by Tanta on 6/30/2007 07:39:00 AM

Remember Brookstreet, the brokerage whose overleveraged retail clients discovered the magic of mark to market a while ago? Evidently the SEC is interested in exactly how that went down. Stories are being, well, not exactly stuck to yet. They're in the works:

[Stanley Brooks] said he is still trying to sort out how the firm imploded. "It's so complicated that the smartest guys in the industry got their lunch handed to them," he said. "It was a perfect storm."

It was also, apparently, a dark and stormy night, during which the Ronco Pocket Cliché Generator began to malfunction. I suppose the industry having its lunch handed to it is better than competitors trying to eat each others' . . . models. Ahem.

Brooks, who founded the family-owned firm in 1990, said the markdowns were executed by its clearing firm, the National Financial unit of Fidelity Investments, the biggest U.S. mutual funds company.

Brooks said "the pricing services [employed by National Financial] issued theoretical pricing [on the CMOs] that apparently wasn't accurate." But he said it was unclear if the firm is planning litigation in the wake of the collapse.

"We are not responsible," Fidelity spokesman Adam Banker said. "While we won't comment on an individual client, I can tell you certain contractual provisions apply when investors borrow on margin purchased securities.

"National Financial has clear margin agreements in place with its clients and uses reputable firms to price securities held in brokerage accounts."

One New York lawyer, who asked not to be named, said he may be retained by one Brookstreet client who lost $1.5 million and is considering litigation.

So Mr. Brooks has settled on the "theoretical pricing" story. One wonders: did Mr. Brooks and his merry band of brokers have any idea that this pricing was "theoretical" before they sold this stuff to clients with 90% borrowed money? Was there some observable market price generated by frequent trades in the asset in question in May that suddenly became "theoretical" in June? Are we to understand that National Financial never marked those positions on the way up?

So now we know: it's "mark to market" during the boom, but it's "mark to model" in the bust. I am eager to find out whether Brookstreet's retail investors get treated with the same contempt certain parties have been heaping on hapless first-time homebuyers who took out 100% toxic loans they didn't understand on the mistaken belief that house prices only go up. I mean, if you want fun, just walk into any group of mortgage-market participants and mention "fiduciary requirements." You will be told in no uncertain terms that your average unsophisticated would-be homeowner carries all the responsibility for doing the due diligence, and that the mortgage brokers are just here to take orders.

If you're an "investor" with $1.5 million to blow? The SEC will get right on it.

(hat tip, risk capital!)