According to local new services, the US Securities and Exchange Commission is asking five Wisconsin school districts for additional information about the $200+ million in synthetic collateralized debt obligations that they purchased through Stifel Nicolaus and Royal Bank of Canada subsidiaries in 2006. The CDO’s are now reportedlyworthless.
The districts collectively bought the CDOs with $35 million of their own money and more than $165 million borrowed from Depfa bank. Since then, the entire investment has failed. In March, Depfa noticed default on the district trusts which had been established for the investments and took the $5.6 million in interest that had been earned since the purchase was made.
In their 2008 securities fraud lawsuit against the investment firms, the districts accused the defendants of deceptive practices and fraud. School officials contend that they were misled into investing in CDO’s because of a Stifel product that was supposed to build trusts for post-retirement teacher benefits. They say that they weren’t told that that they could lose their entire investment because of the 4 – 5% default rate among companies within the CDO. They also contend that they were never advised that their investments included sub-prime mortgage debt, credit card receivables, home equity loans, and other risky investments.
Securities Attorney Robert A. Kantas, who represents the school districts, says the firms should never have sold his clients these CDO’s because the trusts weren’t qualified to make the purchases. Kantas notes that the investment was “bad from the beginning,” and he is confident that the districts will win. He says that the investments were apparently set up in a way that allowed Royal Bank of Canada to make money if the districts lost money.
Some following the suit have estimated that the lawsuit will likely not go to a jury trial until 2012. The districts are seeking to recover their entire $200+ million investment, plus costs including legal fees, plus punitive damages and/or three times the amount lost on the investments.
Related Web Resources:
SEC looks into Kimberly School District investment case, Post Crescent, June 10, 2010
Wisconsin School Districts Sue Royal Bank of Canada and Stifel Nicolaus and Co. in Lawsuit Over Credit Default Swaps, Stockbroker Fraud Blog, October 7, 2008
School Lawsuit Facts