Stifel, ex-executive settle SEC case over Wisconsin school investments

Reuters News
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Posted: Dec 08, 2016 9:47 AM

By Nate Raymond

(Reuters) - Stifel Financial Corp's brokerage unit and an ex-executive have agreed to pay $24.6 million to resolve claims arising from the sale of risky investment products to five Wisconsin school districts ahead of the financial crisis of 2008.

The U.S. Securities and Exchange Commission announced the deal on Thursday. As part of the settlement, St. Louis-based Stifel, Nicolaus & Co and David Noack, a former senior vice president, agreed to admit to wrongdoing, the SEC said.

Under the settlement, Stifel and Noack agreed to jointly forfeit $1.66 million and pay $840,000 in prejudgment interest. Stifel and Noack also agreed to pay penalties of $22 million and $100,000, according to court documents.

The final settlement came after a tentative accord was reached in September on the eve of trial in the 2011 lawsuit. Of the $24.6 million that will be paid, the five school districts will receive $12.5 million, according to court papers.

The SEC said that sum, coupled with prior settlements by the SEC and in private litigation, would fully compensate the school districts for their losses.

A spokesman for Stifel did not immediately respond to a request for comment, nor did a lawyer for Noack.

The SEC sued Stifel and Noack in 2011, saying they misled five Wisconsin school districts about the risks of investing in synthetic collateralized debt obligations.

Synthetic collateralized debt obligations are tied to mortgage-backed securities or credit default swaps and were at the heart of the financial crisis eight years ago.

The districts did not invest directly in the CDOs, instead providing funds to trusts that invested in notes issued by special purpose vehicles affiliated with RBC Capital Markets, the SEC said.

In trying to persuade the districts to make the investments, Noack at the time told them it would take "15 Enrons" for them to lose money, and told two districts that it would take 20 to 30 defaults for them to suffer a loss, the SEC said.

But according to the SEC, the investments were a compete failure, causing the districts to suffer over $200 million in losses as the investments declined in value in 2007 and 2008, amid the housing market downturn and financial crisis.

RBC, a unit of Royal Bank of Canada, in 2011 reached a $30.4 million settlement with the SEC over its role in misconduct relating to the sale of the investments.

The case is Securities and Exchange Commission v. Stifel, Nicolaus & Co Inc et al, U.S. District Court, Eastern District of Wisconsin, No. 11-00755.

(Additional reporting by Susan Heavey and Tim Ahmann; Editing by Frances kerry)