By Joseph A. Giannone
March 19 (Reuters) - Stifel Financial Corp agreed on Monday to pay $13 million to settle a 2008 lawsuit from five Wisconsin school districts claiming they were misled by the brokerage when it sold them $200 million of collateralized debt obligations that then plunged in value.
The St. Louis, Missouri-based brokerage, serving as public finance adviser to five school districts, had sold the districts the investments linked to other debt securities that were created by Royal Bank of Canada. CDOs across Wall Street imploded when credit markets seized up during the financial crisis.
The school districts had complained that Stifel, their broker, failed to disclose the risks posed by the CDOs when they bought them in 2006. But Stifel has long contended that it too was misled by the Canadian bank.
Now, as part of the settlement, Stifel and the schools resolved their differences and are joining forces in a new lawsuit against RBC seeking more than $200 million.
“Both Stifel and the school districts were victims of a product that we believe was deceptively created by RBC,” said Stifel Chief Executive Ronald Kruszewski said in a statement.
RBC issued a statement denying the allegations. “Stifel’s claims against us are preposterous,” it said, adding that Stifel designed the CDOs and had assured RBC the investment was suitable for the school districts.
Shares of Stifel gained 2.74 percent to $38.64 by the end of regular trading on the New York Stock Exchange, ahead of the settlement announcement. They were unchanged in afterhours trade.
Under the settlement, Stifel will pay $13 million to the schools and provides a $9.5 million letter of credit to be paid once Stifel settles a related U.S. Securities and Exchange Commission matter.
The school districts, under the settlement, will not have to repay $154 million they owed on asset-backed notes originally owned by Dublin-based Depfa Bank Plc. These notes were issued by trusts set up by the districts to finance the purchases of the CDOs.
The CDOs, now worthless, were the collateral for the notes. Last August, Stifel purchased the notes, with a face value of $162.5 million, at a substantial discount from Depfa.