Stifel, SEC reach deal over Wisconsin school investments

September 9, 2016 12:32 PM EDT

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By Nate Raymond

(Reuters) - Stifel Financial Corp's (NYSE: SF) brokerage unit has reached a deal with the U.S. Securities and Exchange Commission to resolve claims it misled five Wisconsin school districts about the risks of sinking $200 million in investment products that were involved in the financial crisis of 2008.

The tentative settlement with St. Louis-based Stifel, Nicolaus & Co and David Noack, a former senior vice president, came on the eve of a trial set for Monday, and was disclosed in a filing made public Thursday in federal court in Milwaukee.

The financial terms were not disclosed, but the deal would include the defendants paying a penalty, forfeiting their ill-gotten gains and admitting to certain facts, according to the filing.

The settlement requires the formal approval of the SEC's commissioners, a process that attorneys anticipate could take two months, the filing said.

Stifel, the SEC and Noack's lawyer did not immediately respond to requests for comment.

The SEC sued Stifel and Noack in 2011, saying they misled five Wisconsin school districts about the risks of investing in synthetic collateralized debt obligations (CDOs), which are tied to mortgage-backed securities or credit default swaps and were at the heart of the financial crisis eight years ago.

The districts did not invest directly in the CDOs, instead providing funds to trusts that invested in notes issued by special purpose vehicles affiliated with RBC Capital Markets, the SEC said.

In trying to persuade the districts to make the investments, Noack at the time told them it would take "15 Enrons" for them to lose money, and told two districts that it would take 20 to 30 defaults for them to suffer a loss, the SEC said.

But according to the SEC, the investments were a compete failure, causing the districts to suffer over $200 million in losses as the investments declined in value in 2007 and 2008, amid the housing market downturn and financial crisis.

Stifel denied wrongdoing, and contended in court papers that there was no evidence that the defendants had any intent or motive to defraud the districts.

RBC, a unit of Royal Bank of Canada, in 2011 reached a $30.4 million settlement with the SEC over its role in misconduct relating to the sale of the investments.

Stifel in 2012 reached a settlement in private litigation by the school districts, agreeing to pay $13 million and providing a letter of credit for an additional $9.5 million to be paid once the SEC's case was resolved.

The case is Securities and Exchange Commission v. Stifel, Nicolaus & Co Inc et al, U.S. District Court, Eastern District of Wisconsin, No. 11-00755.

(Reporting by Nate Raymond in New York; Editing by Bernadette Baum)

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