The Wall Street Journal reported today that the SEC has increased the scope of its probe into Stifel Financial Corp. The firm was sued in 2008 by five Wisconsin schools for allegedly misleading them about the risks of collateralized debt obligations (“CDOs”). Stifel has vehemently denied any wrongdoing. It is the SEC’s mission to determine whether the St. Louis-based corporation should have sold the schools three CDOs.
In 2006, the schools bought the CDOs to help them meet current and future health-care and pension costs. Mr. Noack, the, investment banker who worked with the schools, allegedly assured school officials that the securities were a safe investment, saying “there would need to be 15 Enrons before you would be impacted” by any market failure. In total, the schools sunk $200 million into Stifel’s CDOs, about $165 million of which was borrowed from Depfa Bank. The 2008 market crisis has rendered the mortgage bonds nearly worthless, and the Bank has demanded repayment.
To schools are suing Stifel (and the Royal Bank of Canada) for selling sophisticated financial instruments to amateur investors, in violation of Wisconsin state law. Explains the Journal, “The issue of suitability centers on whether the investment is appropriate for the investor, in view of factors such as their sophistication and appetite for risk.” The SEC has “interpreted suitability to be an obligation under federal securities laws, and often takes it into account when assessing whether the sale of a particular investment violates anti-fraud provisions.”
A Stifel Financial spokesperson said that because it “did not create the investment product” it shouldn’t “be the focus of this investigation.” The SEC would not comment.