The Securities & Exchange Commission today filed suit against St. Louis-based brokerage Stifel, Nicolaus & Co. (SF), alleging that it defrauding five Wisconsin school districts out of around $200 million. Also charged was Stifel Nicolaus executive David Noack.

According to the complaint, Stifel devised a program in 2006 for the school districts that tied employee retirement benefits to the performance of synthetic collateralized debt obligations. What it allegedly didn’t do, however, was accurately explain the risks of such investments to the school districts, which lost almost all of their investment when the CDO market collapsed in late 2008:

Stifel and Noack made sweeping assurances to the School Districts, representing that it would take “15 Enrons” – meaning a catastrophic, overnight collapse of 15 investmentgrade companies – for the investments to fail. They represented that 30 of the 105 companies in the portfolio would have to go bankrupt, and that 100 of the top 800 companies in the world would have to go under, before the School Districts would suffer a loss of their principal. They represented that there would be breadlines, and that the country would have to suffer an economic collapse greater than the Great Depression, before the School Districts would lose their money. They represented that the investments were safe and similar to U.S. Treasuries. All of those representations were untrue.

Stifel and Noack also are accused of having withheld certain material facts, such as how the CDO providers themselves had expressed concerns about the investments’ heavy use of leverage. They also didn’t tell the districts that the early portfolio was performing poorly when they solicited additional investment.

No comment yet from Stifel Nicolaus, whose stock is down more than 15% in mid-day trading. Below is a copy of the complaint:

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