A Ninth Circuit panel has affirmed the imposition of a civil penalty against the CEO of Brookstreet Securities Corporation. The court let the $5.88 million penalty stand, citing Stanley Brooks's "particularly egregious" actions that have already resulted in numerous sanctions due to his failure to supervise and establish supervisory procedures (SEC v. Brookstreet Securities Corporation , November 15, 2016, per curiam).
SEC action. In 2009, the Commission filed a civil injunctive action against Brookstreet and Brooks, charging them with fraud. According to the Commission, Brookstreet and Brooks developed a program through which the firm's registered representatives sold collateralized mortgage obligations (CMOs) to seniors and retirees. Even after receiving warnings that the CMOs were risky and could become worthless overnight, Brooks continued to promote and sell them. Many of the customers ultimately lost their homes, ability to retire, or the ability to stay retired.
On a previous appeal, the court found that Brookstreet employees violated the antifraud provisions and that Brooks was liable as a controlling person. In light of Brooks’ knowledge of, but failure to address, the problems in Brookstreet's CMO program, the court found that the injunctive relief ordered against Brooks was appropriate. The portion of the district court judgment regarding disgorgement and civil penalties was vacated, however, in order to recalculate the monetary relief imposed against Brooks.
Not "beyond the pale." On appeal, Brooks argued that the district court abused its discretion by failing to consider a list of factors relevant to determining the appropriate penalty amount. The court disagreed, noting that the district court's analysis incorporated most of the factors listed by Brooks, and the decision not to consider factors such as proportionality to illicit gain did not render the calculation "beyond the pale of reasonable justification under the circumstances."
Brooks also maintained that the penalty violated the Excessive Fines Clause of the Eighth Amendment. The court said, however, that $5.88 million was not disproportional to the severity of Brooks's violation. Among other factors, the court noted that it had previously found Brooks's actions to be "particularly egregious" and that he has been sanctioned by state regulators and FINRA for his failures to supervise. Continuing, the court pointed to the extent of the harm caused by Brooks, noting in particular the "staggering" losses suffered by many of the victims.
The court concluded that a $5.88 million penalty is "not grossly disproportionate to this serious violation." A conservative estimate indicated that six of the 49 victims sustained losses of at least $2 million and a penalty less than three times this figure is not unconstitutionally excessive, the court said.
The case is No. 15-55046.
Attorneys: Morgan B. Ward Doran for the SEC. Charles A. Bird (Dentons US LLP) for Stanley C. Brooks.
Companies: Brookstreet Securities Corp.
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