Stifel settles with state on auction rate securities
Written on December 31, 2009
Stifel Financial Co. will speed up its repurchase of auction rate securities under a settlement reached with Missouri Secretary of State Robin Carnahan. The settlement will bring earlier relief for hundreds of Stifel customers who have been stuck with securities that they can’t sell.
The settlement also ends a nasty, public spat between St. Louis’ third-largest brokerage and Carnahan, who is the likely Democratic nominee for U.S. Senate next year. Carnahan had sued the firm, claiming that clients were misled into buying an investment they thought was safe.
Under the deal, all customers with auction-rate securities will receive a partial settlement by Jan. 15. All with less than $150,000 in such securities will exchange them for cash by December 2010. The remaining investors can redeem their bonds by the end of 2011.
The deal accelerates by six months a buy-back plan that Stifel announced last March.
Stifel also agreed to pay a $525,000 fine to Missouri and other states that participated in the settlement, along with $250,000 to Missouri and $25,000 to Indiana to cover investigative and legal costs.
The firm will also hire an independent consultant to review its policies for unconventional investments.
Stifel was one of many firms that sold auction-rate securities to investors as a higher-interest alternative to money market funds. The auction rate market collapsed in February 2008, as the financial crisis was building, and owners have been unable to sell the securities since.
In her civil suit, Carnahan charged that Stifel misled consumers about the nature of the investments. Carnahan claims brokers told investors that the investments were "as safe as cash," "100 percent liquid" and "the same as money market funds."
Stifel blamed the mess on the larger firms that ran the auction-rate market. Those big players knew the market was weakening, but failed to warn smaller firms such as Stifel, which kept selling the investments to clients.
Bowing to pressure, Stifel last March announced a plan to buy back the investment over three years if financial conditions allowed. Carnahan called that inadequate and filed suit.
In a Monday news release, Stifel CEO Ron Kruszewski extended an olive branch to Carnahan, the state’s main securities regulator, lauding her "willingness to work with us and create a solution that works well for all involved."
About 1,200 Stifel customers owned auction rate securities last year. The issuers of the securities have since redeemed some of them.
Filed in: management.