CHICAGO — The investor who holds $46 million of defaulted bonds issued by a Wisconsin tribe is taking aim at the financial and legal firms on the deal, accusing underwriter Stifel Nicolaus & Co. and bond counsel Godfrey & Kahn SC of misrepresenting the bonds’ validity.

Saybrook Tax Exempt Investors LLC and bond trustee Wells Fargo Bank NA filed a lawsuit earlier this week in Waukesha County, Wis., Circuit Court against the firms and tribe.

It comes four months after a federal appellate panel upheld a lower court ruling that voided the tribe’s bond indenture. The federal court found that the indenture’s terms gave too much control to bondholders over tribal gaming operations and required federal approval.

The voiding of the indenture in turn canceled out the tribe’s waiver of sovereign immunity that would have allowed Saybrook to enforce the tribe’s guaranty to repay the taxable gaming bonds it privately purchased in 2008.

Both the state and federal cases pit Saybrook and Wells Fargo against the Lac du Flambeau Band of Lake Superior Chippewa Indians and its corporate entity that served as the bond issuer, the Lake of the Torches Development Corp.

The new complaint filed in the state courts also targets Stifel, which placed the bonds, and Godfrey & Kahn, which served as the tribe’s legal counsel and bond counsel.

The new lawsuit alleges that in light of the federal court’s opinion that the bond indenture too closely resembled a managerial contract in need of federal approval, the firms “misrepresented to Saybrook that the bonds, the indenture, and the bond purchase agreement were valid and enforceable against the EDC and the EDC’s waiver of sovereign immunity in the indenture was valid and enforceable.”

The new complaint takes Godfrey & Kahn and Stifel to task for asserting that all necessary state and federal approvals were completed and that bond documents and agreements did not violate any laws.

Bond counsel’s opinion also stated that the bond documents and indenture did not constitute a management contract or represent a collateral agreement to a management contract. Stifel’s offering memo included the opinion.

Stifel did not immediately respond to requests for comment. The firm disclosed the lawsuit in a regulatory filing Wednesday in which it said it would fight the charges.

Godfrey & Kahn general counsel Winston Ostrow said the firm does not comment on pending litigation, but added, “It is our intention to vigorously defend against this claim.”

Municipal bond participants in the tribal sector and broader market are closely following the case for the precedent it would set.

Investors have raised concerns that the federal court’s original ruling could sour interest in tribal bonds and undercut investor rights and confidence in bond indentures.

Others have countered that the Lake of the Torches deal was somewhat unique and the rulings provide a roadmap for how to better structure future tribal gaming-bond deals to ensure that they too would not be rendered managerial contracts.

The original litigation began in late 2009 when Wells Fargo sought to enforce bondholder rights under the trust indenture after declaring an event of default on the bonds and accelerating bond repayment. The trustee sought the appointment of a receiver. Lawyers for the tribe argued that appointment of a receiver was not warranted and that the bond indenture should be invalidated because it gave too much managerial power to bondholders in violation of federal rules.

In early 2010, Judge Rudolph Randa of the U.S. District Court for the Western District of Wisconsin agreed, and ruled that the tribe was not required to repay the debt because the trust indenture gave bondholders significant control over casino operations, rendering it a management contract.

Under various provisions, bondholders have a say in operations and the use of various funds when the tribe fails to meet certain debt-service coverage ratios or other terms. Even greater controls are handed to the bondholders in the event of a bond default, allowing them to hire new management.

Under the 1988 Indian Gaming Regulatory Act, the National Indian Gaming Commission must approve managerial contracts. The law was aimed at protecting Indian gaming from the likes of unscrupulous investors or organized crime.

The decision invalidated the tribe’s waiver of immunity against legal proceeding as a sovereign nation.

An appellate panel last September upheld Randa’s decision that the trust indenture handed enough control over to bondholders to require federal approval.

However, the panel left the case open, finding that Randa had erred in refusing to allow Wells Fargo to pursue its position that other bond-related documents such as the offering statement and bond resolution provided a separate and enforceable waiver of sovereign immunity.

The trustee and Saybrook filed an amended complaint in the federal district court in late December seeking enforcement of the guaranty and waiver of immunity included in various legal documents.

In the new state court lawsuit, Saybrook asks the court to enforce the tribe’s guaranty or hold Stifel and Godfrey responsible for repaying the bonds. It charges Stifel with breach of contract, intentional and negligent misrepresentations of the bonds, and securities fraud. It accuses Godfrey & Kahn with misrepresentation and legal malpractice.

The state lawsuit argues that both firms billed themselves as tribal gaming sector specialists and should have known that the terms of the deal rendered the bond indenture a managerial contract that would run afoul of federal law.

The lawsuit outlined how Saybrook was first approached by Stifel professional Michael Schinzer in October 2007 about purchasing the bonds, and after due diligence and negotiations on the terms, Saybrook agreed based on the sovereign immunity waiver.

Stifel initially purchased the $50 million issue in January 2008 and then immediately sold $49.5 million to Saybrook. Stifel kept $375,000 of the bonds in compensation and Godfrey was paid $125,000 in fees. The bonds paid an interest rate of 12%.

Proceeds refunded existing obligations, with $16 million funding a loan for a riverboat project, the Grand Soleil Project, in Natchez, Miss., while $5 million went into a reserve. Profits from the Natchez project were supposed to repay the bonds. That project faltered, straining the tribe’s finances.

The tribe operates a casino, hotel and convention center.

Grippo & Elden LLC is the lead attorney for Saybrook and Well Fargo on the latest litigation. Sources said Saybrook and Wells Fargo have asked the federal court to allow them to add Stifel and Godfrey as defendants in the federal case and likely decided to pursue litigation at the state court level because the federal court may not allow for the change.

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