Missouri Secretary of State Files Lawsuit Against Stifel Over ARS

Missouri Secretary of State Robin Carnahan has filed a lawsuit against Stifel, Nicolaus & Co., parent company Stifel Financial Corp., and 16 managers and agents of the firm for alleged fraudulent auction-rate securities sales practices.

The lawsuit was filed March 12 in the Circuit Court of Franklin County, Mo., charges that Stifel's ARS retail brokers omitted or gave false information to clients. It takes the state ARS investigations a step further by naming individual brokers who, if convicted, could face penalties ranging from between $10,000 and $1 million. The case also is against a retail broker of ARS that was not a major underwriter. Most of the ARS enforcement actions or litigation last year were with underwriters.

In its lawsuit, the state says Stifel brokers pitched ARS to clients as "just like money markets ... safe as cash ... 100% liquid" and "completely insured by the [Securities Investor Protection Corp.]." The brokers also omitted information about the risk that auctions could fail and that the ARS could become illiquid if that happened.

Stifel began selling auction-rate securities in the early 1990s and underwrote some deals, according to the complaint. The firm was not among the top 25 ARS underwriters for the past nine years, according to Thomson Reuters.

Stifel's ARS brokers placed their trades through the company's muni trading desk, which is managed by Ed Poth, the firm's director of municipal retail trading who was named as a defendant. Stifel failed to train its brokers about the risks and features of ARS, the state claimed in the suit.

In February 2008, the ARS market collapsed as firms stopped supporting auctions, the auctions failed, and investors were unable to redeem their securities for cash. Stifel was aware of the "deteriorating conditions" in the ARS market but "failed to inform its retail customers," the state charged in the suit.

In a response, Stifel's president and chief executive officer Ronald J. Kruszewski said he was "shocked and dismayed that individual employees of Stifel were named as defendants." The employees own a total of more than $10 million of ARS in personal accounts and "are victims of the collapse," he said.

As an ARS distributor, Stifel was unaware of the auction problems, Kruszewski said. The firm initiated its own ARS buyback program in February and has been working with regulators to provide liquidity to ARS investors, he said.

In its 2008 financial statement, Stifel said that the Securities and Exchange Commission and the Financial Industry Regulatory Authority had requested information concerning ARS transactions. The statement did not indicate Stifel had bought back auction-rate securities.

Carnahan said Stifel's voluntary buyback offer was inadequate because of the three-year window for the firm to redeem ARS and a clause that said the firm could cancel its buyback offer during adverse financial conditions. She said at least six states are investigating Stifel's sales practices.

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