Firm Will Return Half of School District's Investment

The Whitefish Bay School District will see half of its $1.2 million soured investment returned under to one of the two brokerage firms handling the money.

The district will get back $632,000 of the $1.2 million it initially invested in 2006, according to the SEC order issued against RBC, a subsidiary of the Royal Bank of Canada.

Whitefish Bay is one of five Wisconsin school districts that purchased the complex financial products, known as synthetic CDOs, on the advice of David Noack, a broker then employed by Stifel, Nicolaus & Co. When the investment soured, the districts filed suit against RBC and Stifel, Nicolaus & Co.

C.J. Krawczyk, one of the attorneys representing the five districts in the lawsuit, said the $632,000 settlement is a SEC penalty that is separate from the districts' civil lawsuit.

“The settlement from RBC doesn’t extinguish our claims," he said.

The school districts could also recover more money if the SEC charges Stifel, Nicolaus & Co., the second firm currently under investigation.

Shawn Yde, the district's director of business services, said he is optimistic the district will recover the roughly $600,000 in remaining losses, either through the lawsuit or through an SEC order against Stifel, Nicolaus & Co.

“We look forward to the day that we recover all of the money,” Yde said. “We are working toward that, and we think we’re getting finally close.”

Overall, the five districts invested $200 million in CDOs, which are now worthless. About $37.3 million of that came directly out of the five districts' pockets, and the remaining funds were borrowed from DEPFA bank, an Irish bank, on a moral obligation.

Whitefish Bay, specifically, borrowed $8.8 million from DEPFA. Krawczyk said the districts were never obligated to pay back the notes, which have since been purchased by Stifel.

RBC reached a settlement to pay $30.4 million of the $37.3 million back to the districts.

The school districts issued a news release Wednesday praising the SEC's action and signaling optimism about recovering the rest of the failed investment.

"I am grateful to the SEC for bringing these justified charges," Whitefish Bay Superintendent Mary Gavigan said in the release. "This is the beginning of the end of what has been a distraction for our board and administrators. We look forward to recovery of the money taken from us by fraud."

In the release, Stephen Kravit, another attorney representing the districts in its civil suit, said both RBC and Stifel "ignored obvious warning signs and broke the law in pursuit of profit."

"The $30.4 million from RBC is a significant first payment on what will be, when litigation is concluded, a complete return to the school districts of investment funds taken from them by fraud," Kravit said.

For additional background information, see this report in today's Milwaukee Journal Sentinel