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Probe paved way for broker to bolt: Knall's exit from McDonald a boon for Stifel

April 11, 2005

The Indiana University graduate who runs St. Louis-based Stifel Nicolaus & Co. has known David Knall for years. So his mind began to whir late last year after an insider-trading probe sidelined Knall, one of the nation's top-producing stockbrokers, from his post at McDonald Investments.

By late January, Knall's leave of absence from McDonald had run nearly two months, and it wasn't expected to end until r eg u l a t o r s wrapped up their probe, a process that often takes months or years.

The timing was right, Stifel CEO Ronald Kruszewski decided, to explore whether Knall, Jeff Cohen and their 30-person team might come aboard his firm.

"I made the phone call," Kruszewski said. "I thought, 'This is a fantastic business.'"

That contact culminated in a blockbuster deal that enables Knall to return to work and is expected to shift billions of dollars in customer accounts from Cleveland-based McDonald to Stifel, a midsize investment firm with 88 U.S. offices.

"We just moved up the financial-service-provider rankings in Indianapolis," said Kruszewski, whose firm already operates a 10-person office at Keystone at the Crossing. "We are very excited about that."

Indeed, industry observers say the Knall team holds more of the accounts of central Indiana's rich and famous than anyone else.

The team oversees $3.6 billion in assets for members of the Simon family and many other prominent Indianapolis executives. Last fall, Barron's ranked the team fourth on its list of the nation's topproducing financial advisers.

Under the deal announced April 6, Stifel Nicolaus is assuming the lease and other expenses associated with the McDonald office on East 96th Street and is hiring Knall, Cohen and the rest of their team.

The vast majority of their accounts are expected to follow. As Kruszewski put it, "We are hiring two talented individuals we believe have a loyal client base."

The Knall team's departure is "amicable," said Michael Monroe, chief communications officer for McDonald's parent, KeyCorp. "The reason is because we negotiated a suitable arrangement that was mutually beneficial." He noted that McDonald will continue to operate its other office here, at Woodfield Crossing.

Neither KeyCorp nor Stifel would discuss financial terms of the deal, and Knall could not be reached for comment. However, Cohen confirmed that members of the Knall team had not signed non-compete agreements. Such documents, common in the industry, often complicate brokers' shifts to new firms.

"We made the decision going with Stifel was in our best interests and the best interests of our clients," Cohen said.

While Cohen declined to elaborate, industry observers say the most obvious benefit for the Knall team is that Stifel allowed Knall to return to work immediately.

Knall, 60, had been on a personal leave from McDonald since Dec. 5. In addition, his son Jamie, who also had worked at the firm, had been sidelined since mid-November, when McDonald placed him on indefinite suspension. Jamie also has joined Stifel.

Officials with KeyCorp have said only that their personnel moves stemmed from a pending investigation that did not relate to management of customer accounts.

In January, IBJ reported that the regulatory probe stems from allegations of insider trading in Galyan's Trading Co. stock before the company's $305 million sale last summer to Pittsburgh-based Dick's Sporting Goods Inc.

That probe, conducted by the National Association of Securities Dealers and other regulators, continues. Even so, Stifel CEO Kruszewski said he saw no justification for preventing the pair from returning to work.

Regulators have taken no action against David or Jamie, and neither man has regulatory problems listed on his brokerage record. David had been with McDonald since 1969. Jamie entered the securities industry in 2001 and joined McDonald in December 2003.

Observers say Knall grew his client base through the decades pitching a conservative investment strategy. As a value investor, Knall is a bargain-hunter, focusing on stocks that appear cheap based on earnings or other measures. He also has prospered by buying stakes in local and regional banks.

"David has a very stellar reputation within business circles of the securities industry," Kruszewski said. "We reviewed what we could about the current situation and concluded we were comfortable hiring Dave and having him service clients in the exemplary fashion he has done in the last 30 years."

Stifel may have been more willing to accept the regulatory risks of hiring the Knalls than some larger firms, said Mark Maddox, an Indianapolis attorney who represents customers in complaints against investment firms.

Maddox recalled that Stifel a few years ago hired a prominent Cleveland stockbroker, Larry Bain, even though he had regulatory problems at both Dean Witter and Everen Securities.

"I can tell you a lot of brokerage firms would not have hired Larry Bain with his known problems at that time," said Maddox, who represented customers who lodged complaints against Bain.

It's unclear when the insider-trading probe hanging over the Knalls might conclude. A spokesman for the NASD, whose duties include monitoring stockbrokers and overseeing the NASDAQ stock market, declined to comment.

A Dick's official and a former Galyan's official told IBJ in January that the NASD was scrutinizing trades in Galyan's shares before the June 23 merger announcement.

The NASD asked Galyan's board members and executives in late July to sift through a list of roughly 120 institutional and individual investors who had traded in the company's stock and identify any who were relatives or acquaintances of insiders.

The NASD followed up in late 2004, asking company insiders if they had any ties to investors on a smaller list, this one with fewer than 10 names, according to Galyan's former general counsel, David Zoba.

Last week, Zoba and Dick's Senior Vice President Jeff Hennion said they were unaware of additional developments.
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