The SEC on Wednesday filed suit against Stifel, Nicolaus & Co. and David W. Noack, former senior vice president, claiming the firm defrauded five Wisconsin school districts that invested $200 million in collateralized debt obligation investments the SEC alleges were both unsuitable and misrepresented by the firm.
The five districts, which had intended to use the investment returns to pay retiree benefits, borrowed all but $37 million of the investment. They lost most of their money and suffered credit rating downgrades when unable to pay back the loans, according to the SEC complaint filed in U.S. District Court in Milwaukee.
“In the end, the investments were a complete failure, but generated significant fees for Stifel and Noack,” the SEC said in a statement Wednesday.
“Let this be a teaching moment for sellers of complex financial products,” said Robert Khuzami, director of the SEC's Division of Enforcement, in the statement.
The Stifel Nicolaus case is the first SEC investigation conducted jointly by some of the five specialized enforcement units created in 2010 to deal with new products and targets. In an interview, Elaine C. Greenberg, chief of the Municipal Securities and Public Pensions Unit, said her team worked with the Structured and New Products Unit because it involved school districts and the new CDO vehicles.
“This was an unsuitable investment, and they were well aware that the districts couldn't afford those losses,” Ms. Greenberg said. “What Stifel and Noack engaged in was fraudulent conduct, and they made material misrepresentations and omissions” about the risks involved.
The SEC is seeking financial penalties and permanent injunctions against the firm plus repayment of their gains with interest. Ms. Greenberg said the gains were “well over $1 million” and could double with interest.
Last year, the school districts involved — Kenosha, Kimberly, Waukesha, West Allis-West Milwaukee and Whitefish Bay — won court approval to bring their own civil action against Stifel, Nicolaus, Royal Bank of Canada Capital Markets, RBC Europe and RBC Holdings. Ms. Greenberg said the investigation is ongoing in terms of the other parties named in the school districts' suit.
A statement from Stifel Financial, parent of Stifel Nicolaus, said the real issue is the “inherent structural problems” of the products and the SEC is “unfairly blaming” the placement agent.
Attorneys for Mr. Noack did not return calls at press time.