NEW ALLEGATIONS IN REOPENED SCHOOL DISTRICTS V. STIFEL CASE

Districts Were Not "Accredited Investors"
or "Qualified Institutional Buyers"
Calls for Rescission of $200 Million Transaction
also
New Book, "Looting of America," begins with Chapter on Whitefish Bay's OPEB Crisis

Special to the Readers of Milwaukeeworld.com

By Michael Horne

And The Milwaukee World Hound Dog Team


The first salvo has been filed in the reopened Kenosha Unified School District et al v. Stifel Nicolaus & Company, Inc., Royal Bank of Canada, Europe, et al. "School District Lawsuit," [Milwaukee County Case No. 2008CV013726].
In a court filing yesterday, Wednesday, April 22nd, 2009, Plaintiff's attorney Stephen E. Kravit [Harvard U '75] added new counts against the St. Louis investment house. It is the first development since federal judge Rudolph A. Randa [U Wisconsin '66] remanded the case to state court on April 17th, 2009. The case is being argued before Hon. David A. Hansher [U Wisconsin '68] of Branch 42, Milwaukee County Circuit Court.

According to the filing, Kravit argues the plaintiffs are entitled to a rescission of the $200 million transaction in which five Wisconsin school districts purchased elaborate mortgage security-backed Synthetic Collateralized Debt Obligations to fund Other Post Employment Benefits [OPEB] for district employees.
A rescission would void the transactions and entitle plaintiffs to a return of their entire initial investment, which now has lost 90 per cent of its value.
The grounds for the rescission is that the districts were neither:

• "Qualified Institutional Buyers" [QIBs]

or

• "Accredited Investors"

According to the court document:

"One major limitaton of the GOAL Program [established to market the Synthetic CDOs--Ed.] was that it called for the sale of unregistered securities, and the OPEB Trusts were not qualified to buy them.
"Under Wisconsin law, unregistered securities can only be sold to certain types of sophisticated investors, including large institutions (known as 'Qualified Institutional Buyers' or 'QIBs' and 'Accredited Investors' or 'IAIs.'" ...
"Neither the School Districts nor the OPEB Trusts have ever come remotely close to qualifying as QIBs. Aware of this, Defendants needed the Plaintiffs to qualify as Accredited Investors."

Likewise, none of the districts qualified as IAIs, the complaint alleges:

"None of the OPEB Trusts met all of the requirements to qualify as an accredited investor. In fact, most of the trusts did not meet any of the requirements."

Accordingly, the first claim for relief is now "Violations of the Registration Requirements of the Wisconsin Uniform Securities Law" There are 11 others, including for Fraud, violation of Deceptive Trade Practices law, Negligent Representation and others, all outlined in the complaint cited above.

Specifically:

Wisconsin Statutes Section 551.509; Wisconsin Statutes Section 551.201, Wisconsin Statutes Section 100.18, and others.

[The story has received national and international media attention (including a front page Sunday New York Times Above-the-Fold story) which your correspondent has helped assemble at www.schoollawsuitfacts.com, which is updated on a regular basis.--Ed.]

"White Folks Bay" OPEB Crisis Lead Story in "Looting of America"

While researching this story, I came upon a website promoting a to-be-published book entitled "The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity -- and What We Can Do About It," by Les Leopold. [White River Junction, Vt., 2009, Chelsea Green publishers]

The book begins with a chapter entitled "The Financial Collapse of 'White Folks' Bay, Wisconsin," which you can listen to the author read here.

In it, Leopold lays out for the reader the sequence of events that led Whitefish Bay's school district to invest in what he calls "Wall Street's 'Innovative' securities," such as the Synthetic CDOs that were marketed to the district and others involved in the school lawsuit.:

The school district takes its fiscal responsibilities seriously. It has set up a trust fund to pay benefits, primarily health insurance, for retired school employees. When these benefits (called “Other Post-Employment Benefits” or OPEB) were originally negotiated, the expense was modest. But then health care costs exploded. What’s more, accounting rules now require that school districts amortize these costs and post them on their books as a liability each year. Whitefish Bay, like many other school districts, became worried about how to meet these liabilities.

Whitefish Bay is a town full of financially sophisticated residents, including its school managers. They sought to pump up the OPEB trust fund quickly so they could keep their promises to retirees. As responsible guardians of the town’s resources, they looked for the highest rate of return at a minimal risk to the fund’s principal. As Shawn Yde, the school district’s director of business services, put it, the goal was to “guarantee a secure future for our employees without increasing the burden on our taxpayers or decreasing the funds available to our students to fund their education.”

Meanwhile, Wall Street investment houses had set their sights on school-district trust funds like Whitefish Bay’s. They hoped to persuade districts to stop stashing this money—valued at well above $100 billion nationwide in 2006—in treasury bonds and federally insured certificates of deposit (CDs). Wall Street’s “innovative” securities could provide higher returns—not to mention more lucrative fees for the investment firms. So an old-fashioned financial romance began: Supply (Wall Street’s hottest financial products) met Demand (school districts seeking to build up their OPEB trust funds). It looked like a perfect match.

--Michael Horne