securities government-backed, or government–issued bonds. While some were federally guaranteed, others were not.

The brokers compounded the losses by borrowing against their customers’ accounts to buy more CMO, leaving them owing $36 million to the brokerage that “cleared” trades for Brookstreet..

The SEC is asking the court to order the defendants to surrender the money they made from the CMO sales, plus interest and other financial penalties.