-
Court Approves SEC Settlement With Broker-Dealer And Top Executive Regarding Marketing Of CDOs To School Districts
12/12/2016On December 6, the district court approved the SEC’s settlement with broker-dealer Stifel Nicolaus & Co. and one of its former executives, David Noack. The settlement ended a long-running SEC investigation and lawsuit against the defendants, which alleged that they had induced several Wisconsin school districts to invest in complex financial instruments through a series of falsehoods and misrepresentations in violation of Section 10(b) of the Securities Exchange Act of 1934 and Section 17(a) of the Securities Act of 1933. Under the terms of the settlement, Stifel and Noack agreed to pay penalties totaling $24.6 million, and were enjoined from violating Section 17(a)(2) and Section 17(a)(3) of the Securities Act of 1933.
The SEC brought suit against Stifel and Noack in August 2011, alleging that they made material misstatements and omissions in marketing $200 million of notes tied to synthetic CDOs in 2006. The court documents reveal that in 2006, Stifel and Noack recommended that five school districts in Wisconsin invest in CDOs. School districts were atypical investors in CDOs at the time, and Noack was the primary spokesperson for these products, despite having little knowledge or experience with how these products worked. The SEC alleged that Noack made a number of material misstatements regarding these products, including statements suggesting that the investments were “conservative” and involved “very little risk,” that “it would take 15 Enrons for the School Districts to start to lose money,” and that the portfolio for certain of the investments included only investment-grade companies.
The duration of the case is in part explained by the fact that both Stifel and Noack entered into tolling agreements with the SEC. On the eve of trial, the parties notified the court that they had reached a tentative settlement agreement, which the court approved on December 6. Under the terms of the settlement, Stifel will pay a civil penalty of $22 million, while David Noack, its former senior vice president, will pay a civil penalty of $100,000. In addition, both defendants are liable for disgorgement of their profits of $1.66 million, in addition to pre-judgment interest.
In addition to the monetary penalty, both Stifel and Noack were required to make a series of admissions as a condition of settlement. The admissions included that the defendants acted negligently in making material misstatements and omissions about the safety of investing in CDOs, and in failing to adequately assess the appropriateness of the investments in light of the school districts’ conservative investment objectives. According to the admissions, aside from information they received from the entity that structured and sold the CDOs, Stifel and Noack performed little to no independent due diligence on the underlying CDO investments.
While neither the monetary penalty nor the SEC’s theory necessarily stands out, the case is unique in that it highlights the plodding nature of certain regulatory inquiries and the SEC’s willingness to pursue long-term investigations and cases. Here, the CDO-related allegations occurred almost ten years ago, and it took five years to resolve following the filing of the original complaint.
