Stifel, Rokita reach settlement in auction-rate securities case

December 28, 2009

St. Louis-based money management firm Stifel, Nicolaus and Co., whose clients include some of Indiana’s wealthiest people, has reached a settlement agreement with Indiana Secretary of State Todd Rokita over the company’s handling of $54 million in auction-rate securities sold here.

The Indiana Securities Division of Rokita’s office filed an administrative complaint against Stifel in October, alleging securities fraud, failure to properly supervise and train salespeople, and that the investments were not suitable for Stifel’s customers. The complaint alleged that Stifel failed to disclose the risks associated with auction-rate securities.

The global auction-rate market collapsed in February 2008. According to Rokita’s office, 142 Indiana investors held $54 million in auction-rate securities sold by Stifel.

Rokita’s office announced late this afternoon that Indiana residents who purchased auction-rate securities from Stifel will regain complete access to their investments within the next 24 months under the settlement. It was part of a global settlement coordinated through the North American Securities Administrators Association.

Auction-rate securities are bonds whose interest rates are meant to be reset regularly at daily, weekly or monthly auctions. Many financial firms marketed them as safe, liquid and cash-like investments. But when credit markets seized up as the recession deepened, auctions began to fail, freezing the $200 billion global market and leaving investors unable to access their money.

Because only a handful of previous auctions ever had failed, many investors considered the securities a safe form of temporary financing—essentially a better-yielding alternative to money market accounts.

Stifel maintained its innocence from the start of Rokita’s investigation. And it voluntarily promised to buy back all its clients’ auction-rate securities over three years—a deal it claims 100 percent of its Indiana clients had already accepted before Rokita filed his complaint.

“Hindsight’s always 20/20,” Stifel CEO Ronald Kruszewski told IBJ in October. “No one anticipated a complete market collapse. It’s just that simple. And to say you committed fraud by not disclosing an unknown risk can only be true with the benefit of hindsight.”

Under the settlement, Stifel will repurchase from each eligible Indiana investor the greater of $25,000 or 10 percent of their auction-rate holdings by Jan. 15, 2010. Stifel will then continue making accelerated payments to investors over the next two years. All Stifel investors who had $150,000 or less tied up in auction-rate securities will be made whole by Dec. 31, 2010, and all remaining investors will regain complete control of their investments by the end of 2011.

Stifel had previously pledged to pay back all its auction-rate investors by June 2012.

Under the settlement, Stifel has also agreed to hire an outside consultant to review and make recommendations about its internal supervisory and compliance policies and procedures related to the sale of non-conventional investments.


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