Judge allows school districts' lawsuit over soured investments to continue

By Amy Hetzner of the Journal Sentinel

Five Wisconsin school districts' legal claims can go forward against banks that district officials say misled them to invest millions of dollars of borrowed money in risky investments, a judge decided Thursday.

In an oral ruling, Milwaukee County Circuit Judge William W. Brash III denied motions to dismiss the districts' lawsuit against Stifel, Nicolaus & Co. Inc. and Royal Bank of Canada Capital Markets, RBC Europe and RBC Holdings.

In ruling for the districts, Brash employed a minimal standard that considered only whether they could show a violation of the law if everything they claimed were proved true.

The districts will have a tougher time backing up their claims as the lawsuit proceeds, said Brian Cahill, an attorney for Stifel, Nicolaus.

"Now, the next step comes, which is much more expensive for everybody involved," he said.

The districts - Kenosha, Kimberly, Waukesha, West Allis-West Milwaukee and Whitefish Bay - sued the banks in September 2008 and have asserted a number of legal claims that include violations of state securities law, fraud, misrepresentation and breach of contract.

Lawyers for the districts claim that district officials had been led to believe the investments sold by the banks in 2006 carried little risk of loss.

The districts' attorneys say the value of their $200 million investments in complicated transactions that involved collateralized debt obligations and credit default swaps has dropped dramatically since then. Those investments are virtually worthless and unlikely to pay back much money when they mature in 2013, the districts have said.

Stifel, Nicolaus and Royal Bank of Canada asked for a dismissal of all the claims, characterizing the lawsuit as a way to cast blame for their potential losses.

"During a once-in-a-lifetime economic meltdown that no one saw coming last year, the investments didn't succeed," Mark Kirsch, one of the attorneys for Royal Bank of Canada, said at a hearing on the dismissal motions in November.

Thursday's ruling comes at a time when the school districts are being pressured by DEPFA Bank, which lent more than $165 million to the districts' trusts, to negotiate a settlement of the loans used to purchase the investments.