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Bank Says Fraudster & Victims Are in Cahoots

MILWAUKEE (CN) - Securities fraudsters have conspired with their victims to extort "a windfall ransom" from RBC Europe and RBC Capital Markets, the banks say in court.

After leaving four Wisconsin school districts in crisis with shaky investment promises, the two financial advisers responsible for the fraud have "recruited" the school districts to "fabricate damages based on maliciously false claims designed to injure RBC's business and reputation," according to the complaint in Milwaukee County Circuit Court.

RBC says "greed and hubris" fueled the initial fraud and are as much to blame today. Facing a financing shortfall in 2004, the school districts relied on their advisers at Stifel Nicolaus & Co., who "promised returns without them having to put up any of their own money," according to the complaint.

The districts verified that they understood the inherent risk in investing with RBC, and the bank also received additional representations from Stifel and its employee David Noack, according to the complaint.

"All the forgoing representations by Stifel and Noack were false," the complaint states. "Unbeknownst to RBC, Noack - the boastful 'financial guru' to the districts and the face of Stifel in the transactions - barely comprehended the basic concepts of synthetic CDOs (if at all), and had never even heard of CDOs before they became the centerpiece of Stifel's flagship GOAL program." (Emphasis and parentheses in original.)

Earlier in the complaint, RBC says GOAL is an abbreviation of Government OPEB Asset & Liability, a Stifel program that "contemplated borrowing funds at one rate and investing the funds in synthetic corporate CDOs that paid a higher rate."

The school districts sued Stifel and RBC in 2008 after allegedly losing more than $150 million of their $200 million investment.

But RBC says the recently filed amended complaint departs drastically from the first three versions in which "the districts viewed their 'trusted advisor' Stifel as the principal wrongdoer." The bank blames Stifel and its CEO Ronald Kruszewski.

"The districts' latest complaint, however, reflecting over 1,000 line edits to their allegations, scrubs virtually all mention of Stifel," the complaint states. "This work of fiction - ghostwritten in part by Stifel - is the centerpiece of an unlawful conspiracy designed to maliciously injure RBC's reputation and business. In pursuing their unlawful scheme, Stifel, Kruszewski and the districts hope to extort from RBC a windfall ransom by advancing in the third amended complaint and elsewhere patently false allegations concerning RBC and the notes."

RBC says Stifel and Kruszewski backed the school districts against a wall in a 2012 settlement agreement that "actually reflects a malevolent and malicious pact in which publicly sponsored entities are used as puppets to pursue false claims and illusory damages."

The agreement hinges on the fact that the trusts - publicly sponsored entities established to provide pension and health insurance benefits to retired teachers - are still on the hook for defaulted notes Stipfel orchestrated their behalf with another bank, Depfa.

Stipfel's settlement gave it effective "control of the trusts to recast bogus litigation claims against RBC and transform the Depfa notes into the equivalent of a counterfeit lottery ticket," according to the complaint. "Stated differently, Stifel - the central actor accused by the SEC of fraud here - has wrapped itself in the cloak of the public entity trusts in an effort to reap hundreds of millions of dollars based on unrecoverable investment losses for which Stifel itself bears blame."

Stifel allegedly sweetened the pot by agreeing to pay the districts' legal fees.

"Stifel, Kruszewski and the districts also agreed upon an approach to divvying up any ill-gotten gains jointly extracted from RBC, with Stifel first getting reimbursed for all payments of the aforementioned fees and expenses before sharing any remaining spoils equally with the districts."

RBC says it already paid a "Fair Funds" payment in 2011 "that largely restored the Districts to their pre-financial crisis condition, and in contrast to the false injury supporting [Stifel's] latest ploy, the only party that has suffered any continuing harm resulting from the Transactions is RBC."

The London-based bank and its Manhattan subsidiary seek punitive damages from Kruszewski and Noack for fraudulent inducement, misrepresentation, civil conspiracy and other claims.

They are represented by Janet Cain with Peterson, Johnson and Murray.

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