The financial firm that allegedly defrauded the Waukesha School District and four other Wisconsin school districts has been charged with fraud by the U.S. Securities and Exchange Commission.
In a complaint filed in federal court in Milwaukee, the SEC alleged that Stifel and Senior Vice President David W. 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 to December 2006, paid for largely with borrowed funds. 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, according to a news release issued by the SEC.
“Let this be a teaching moment for sellers of complex financial products,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The sale of these products to school districts or similar investors must meet well-established standards of suitability and accurate disclosure. Stifel and Noack violated these standards and jeopardized the ability of the school districts to fund operations and provide a quality education to students.”
Elaine C. Greenberg, Chief of the SEC Division of Enforcement’s Municipal Securities and Public Pensions Unit, added, “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.”
In 2006, the Kimberly, Kenosha, Waukesha, West Allis/West Milwaukee, and Whitefish Bay School Districts were convinced by Stifel and Royal Bank of Canada to purchase synthetic CDO products offered by Stifel, Nicolaus & Company and the Royal Bank of Canada, which were represented to be “just like buying US Treasuries for seven years,” according to a news release issued by the attorney representing the five school districts in a lawsuit filed against the financial firms in Milwaukee County Circuit Court. The districts' attorneys and the financial firms were in settlement talks earlier this month.
"Our thanks go to the SEC for taking a stand against Wall Street firms who took advantage of our school district and our hard working board members, teachers and staff, all of whom were just trying to fund promised benefits in a responsible way," said Waukesha Superintendent Todd Gray in a news release.
The SEC filed charges against brokerage firm Stifel Nicolaus and its then broker, David Noack. Noack worked both as a registered representative for Stifel and as financial advisor to the school districts. Stifel and the Royal Bank of Canada advised the School Districts to purchase synthetic CDOs as a safe means to partially fund other post-employment benefits (OPEB), such as health insurance, to be paid over many years to retired teachers and staff, and the Districts followed that advice, according to the news release.
The attorneys representing the school districts claimed the districts’ OPEB trusts were not accredited investors or qualified purchasers for such extremely complex derivative investments, which could only legally be sold to certain large, ultra-sophisticated investors. Secondly, the attorneys claimed Stifel and the Royal Bank of Canada violated securities laws requiring the sellers to know their customers, and only offer suitable investments to them. Thirdly, the attorneys claimed Stifel and the Royal Bank of Canada lied to the districts about what was contained in the investment and failed to inform the districts that the investments were failing, while at the same time selling the districts additional, new synthetic CDOs.
In a statement, Stephen Kravit, one of the attorneys for the five Wisconsin school districts suing Stifel Nicolaus & Co., the Royal Bank of Canada, and others, said three million pages of discovery documents have been reviewed and analyzed by the districts' counsel, and information has since been turned over to the SEC as they cooperate in the investigation.
"The districts are gratified that the SEC has issued fraud charges against Stifel and Noack," Kravit said. "The districts are aware that the SEC has dedicated considerable resources to its own investigation. 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."