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SEC Charges Stifel Nicolaus with Selling Fraudulent Investments to School District

The SEC has charged St. Louis-based brokerage firm Stifel, Nicolaus & Co. and a former senior executive with defrauding several Wisconsin school districts by selling them unsuitably risky and complex investments funded largely with borrowed money.

The SEC is alleging that Stifel and Senior Vice President David W. Noack created a proprietary program to help the school districts fund retiree benefits by investing in notes linked to the performance of synthetic collateralized debt obligations (CDOs).

The school districts established trusts that invested $200 million in three paid for largely with borrowed funds. Stifel and Noack misrepresented the risk of the investments and failed to disclose material facts to the school districts. The investments proved a failure and generated significant fees for Stifel and Noack.

Stifel and Noack represented that it would take “15 Enrons” for the investments to fail, and that 30 of the 105 companies in the portfolio would have to default before the school districts would suffer a loss of their principal.

Stifel and Noack sold the school districts an unsuitable product that did not meet their investment needs. They also used heavy leverage and the structure of the synthetic CDOs exposed the school districts to a heightened risk of catastrophic loss.