Stifel Nicolaus & Co. Buyback Offer Draws Criticism


Stifel Nicolaus & Co. offered Wednesday to buy back some of the auction-rate securities it sold to customers before the market for them collapsed in February 2008.

Missouri Secretary of State Robin Carnahan, whose office launched an investigation of Stifel and other firms last summer after receiving complaints about their marketing of the securities, immediately termed the offer inadequate.

Stifel is proposing to buy back from each account whichever is greater - 10 percent or $25,000 of the auction-rate securities it sold to clients. Stifel's chairman and chief executive, Ronald Kruszewski, said that about 1,200 accounts, or less than 1 percent of Stifel's retail client accounts, currently hold the securities and that the offer would provide 100 percent liquidity to about 40 percent of those accounts.

Carnahan, however, called on Stifel to buy back all of the auction-rate securities it sold to its customers.

"After nearly a year, Stifel is finally beginning to address this issue but it is too little too late - too late for those who desperately need their frozen savings," Carnahan said in a statement. "It is time for Stifel to follow the lead of other major investment banks and give their customers the access to their money that was promised."

The other firms investigated by Carnahan's office agreed to large settlements shortly after her office began its investigation. Wachovia Corp. agreed to buy back nearly $9 billion from thousands of investors nationwide, while Kansas City-based Commerce Bank offered to repurchase $545 million in auction-rate securities from as many as 140 customers.

Kruszewski insisted that Stifel would never have sold the securities had major market participants "disclosed to the entire marketplace the material facts known by them."

"While several larger firms have announced more complete repurchase plans, Stifel's lack of knowledge of the impending market collapse is the critical difference that serves as the foundation of Stifel's position, and one that forms the basis of the repurchase plan," he said.

But one lawyer representing investors who sued Stifel last year for allegedly deceiving them about the securities dismissed Stifel's offer and questioned Kruszewski's claim.

"This proposal is plainly inadequate and collusive on its face," said Kansas City attorney Norman Siegel. "... I also question the underlying premise that Stifel was unaware of the market conditions because they were underwriters of these securities."

Auction-rate securities are long-term debt instruments bought and sold at weekly and monthly auctions where new interest or dividend rates are set. The instruments were marketed as alternatives to money-market funds and touted as being safe and liquid.

But in February 2008, the $330 billion auction-rate market collapsed, causing the auctions to fail and banks to turn away customers who sought to cash in their auction-rate investments.

That, in turn, drove up interest rates for auction-rate security issuers such as municipalities and student-loan providers, including Missouri's student loan agency, the Missouri Higher Education Loan Authority.

Siegel said Stifel sold about $225 million in auction-rate securities. Slightly more than half that amount has been repurchased by the securities' issuers, leaving more than $100 million in the hands of customers who, until now, have been unable to cash them in.


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