When investors went to Francis Weller, Jr. between 2012 and 2017, the Cape Cod representative had them open advisory accounts with the St. Louis-based broker-dealer Stifel, Nicolaus & Company. In return, the firm’s local representative provided Weller with investment recommendations, office space, and other services, while receiving full-service commission payments from Weller’s customers—who also paid Weller account management fees.
According to charges by the Massachusetts Securities Division, Weller did not disclose to his clients, who were largely senior citizens, that his overhead charges were being subsidized by Stifel, Nicolaus & Co., even as they generated as much as $1.07 million in fees for the local Stifel rep. Stifel neither admitted to nor denied these findings when it agreed to pay a $300,00 fine to the regulator.
That fine was one of 135 regulatory actions listed in the firm’s records, on top of dozens of arbitration awards over customer complaints. In 2014, Stifel was ordered to pay $790,000 over unsuitable exchange-traded funds. In 2019 it was fined $300,000 over failures to disclose certain fees. In two separate 2020 awards, it was ordered to pay $800,000 and $500,000 over allegations of fraud and breach of fiduciary duty. Even those numbers pale before the millions Stifel, Nicolaus has paid in connection to regulatory sanctions and settlements.
In 2011 the Securities and Exchange Commission sued Stifel, Nicolaus & Co. over allegations the firm and its ex-Senior Vice President, David Noack, defrauded five Wisconsin school districts. According to the lawsuit, Noack and Stifel, Nicolaus sold the school districts “risky and complex investments funded largely with borrowed money.” The products in question were synthetic collateralized debt obligations, in which the districts invested $200 million via three trusts. Stifel allegedly “made sweeping assurances” that the investments’ failure was a prospect as unlikely as “15 Enrons,” according to the SEC. It further asserted that the school districts would not suffer a loss unless “30 of the 105 companies” in the portfolio defaulted and “100 of the top 100 companies in the world” failed.
Unfortunately, these representations were in fact misrepresentations. Stifel, Nicolaus and Noack allegedly did not disclose to the school districts that the portfolio suffered poor performance “from the outset,” nor that some CDO issuers were so concerned about the CDO program’s risks that they chose not to be a part of it. The SEC alleged that the CDOs were unsuitable for the school districts, which had no experience investing in those complex products. Still, the districts themselves contributed $37.3 million into the program, borrowing another $162.7 million. Over the subsequent years, the CDOs gradually declined in value, ultimately suffering “a complete loss.” In addition to losing their investment, the school districts also received credit rating downgrades because they were unable to contribute additional funds toward their trusts. Stifel, Nicolaus and Noack were aware of their clients’ relative lack of sophistication, according to the SEC, and knew also that their clients relied on their recommendations.
In 2016, Stifel and Noack reached a settlement with the SEC right before the case went to trial. Reuters reported at the time that they jointly forfeit $1.66 million, plus prejudgment interest of $840,000. They also consented to penalties of $100,000 and $22 million, respectively. The SEC noted in a release that these payments, in connection with previous settlements, would fully compensate the school districts for their losses in the synthetic CDO program.
An investment in variable annuities and a real estate investment trust led to substantial losses for Mississippi investor Tracy Noble Gilbert, according to a 2015 arbitration award against Stifel Nicolaus & Co. The investor’s complaint, filed in 2012, alleged Stifel broker Lanis Dale Noble breached his fiduciary duty and churned her account. A FINRA panel found in her favor, granting her $1.3 million in damages.
In 2019 FINRA found Stifel, Nicolaus & Co. liable for failing to supervise a broker’s sales of biotechnology and healthcare stocks to three clients. The customers alleged in their complaint that broker Kenneth Blumberg “invested as much as 80% of their portfolio in fewer than 10 biotech stocks,” according to a report by AdvisorHub. When the investments started sustaining losses, Blumberg advised them to hold their positions; he also allegedly mismarked their transactions as unsolicited. The customers ultimately suffered losses of $1.8 million, leading to FINRA’s order that the firm pay them an award of $1.5 million.
Widespread supervisory failures led to $935.2 million in early unit investment trust rollovers that may have incurred $1.9 million in excessive sales charges for Stifel Nicolaus & Co. customers, according to a 2020 FINRA sanction. UITs are typically held as long-term investments that mature after 15 or 24 months, with fees designed accordingly. A UIT “rollover” occurs when an investor sells their position and uses the proceeds to invest in a new UIT, incurring sales charges the investor would not incur if they held the original investment. As FINRA notes, these charges may be unsuitable for many investors.
In its 2020 sanction, FINRA found that Stifel’s brokers recommended unsuitable UIT rollovers for “more than 1,700 customers.” During the period in question—January 2012 until December 2016, during which time the firm conducted almost $11 billion in UIT trades—Stifel’s supervisory system was “not reasonably designed to supervise the suitability of those early rollovers,” according to FINRA, resulting in the firm’s failure to identify transactions that may have been unsuitable. The firm was ultimately ordered to pay $1.9 million in restitution to the customers affected.
“Firms must have an adequate supervisory system in place to detect potentially unsuitable UIT rollovers,” FINRA’s enforcement head said in a statement, “and also provide customers with accurate information so they can make informed decisions about those rollover recommendations. We are pleased that customers will receive restitution for sales charges incurred as a result of the recommendations.”
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