Stifel Financial Corp. (SF), sued by five Wisconsin school districts over collateralized debt oligations, said it will pay them $13 million and plans to join them in pressing claims against Royal Bank of Canada.
The payment may convert Stifel from a defendant to a plaintiff in a lawsuit the districts filed against Toronto-based RBC in 2008. The St. Louis-based financial services firm cited “numerous misrepresentations, omissions and conflicts of interest” contained in CDOs created by the Canadian bank and sold to trusts set up by the districts for $200 million with money they raised by issuing asset-backed notes.
“The CDOs were collateral for the notes and those CDOs are now worthless,” Stifel said yesterday in a statement issued jointly with the districts.
RBC issued a statement yesterday calling Stifel’s claims “preposterous.”
“We vehemently deny their allegations,” the bank said.
The original complaint was filed in state court in Milwaukee by school districts in Kenosha, Waukesha, West Allis/West Milwaukee, Whitefish Bay and Kimberly. Stifel and the schools said they need court permission to file their amended complaint.
“No district, if it had known what we now know about the product that RBC actually sold us, would have made this investment,” Kenosha schools Superintendent Michele Hancock said in the joint statement.
RBC said in its statement that Stifel unilaterally designed this investment, and had represented to the bank in writing that the CDOs were suitable for the schools’ objectives.
RBC said it blamed Stifel for “misrepresenting and selling the product, whose risk it compared to treasury notes.”
As part of the accord announced today, Stifel said it relieved and released the districts from $154 million in moral obligations to repay trust obligations arising under the notes, which were initially owned by Depfa Bank Plc (DEP) and acquired by the St. Louis firm last year.
Stifel said it will also post a $9.5 million standby letter of credit for the schools, payable when it settles related U.S. Securities and Exchange litigation.
“The settlement also provides the potential for the school districts to obtain significant additional damages,” Stifel said.
The case is Kenosha Unified School District v. Royal Bank of Canada (RY) Europe Ltd., 2008-cv-013726, Milwaukee County, Wisconsin Circuit Court (Milwaukee).
-- With assistance from Michael Marois in Sacramento. Editors: Peter Blumberg, Michael Hytha
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