SEC Sues Broker for Defrauding Wisconsin School Districts

August 16, 2011 (PLANSPONSOR.com) - The Securities and Exchange Commission has charged St. Louis-based brokerage firm Stifel, Nicolaus & Co. and a former senior executive with defrauding five Wisconsin school districts by selling them unsuitably risky and complex investments funded largely with borrowed money.

In a complaint filed in federal court in Milwaukee, the SEC alleges that Stifel and Senior Vice President David W. Noack created a proprietary program to help the school districts fund retiree benefits by investing in notes linked to the performance of synthetic collateralized debt obligations (CDOs). The school districts established trusts that invested $200 million in three transactions from June to December 2006, paid for largely with borrowed funds. 

According to an SEC announcement, Stifel and Noack misrepresented the risk of the investments and failed to disclose material facts to the school districts. In the end, the investments were a complete failure, but generated significant fees for Stifel and Noack.  

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The five school districts are Kenosha Unified School District No. 1, Kimberly Area School District, School District of Waukesha, West Allis-West Milwaukee School District, and School District of Whitefish Bay. The SEC alleges that Stifel and Noack made sweeping assurances to the school districts, misrepresenting that it would take “15 Enrons” — a catastrophic, overnight collapse — for the investments to fail. They also misrepresented that 30 of the 105 companies in the portfolio would have to default and that 100 of the top 800 companies in the world would have to fail before the school districts would suffer a loss of their principal.   

The SEC alleges that among material facts that Stifel and Noack failed to disclose were the portfolio in the first transaction performing poorly from the outset, credit rating agencies placing 10% of the portfolio on negative watch within 36 days of closing, and certain CDO providers expressing concerns about the risks of Stifel’s proprietary program and declining to participate in it.  

According to the SEC’s complaint, Stifel and Noack sold the school districts an unsuitable product that did not meet their investment needs. The school districts had no prior experience with investing in CDOs and related instruments. Stifel and Noack knew that the school districts lacked the requisite sophistication and experience to independently evaluate the risks of the investment, and knew that the school districts relied on Stifel and Noack’s recommendations. The school districts contributed $37.3 million toward the $200 million investment and borrowed the remaining $162.7 million.   

The SEC alleges that the heavy use of leverage and the structure of the synthetic CDOs exposed the school districts to a heightened risk of catastrophic loss. The investments steadily declined in value in 2007 and 2008 as the CDO portfolios suffered a series of downgrades. By 2010, the school districts learned that the second and third investments were a complete loss and that the lender had seized all of the trusts’ assets. The school districts suffered a complete loss of their investment and suffered credit rating downgrades for failing to provide additional funds to the trusts they established.

CalPERS Earmarks up to $200 Million for New Emerging Managers Program

August 15, 2011 (PLANSPONSOR.com) - The California Public Employees’ Retirement System (CalPERS) has approved a new $200 million program for emerging real estate managers.

 

According to a press release, the program has been approved for real estate managers who have less than $1 billion of assets under management.  The term of the new Emerging Manager Program for Real Estate will be five years, though CalPERS will review the progress and outcome of the program after two years.

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“Our top goal is to achieve appropriate risk-adjusted earnings,” said Rob Feckner, CalPERS Board President. “We also hope to find investment opportunities in underserved sectors for sound long-term returns and to increase diversity among our pool of real estate investment managers.”

According to the announcement, CalPERS will seek managers who have no more than three prior commingled funds or separate account investment vehicles. “The pension fund will select from its current team of seasoned successful investment managers to oversee the selection of talented new managers, provide mentoring, and back office support,” according to a press release. The program will focus on managers and assets in urban California markets.

Approximately 20 to 50 firms are in the universe of emerging managers who might qualify for the new program, according to Crosswater Realty Advisors, which assisted CalPERS in research, design and development of the Emerging Manager Program.

CalPERS is the nation’s largest public pension fund with approximately $224 billion in market assets. 

Investment proposals can be submitted at http://www.calpers.ca.gov/index.jsp?bc=/investments/investment-proposals.xml 

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