On Thursday October 1st, 2009, Colorado state securities regulators filed a complaint against Stifel, Nicolaus & Co. seeking to strip or suspend that company’s state security license. This action is being taken in connection with Stifel’s sale of securities products known as auction-rate securities (ARS). State regulators are alleging that Stifel fraudulently marketed these debt instruments as safe and liquid cash alternatives. Unfortunately for investors, the reality of the situation revealed that ARS products were anything but safe and liquid investments.
As a remedy to the current situation, regulators want the firm to return approximately $14 million in ARS notes sold to Colorado investors.
The ARS market operated without issue for several years, using investment banks as buyers for notes when retail investors were in short supply. However, as investment banks saw their capital disappear in the economic climate of early 2008, the inherent flaws in the ARS market were exposed as investment banks stopped purchasing ARS notes. Without buyers for these notes, such investors were left without buyers, essentially making their notes worthless.
Colorado state regulators argue that retail investors, who were seeking short term liquid investments, were not informed of the risk involved.
Stifel has 30 days to respond to the complaint. A hearing date will be set November 17th.
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