Yesterday, the Securities and Exchange Commission announced the filing of a civil suit in which it alleges fraudulent activity by 10 brokers associated with a now-defunct California based investment firm.
The complaint filed by the SEC in federal district court in Palm Beach, Florida, alleges that the 10 brokers failed to provide sufficient disclosure to investors with regard to the risks associated with investments in collateralized mortgage obligations (CMOs). Specifically, the SEC alleges, "contrary to the representations they made to their customers, the defendants invested in risky types of CMOs that were highly sensitive to changes in interest rates and jeopardized customers’ yield and principal. They were not all guaranteed by the U.S. government as the defendants told their customers, and they were not suitable for retirees or investors with conservative investment objectives." The SEC further alleges fraudulent statements regarding the use of margin credit and used “deceptive and misleading tactics to enrich themselves at their clients’ expense,” causing the investors to lose $36 million, while the 10 brokers received $18 million in commissions and salaries.
The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties for the alleged violations of the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5.
The Financial Industry Regulatory Authority filed its own complaint alleging fraud and suitability violations against six additional brokers from the same firm.
