Wall Street crisis snares Main St. schools

Five Wisconsin school districts claim they were misled by advisers and could lose most of $200M investment.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Poppy Harlow, CNNMoney.com

Whitefish Bay, Wis., High School

WHITEFISH BAY, Wis. (CNNMoney.com) -- Lehman Brothers. Washington Mutual. And now ... Whitefish Bay Schools?

The global financial crisis that claimed some of the world's biggest banks now has this suburban Milwaukee school district and four others on the brink of losing a hefty $200 million investment.

Two years ago board members from the districts signed off on an investment to fund their teachers' retirement and health care benefits.

Shawn Yde, business director for the Whitefish Bay School District, says he and his board members were told they were making a conservative investment in "AA" and "AAA"-rated bonds. Mark Hujik, from the Kenosha school board, says he and other board members were told they were investing in highly rated, and relatively safe, corporate bonds.

But instead of buying corporate bonds, the school districts actually purchased one of Wall Street's most complex financial instruments: synthetic collateralized debt obligations (CDOs).

Through the CDOs the schools were insuring the debt of more than a hundred companies, including 3M (MMM, Fortune 500), General Electric (GE, Fortune 500) and Exxon Mobil (XOM, Fortune 500). But they were also insuring debt from Lehman Brothers, Washington Mutual, Fannie Mae and Freddie Mac. With the downfall of Lehman, the failure of Washington Mutual and the government takeover of Fannie and Freddie, the debt defaults came rolling in, and the value of the schools' investment fell 95%.

The districts are now suing their investment advisor, Stifel Nicolaus, and the Royal Bank of Canada - which created the investment product - calling it fraudulent and alleging they were misled from the beginning.

'You would need 15 Enrons'

The school boards' complaint says the nature and risks of the investments were intentionally or negligently misrepresented, or omitted by the RBC and Stifel Nicolaus. RBC and Stifel Nicolaus denied any wrongdoing and claim the risk was clearly outlined. And it was - on paper.

Board members from all five districts - West Allis, Kimberly, Waukesha, Whitefish Bay and Kenosha - signed closing documents that outlined investment risks. But according to Whitefish Bay's Yde, "the risk that was verbally provided to us is not the risks that we have in this transaction."

The school districts cite multiple meetings they had with David Noack, their then-financial adviser from Stifel Nicolaus. According to an audio tape of a 2006 Whitefish Bay School Board meeting, Noack told board members, "It takes 15 defaults for us to start losing money and we have someone watching over every company every day for seven years. If it looks like it's going that way, they get out of it ...You would need 15 Enrons. You would need something to happen overnight."

A videotape of another local school board meeting in May 2007 shows Noack saying, "If we stick to all investment-grade companies, you've still gotta have 10% go under, and I would assume - I'm not an economist, but that's a depression."

Noack has not been named as a defendant in the lawsuit and his lawyer declined to comment for this story.

The attorneys for the districts are calling for a rescission of the deal. A trial date is yet to be set.

As for the schools' investment, they won't know its value until it matures in 2013. But with every default, the districts come closer to seeing their $200 million investment evaporate. It's something that keeps Yde and Hujik up at night - and brings Wall Street much closer to home than ever before. To top of page

They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.