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Districts to recover millions in settlement over risky investments

School Zone

The Journal Sentinel education reporters offer news and notes from their beat

March 19, 2012

By Erin Richards of the Journal Sentinel

March 19, 2012 0

Five Wisconsin school districts that invested in $200 million worth of risky financial instruments that tanked in the economic collapse have reached a settlement with a St. Louis-based financial firm they sued for leading them astray, according to documents released Monday.

Under the terms of the settlement, Stifel Nicolaus & Company Inc. on Monday paid $13 million to the districts – Waukesha, West Allis-West Milwaukee, Whitefish Bay, Kenosha and Kimberly – and provided a standby letter of credit for an additional $9.5 million to be paid when Stifel resolves a related case with the U.S. Securities and Exchange Commission, says a news release from the districts' attorneys at Kravit, Hovel & Krawczyk law firm.

Stifel sent out a news release as well, saying that the school districts, their trusts and Stifel will now work together to pursue their legal case against the Royal Bank of Canada, which manufactured the risky investments.

The financial provisions for the districts under the new settlement, coupled with an earlier administrative settlement with the Royal Bank of Canada, means that a total of $217.9 million has been recovered or will be restored to the districts.

That makes the settlement the second-largest in civil litigation in Wisconsin history, according to Steve Kravit, an attorney representing the districts.

The school districts sued both financial institutions in 2008 after bankers with Stifel helped sell them complex financial instruments known as collateralized debt obligations in 2006. The Royal Bank of Canada marketed and sold to trusts created by the districts the $200 million worth of CDOs, for which the districts contributed $37.3 million of their own funds and borrowed the rest.

The districts had intended to use the money from the investments to help fund the non-pension post-employment benefits promised to district employees.

They borrowed much of the money for the investments - either on their own or through trusts - with the expectation that what had been billed as safe investments would generate enough money to pay interest and benefits costs.

But the CDOs became worthless after the global markets collapsed in 2008.

The five districts recovered some of their money in September, when the SEC charged RBC Capital Markets LLC with misconduct in the sale of unsuitable investments to the districts, and for inadequate disclosures about the risk of those investments.

That brought the districts a share of $30.4 million.

The settlement Monday provides the potential for districts to “obtain significant additional damages,” according to the law firm's news release.

The settlement also means that Stifel has relieved the districts of their moral obligation to repay the $154 million in notes originally issued by Depfa Bank as part of the investment transactions, according to the Stifel release.

Erin Richards thumbnail
About Erin Richards

Erin Richards covers K-12 education in urban and suburban Milwaukee, as well as state politics related to education issues.

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