Legal Issues and Investment Losses and Fraud and Banking & Finance and Investing and Investment Brokers and Investment Advisers and Law

State charges Stifel Nicolaus didn't disclose risks of auction-rate securities

October 1, 2009

An administrative complaint filed today by the Indiana Secretary of State’s Office alleges securities firm Stifel Nicolaus & Co. committed securities fraud and failed to properly train its sales staff.

The complaint alleges that Stifel Nicolaus failed to disclose risks associated with the sale of auction-rate securities to 141 Hoosiers who invested $54.9 million in the securities.  

Of the total, 92 were clients of Jeffrey Cohen, managing director of the local Stifel office. The state says his clients invested $45 million. Cohen and partner David Knall work with some of the state’s wealthiest investors and oversee billions of dollars in client funds.

Auction-rate securities are debt instruments whose interest rates are meant to be reset regularly at daily, weekly or monthly auctions. Numerous investment firms marketed them as safe, liquid and cash-like investments. But when the auction process collapsed in early 2008, the securities became illiquid—meaning investors could no longer access their invested funds.
 
As a result of the failure of the auction-rate securities market, $54.9 million invested by Indiana residents was frozen, according to the Secretary of State’s Office.

“Today, we are holding Stifel Nicolaus & Co. accountable for putting Indiana investors at unnecessary risk,” Secretary of State Todd Rokita said in a prepared statement. “This action sends a strong message that our state will not tolerate unethical and unlawful behavior and that my office will hold the securities industry accountable for any violations of the securities laws of Indiana.”

The Indiana complaint could result in a fine of $10,000 per violation of the Indiana Securities Act, in addition to restitution for the investors’ funds frozen in the failed auction rate securities market.

Stifel Nicholas is facing similar charges in other states.

Colorado officials filed a similar complaint against the firm today. Indiana investigators and the Colorado Division of Securities worked together and within a multistate task force to develop evidence of the company’s alleged securities violations, Rokita said in the statement.

Also, officials in Missouri accused Stifel of the same charges in March.

Cohen initially was named in the Missouri complaint, but was later dropped. He is a member of IUPUI’s board of advisers and serves as a trustee for Park Tudor School, where he co-chaired its capital campaign that ended last month. He was not immediately available for comment.

Missouri’s lawsuit alleges more than 1,200 Stifel investors were stuck with $180 million in auction-rate securities they couldn’t access for more than a year.

The Missouri lawsuit calls for Stifel to pay immediate restitution with interest to all its clients who purchased auction-rate securities, plus penalties. Missouri also wants Stifel to make payments for investor education and to reimburse its legal costs.

Based in St. Louis, Stifel has 3,300 employees and more than 200 offices in the United States and Europe.



 

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