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Jefferson City, MO – Missouri Secretary of State Robin Carnahan today announced that $574,000 will be returned to more than 100 investors, many of them seniors, who suffered losses after their savings were mishandled by a former Bankers Life and Casualty Company insurance agent, James Otto.

According to the cease and desist order, Otto, of Overland Park, Kan., provided brokerage services for customers of Bankers Life and gave advice on how to manage their securities investments held at other firms. Otto was not registered to sell securities or give investment advice, as required by Missouri law, but that did not stop him from promoting these services to his fellow agents at the insurance company.

In a complex scheme, Otto allegedly liquidated more than $7,100,000 in securities investments from 180 customer accounts and moved most of these funds into fixed or equity indexed annuities sold by Bankers Life. To do this, Otto set up new accounts for clients at discount brokerage firms, gave himself power of attorney, and transferred the investments to these brokerages. He immediately liquidated the accounts and moved the investments into annuity products that earned commissions for Otto and his coworkers.

RALEIGH – A former Harnett County man accused of luring investors into a fraudulent daytrading scheme pleaded guilty July 20 in US District Court in Raleigh, following an investigation by the North Carolina Secretary of State’s Securities Division. Ronnie D. Rainey, 43, pleaded guilty to federal mail fraud. He is scheduled to be sentenced on November 1. The Secretary of State’s Office conducted the investigation, and the mail fraud charge was brought by the US Attorney’s Office.

Rainey – a day trader and former Harnett County school teacher – solicited investors in North Carolina and other states to invest their money with him from 2003 until 2005 through four LLC’s that he created, Par 5 Investors, LLC; Birdie Investors, LLC; Eagle Investors, LLC; and Double Eagle Investors, LLC. Rainey was never registered to sell securities in North Carolina. He created multiple accounts with E*Trade and Ameritrade and drew in investors with claims that they would get monthly returns of 10-percent if they invested with him. Rainey is accused of defrauding 60 investors – including 12 North Carolina investors – of nearly $3 Million between 2003 and 2005.

When Rainey’s investments began losing money, he manufactured false monthly and quarterly statements for investors indicating their investments were turning a profit. Investigators allege Rainey shuffled funds between accounts and converted much of investors’ money to his personal use.

The article below is from the Orange County Register. Brookstreet has now closed and many unanswered questions remain: Why were retail client accounts approved for so much margin? Why wasn’t the illiquid nature of the CMOs taken into consideration for margin purposes? What was NFS involvement? Stay tuned

By JOHN GITTELSOHN
The Orange County Register
Agents with the U.S. Securities and Exchange Commission spent Friday monitoring the last day of business at the Irvine offices of Brookstreet Securities, which closed to retail customers this month after failing to meet margin calls on complex mortgage-based investments.
Stanley Brooks, Brookstreet’s founder and president, said SEC officials were posted at his office all week to ensure records were properly stored and secured. Asked if the SEC was there to investigate possible securities violations, he replied: “Not that I’m aware of.”
Andrew Petillon, an SEC spokesman, said he could not confirm or deny the existence of any inspection or investigation.
Several Brookstreet clients told the Orange County Register this week that they did not understand the risks involved in the investments that led to the company’s collapse.
Brooks said his company had $17 million in cash on hand at the end of May. But by June 20, after the clearing firm that handled Brookstreet’s accounts demanded cash to meet margin calls, Brookstreet was left with debts of $14 million.
The securities, called Collateralized Mortgage Obligations, are backed by pools of residential mortgages. Most CMOs are safe, paying investors principal and interest drawn from thousands of mortgages.
But 30 Brookstreet CMOs reviewed by the Register were more complex than most CMOs. Their structures expose investors to losing or gaining money following tiny fluctuations in interest rates. As such, they are difficult to value. Most are “interest-only strips,” which pay investors the interest stream but no principal from mortgages.
Brooks said the accounts collapsed because the clearing firm, a subsidiary of Fidelity Investments, used what are called “notional values” to price the CMOs. Those values plummeted as confidence plunged in mortgage-backed securities to subprime home loans.
“We never had a performance issue,” Brooks said of the CMOs. “We had a notional pricing disparity.”
Brooks said clients who paid the full price for their CMOs – and other financial products – still have money in their accounts, which will accompany his former brokers to whatever new jobs they get. SEC filings said Brookstreet managed $571 million for 3,644 clients.
Although he served as Brookstreet’s president, Brooks said Friday he was not responsible for overseeing the company’s trades, which relied on a network of 650 independent brokers nationwide.
In March 2005, the National Association of Securities Dealers suspended Brooks’ securities license for two years for inadequate supervision of trades. Last week, Brooks’ license was suspended again, this time for 60 days, because of failures in record keeping.
Contact the writer: 714-796-7969 or jgittelsohn@ocregister.com