Bagholders in Tears

Just moments after posting Who's Holding The Bag? someone sent me a link about Bagholders in Tears.

Dozens of South Florida senior citizens have lost millions of dollars of their savings because their brokers bet wrong on risky mortgage-backed securities after promising them a stable investment.

Coral Springs lawyer Darren Blum said Tuesday that his firm, Blum & Silver, is representing about 25 investors who had invested $20 million with Brookstreet Securities, a California firm that has brokers in at least a half-dozen South Florida offices. Many investors are planning legal action to recover their losses, and for damages and attorney's fees.

The Securities and Exchange Commission and brokerage regulator NASD are reviewing Brookstreet's financial records and the firm has started shutting down its operations.

"We've had people in their 80s in here in tears," Blum said. "These people are devastated."

The seniors invested in securities called collateralized mortgage obligations, or CMOs. Some independent brokers working in Brookstreet offices pitched the CMOs to wealthy seniors at dinner seminars and condominium meetings.

"They presented these as very safe, like a bond, paying 7 to 8 percent," Blum said. The CMOs the brokers invested in, however, were complex and highly speculative, he said. Investors also received inaccurate brokerage statements that overstated how much they had in their accounts, Blum said.

Brookstreet executives could not be reached for comment Tuesday.

Brookstreet has said the money was lost in part because of too much securities trading on margin, or borrowed money. The value of the CMOs declined, Brookstreet said, as the so-called subprime mortgage market worsened. The firm that administers Brookstreet's accounts, National Financial Services, then demanded to be paid for the investments bought on margin.

The margin losses mean that investors not only lost their funds, but could owe money that was borrowed to trade in their accounts. Blum said he talked with one client Tuesday who has about $12 million in margin losses.

One of Blum's youngest clients is Gail Fisher of Boca Raton. After her husband died in 2001, Fisher, 54, was looking for a safe investment that would give her steady income to help pay for expenses, including college education for two children.

Several months later, she heard a Brookstreet broker based in Coral Springs give a seminar at the Boca Raton condo development where her 87-year-old father lives. She was told that the investment was a mix of CMOs and mutual funds designed to work like a seesaw.

"Basically if one goes down the other would go up, so it was supposed to be very safe," Fisher said.

Fisher initially invested $410,000, then $50,000 and later $60,000. Her father invested $50,000. She was receiving monthly income of about $4,000. Fisher now thinks that money was being paid out of her principal and that the vast majority of her investment is gone.

She said she received brokerage statements that, while somewhat confusing, indicated that her investment was safe. Last year, Fisher's accountant told her he was troubled by the statements and urged her to have another financial specialist study them. That specialist "took one look and said, 'You have to see a lawyer,'" Fisher said, sobbing as she spoke. "He couldn't believe what [investments] they had me in."

Three Comments

1. I do not take any pleasure in this other than in being right.
2. I sure would not have been warning people about this for several years if I wanted it to happen.
3. If you think you know something that others don't, the best way to profit from it is to keep your mouth shut.
   

With that out of the way even I am stunned by a $12 million in margin call. I don't think I would wish that on anyone. How can any company let losses get that far away?

Of course we all know the answer to that: greed and fraud. Clearly these investments were not at all suitable for anyone let alone someone with a clear goal of capital preservation.

Will it matter? Of course not. Sure, there will be lawsuits. Perhaps someone goes to jail over this. Perhaps. But that will not restore a $12 million margin call. Nor will it make right the woes of Gail Fisher or anyone like her.

Note that Brookstreet executives could not be reached for comment. Add that to the growing list those refusing to comment. At the top of the list are Bear Stearns and Merrill Lynch, both refusing to comment on recent happenings.

The sad thing is this is just the beginning of what is to become a long trail of tears. Expect to hear more stories like this. A lot more.

This post originally appeared on Minyanville.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/