Recovering Losses caused by Investment Misconduct

SEC Charges Stifle, Nicolaus & Co and Executive with Defrauding Wisconsin Schools

The SEC has accused St. Louis-based brokerage firm Stifel, Nicolaus & Co. and a former senior executive of defrauding five Wisconsin school districts by selling them unsuitable, risky, and complex investments, according to an Aug. 10 SEC news release. The SEC filed the complaint in Milwaukee on Wednesday.

The SEC alleges that Stifel and Senior Vice President David W. Noack created a "proprietary program to help the school districts fund retiree benefits" through the investment of notes linked to the performance of synthetic collateralized debt obligations (CDOs), but grossly misrepresented the riskiness of the investments to the districts. (According to the complaint, Stifel and Noack said it would take "15 Enrons" for the investments to fail.)

The SEC also alleged that Stifel and Noack failed to disclose certain material facts to the districts, including the fact that certain CDO providers felt Stifel's proprietary program was too risky, and therefore declined to participate in it.

According to the complaint, the school districts set up trusts to deposit $200 million of primarily borrowed money into the notes in a series of three transactions over the last seven months of 2006. The investments were a complete failure. In addition to their losses, the school districts suffered a downgrading of their credit rates due to their inability to provide additional funds to the trusts they had established.

"Stifel and Noack abused their longstanding relationships of trust with the school districts by fraudulently peddling these inappropriate products to them. They were clearly aware that the school districts could ill afford to bear the risk of catastrophic loss if these investments failed," said Elaine C. Greenberg, Chief of the SEC Division of Enforcement's Municipal Securities and Public Pensions Unit.

The SEC's complaint listed the five defrauded school districts as: 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.

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