School District Recovers Nearly All of Failed Investment

The will recoup nearly all of its losses and has been relieved from repaying notes from under a legal settlement reached with its former financial advisor.

Waukesha was one of five Wisconsin school districts that filed suit against Stifel Nicolaus and the Royal Bank of Canada in September 2008 as a result of a failed investment. Those district purchased $200 million in synthetic CDOs manufactured by the Royal Bank of Canada and purchased by the districts' trusts when Stifel served as their investment banker.

The districts believed it was a safe AA-rated investment, but within 18 months, the CDOs became worthless.

The settlement announced today returned $13 million to the districts' trusts, and relieves the districts of their moral obligation to repay $154 million in notes originally issued by Depfa Bank as part of the CDO transactions. Those notes were purchased by Stifel in the summer of 2011, and as part of the agreement, Stifel agreed to release the district from any obligation to pay the trusts' notes.

“This settlement is a significant step toward recouping our losses,” said Waukesha Superintendent Todd Gray in the news release. “It is the result of cooperation and hard work for the benefit of our district and its taxpayers. We look forward to the day when there will be a final resolution and full damages assessed.”

Whitefish Bay School District Superintendent Mary Gavigan thanked the School Board and district staff for its work that led to today's announcement, and thanked taxpayers for their patience over the last four years. She said the district and the School Board have not been able to share much information about the case over the years, but with today's announcement, she said the numbers speak for themselves.

"Especially in these challenging financial times for school districts, we are delighted to be in a position to achieve return of our invested funds, and look forward to the day when this is all behind us," she said.

Stephen Kravitt, who is representing the five districts and their trusts, said the settlement announced today is the second largest civil litigation settlement in Wisconsin history.

Previously, the districts'  in an SEC proceeding against the Royal Bank of Canada. 

With the forgiven debt and the settlements received so far, the districts and their trusts have recovered 99.6 percent of its original $200 million investment. The district also expects the damages and legal fees — which Kravitt is estimating to be in the millions — to be recouped through its ongoing lawsuit against the Royal Bank of Canada, which alleges the company misrepresented the risks associated with the investment.

"The real thing that should be learned from this is that a fraud was committed here," Kravitt said. "It was promoted to be one thing, and it was another. The Royal Bank of Canada knew it was an inappropriate investment, and it didn't tell anybody."