Stifel Nicolaus investigated by SEC over risky investments, CDOs

According the Investment News, Stifel, Nicolaus & Co. and a former executive at the brokerage defrauded five eastern Wisconsin school districts through the sale of $200 million in risky investments that turned out to be a complete bust, securities regulators said.

The St. Louis-based company, along with former senior vice president David Noack, promised the districts that it would take “15 Enrons” or “that 100 of the top 800 companies in the world would have to go under” before the school districts would lose their principal, the Securities and Exchange Commission said in its civil complaint.

Stifel Nicolaus and Mr. Noack knew the school districts didn’t have the sophistication or experience to evaluate the risks of the program they created to fund retiree benefits through investing in notes tied to the performance of synthetic collateralized debt obligations, the SEC said in its suit, filed Wednesday in U.S. district court in Milwaukee.

The SEC in recent months has been cracking down on firms that sell unsuitable, complex products to individual and otherwise unsophisticated investors. Last month, the commission recommended broker-dealers boost disclosure about structured securities products after a sweeping examination of 11 broker-dealers pointed out deficiencies in sales practices.

The regulator alleges that Stifel Nicolaus and Mr. Noack misrepresented the risk of the investments and failed to tell the school districts that the portfolio in the first transaction was performing poorly from the beginning. In fact, the SEC says that certain CDO providers had expressed concerns about the risks of Stifel’s program and declined to participate.

Additionally, reliance on leverage and the structure of the CDOs exposed the districts to “a heightened risk of catastrophic loss,” the commission said. The school districts — Kenosha Unified School District No. 1, Kimberly Area School District, School District of Waukesha, the School district of West Allis-West Milwaukee, and School District of Whitefish Bay — lost their full investment and suffered credit rating downgrades, the SEC said.

Stifel Nicolaus revealed in April that it had received a notice from the SEC that said commission staff planned to recommend civil or administrative action against the firm. Additionally, five Wisconsin school districts named Stifel Nicolaus in a Sept. 2008 lawsuit that alleged fraud and negligence from the $200 million in investments.

As a firm, Stifel has quintupled its revenue since 2005 with nine acquisitions, including Legg Mason Inc.’s capital-markets business and Thomas Weisel Partners Group Inc. It has been discussed as a possible buyer for Regions Financial Corp.’s Morgan Keegan & Co., which itself has been the subject of SEC complaints over sales of sub-prime mortgage-backed securities.

Mr. Noack worked for Stifel Nicolaus from 2000 to 2007. He’s been a registered representative with Robert W. Baird & Co. Inc. in Milwaukee since February 2007, according to broker registration records kept by the Financial Industry Regulatory Authority Inc.

If you have questions about investments you made with Stifel Nicolaus, the securities attorneys of The White Law Group may be able to help. To speak with a securities attorney, please call the firm’s Chicago office at 312/238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, please visit our website at https://whitesecuritieslaw.com.