U.S. securities regulators have charged a St. Louis-based brokerage firm and a former executive with defrauding five Wisconsin school districts by selling them risky investments that were unsuitable for the districts' purposes, according to a complaint filed in a Milwaukee federal court.
In the complaint, the U.S. Securities and Exchange Commission alleges that Stifel, Nicolaus & Co. and then-senior vice president David Noack created a program to help the school districts fund post-retirement benefits for employees by investing in complex financial instruments. The school districts established trusts and borrowed money to invest about $200 milllion in notes linked to the performance of those instruments, known as collateralized debt obligations, in 2006.
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.
When global markets crashed in 2008, the investments became virtually worthless, but generated significant fees for Stifel and Noack, according to the complaint.
The five Wisconsin districts - Kimberly, Kenosha, West Allis-West Milwaukee, Waukesha and Whitefish Bay - sued Stifel and the Royal Bank of Canada in Milwaukee County circuit court for fraud. The parties were involved in settlement talks last month.
The districts' attorneys praised the SEC Wednesday for filing fraud charges against Stifel and Noack.
"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 fraud," Stephen Kravit, one of the attorneys for the school districts, said in a statement.
Dan Callahan, a spokesman for Stifel, said the company would provide a a response soon.
Stay tuned for more details.