SEC charges Stifel Nicolaus with defrauding Wisconsin school districts

By Angela McDaniels

Tacoma, Wash., Aug. 10 - The Securities and Exchange Commission said it charged Stifel, Nicolaus & Co., Inc. and a former senior executive with defrauding five Wisconsin school districts by selling them unsuitably risky and complex investments funded largely with borrowed money.

The SEC alleges that Stifel and senior vice president David Noack created a proprietary program to help the school districts fund retiree benefits by investing in notes linked to the performance of synthetic collateralized debt obligations. The school districts established trusts that invested $200 million in three transactions from June 2006 to December 2006. The districts contributed $37.3 million and borrowed the remaining $162.7 million.

The investments sold to the trusts were created by Royal Bank of Canada. These investments steadily declined in value, the SEC said, and eventually the school districts lost all of their investments and were downgraded for failing to provide additional funds to the trusts they established.

According to the SEC's complaint, Stifel and Noack misrepresented the risk of the investments and failed to disclose material facts to the school districts.

"In the end, the investments were a complete failure but generated significant fees for Stifel and Noack," the SEC said in a news release.

The SEC seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest and financial penalties.

The five school districts are Kenosha Unified School District No. 1, Kimberly Area School District, School District of Waukesha, West Allis-West Milwaukee School District and School District of Whitefish Bay.

Stifel Nicolaus responds

Stifel Nicolaus said that it is "deeply disappointed" and will "vigorously" defend itself.

Stifel Nicolaus noted the AA- rating of the investments and said the school districts acknowledged in writing that they were sophisticated and accredited investors, the investments were suitable, they read the offering materials and understood the risk of the investments and they could withstand the total loss of their investment.

In addition, the broker said RBC, the creator of the investments, had an obligation to assess the suitability of these investments and determined the investments were suitable.

"If there is an issue in this case, it is with the manufacture and management of the investments. The SEC chose to focus on Stifel's sales practices rather than the creation of the investments and their inherent conflicts," Stifel Nicolaus said in a company news release.

"Based on what we knew in 2006, the investments were suitable. With what we have uncovered in the meantime, we do not believe the product, created by RBC, was suitable for any investor."

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