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Suit seeks restitution, interest for Stifel's Missouri customers

Friday, March 13, 2009 | 12:01 a.m. CDT

ST. LOUIS — Secretary of State Robin Carnahan filed a lawsuit on Thursday against Stifel Nicolaus & Co., accusing the St. Louis-based financial firm of misleading customers who bought auction-rate securities.

The lawsuit on behalf of investors alleges that customers in Missouri and around the country bought the securities through Stifel thinking they were "like a money market," or "same as cash." But with the ARS market in disarray, their funds were frozen.

Also named in the suit are 16 Stifel employees, including executives, traders, agents and branch managers. Stifel planned a late-afternoon news conference to address the allegations, and declined to comment until then.

On Monday, parent company Stifel Financial Corp. announced plans to buy back all auction-rate securities held by its retail investors, who bought them before the collapse of the ARS market in February 2008.

Carnahan's lawsuit seeks not only restitution to customers, but interest. It says 1,200 auction-rate securities investors nationwide are owed $180 million.

The suit also seeks unspecified penalties from Stifel, along with reimbursement to the state for legal and investigative costs, and payments to the state to be used for investor education.

The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt whose interest rates were reset at regular auctions, some as frequently as once a week. They were sold as being as safe as cash. But the $330 billion market for them fell apart last year amid the downturn in the broader credit markets.

At least 10 banks and investment firms have agreed to buy back securities, including Merrill Lynch & Co., Goldman Sachs Group Inc., Deutsche Bank, UBS AG, Citigroup Inc., Morgan Stanley, JPMorgan Chase & Co. and Wachovia Corp.

In fact, it was Carnahan who announced in August that Wachovia Corp. had agreed to an $8.5 billion settlement.

"Other financial institutions across the country did the right thing and made their investors whole, but Stifel has refused to guarantee that they will take care of their customers," Carnahan said. "Investors call my office every week and desperately need access to their savings."

In its announcement on Monday, Stifel said it would begin the buyback in June, and that repurchases from all retail clients who bought auction-rate securities would be completed by June 30, 2012.

Employee accounts would not be eligible until the last phase of the retail investor repurchasing is completed.

Stifel Chief Executive Ronald J. Kruszewski said Monday that the plan ultimately will provide liquidity to all of the company's ARS retail clients. But the company said the buyback plan was subject to redemptions, market conditions and future events, including those affecting Stifel's financial condition.

Carnahan said that plan has "loopholes you can drive a truck through." And she said the three-year buyback period was too long to wait, that investors should get their money back immediately.

At the news conference, Stifel customer Grant Medlin of Sullivan, 46, said having his money tied up has hurt his business. Medlin and a partner sell equipment used for excavation and other purposes.

"We've had to cut inventory, borrow extra money. It put us behind the 8-ball in a lot of ways," he said.

Another investor, 69-year-old Shirley Weiss of St. Louis County, said a Stifel adviser told her the investment would be liquid.

"She definitely misled me," Weiss said. "I need the money to live on."

Doug Ommen, chief counsel of the Missouri attorney general's Consumer Protection Division, said there were no plans to seek criminal prosecution against Stifel or its employees.


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