Federal regulators are accusing brokerage firm Stifel Nicolaus & Co. of civil fraud in its sales of risky complex investments to five Wisconsin school districts that lost all of the $200 million they invested.
The Securities and Exchange Commission announced the lawsuit Wednesday against St. Louis-based Stifel Nicolaus and former senior vice president David Noack. The SEC said they misled officials of the school districts by telling them the investments made in 2006, which ended up failing, were safe. The investments were linked to default insurance protection on corporate bonds. The school districts' credit ratings were downgraded as a result.
Stifel Financial Corp., the brokerage firm's parent, disputed the SEC's allegations and said it will challenge them in court.
In its suit filed in federal court in Milwaukee, the SEC is seeking unspecified restitution and fines against Stifel Nicolaus and Noack.
It was the latest SEC case targeting brokerage firms' sales of complex investments in the run-up to the financial crisis that hit with full force in 2008. Last year Goldman Sachs paid $550 million to settle similar civil fraud charges. That was the largest penalty against a Wall Street firm in SEC history.
Goldman was accused of steering investors toward complex mortgage investments without telling the buyers that the securities had been crafted with input from a client that was betting they would fail. In June, JPMorgan Chase & Co. agreed to pay $153.6 million to settle the SEC's civil fraud charges that it misled buyers of mortgage investments just as the U.S. housing market was collapsing.
An attorney representing Noack didn't return telephone calls seeking comment.
As was the case with Goldman and JPMorgan, the investments sold by Stifel Nicolaus were so-called collateralized debt obligations, securities backed by pools of other assets. They plummeted in value after the financial crisis struck as investors fled all but the safest forms of debt.
The five Wisconsin 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.
The school districts themselves sued Stifel Nicolaus and the Royal Bank of Canada, which put the investments together, in 2008 in Milwaukee County Circuit court.
"The districts are gratified that the SEC has issued fraud charges against Stifel and Noack," Stephen Kravit, an attorney for the school districts, said in a statement Wednesday. "The filing by the SEC of a parallel lawsuit to our case is proof that the districts are following a just path, and that they are ever closer to recovering their losses from this fraud."
The SEC said the investments sold by Stifel Nicolaus were unsuitable for the school districts and at odds with their conservative, risk-averse investment goals. The districts borrowed $162.7 million of their $200 million investment, according to the agency.
Stifel Financial, in a statement, said the investments were suitable "based on what we knew in 2006." The school districts read the offering materials and understood the risks of the investments, it said.
"If there is an issue in this case, it is with the manufacture and management of the investments" by Royal Bank of Canada, the company said. Royal Bank of Canada hid important information on the investments from Stifel and the school districts, the statement said.
But Royal Bank of Canada disputed that. "Stifel's claims are without merit. We take exception to Stifel's attempt to deflect blame without acknowledging their own central role in the school districts' losses," said Kevin Foster, a spokesman for RBC Capital Markets.
Stifel on its own conceived of the investments and persuaded its longstanding school district clients to participate, arranged financing, and told Royal Bank of Canada in writing that it had determined that type of investment was suitable for the districts, Foster said.