SEC v. Stifel, Nicolaus & Co., Inc. and David W. Noack

Analysis Group was retained by the U.S. Securities and Exchange Commission (SEC) to assess issues of suitability about certain complex financial instruments in an “ill-gotten gains” suit against the investment firm Stifel, Nicolaus & Co. and its former Senior Vice President, David W. Noack. The SEC alleged that the defendants made fraudulent sales of complex financial instruments—synthetic collateral debt obligations (CDOs)—to five Wisconsin School Districts. Specifically, the SEC alleged that the defendants materially misled the School Districts about the risks of the CDO transactions, the likelihood of defaults, and the safety of the districts' principal, and that the defendants knowingly or recklessly recommended an unsuitable product that did not meet the investment needs of the School Districts.

An Analysis Group team led by Vice President Lauren Kindler supported an affiliated industry expert in analyzing whether the defendants had a reasonable basis to recommend the CDO transactions as a suitable investment for the School Districts. In an expert report, Analysis Group's affiliate concluded that the CDO transactions were fundamentally different than the School Districts' prior investments, and that there was no reasonable basis to conclude that they were suitable for the School Districts, given the extremely complex and speculative nature of the transactions compared to the School Districts' investment objectives, prior investment history, and level of expertise and financial sophistication.

The case settled shortly before a jury trial was scheduled to begin. As part of the settlement, the defendants admitted to specific facts of wrongdoing, including an admission that Stifel and Mr. Noack failed to perform any meaningful suitability analysis with respect to the CDO investments they recommended to the School Districts, and were required to pay disgorgement, prejudgment interest, and civil penalties. The distribution, along with a prior Fair Fund distribution in a related case and settlements obtained in a private lawsuit, will fully compensate the five Wisconsin School Districts for their losses.

 

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