Judge says bank can pursue suit against broker

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The Peoples State Bank of Ellettsville can move forward with its lawsuit against broker Stifel Nicolaus & Co., which the bank claims duped it into investing $13 million in auction-rate securities just before those markets froze up.

Federal Judge Richard Young granted Peoples the victory March 14 by ruling that the bank can sue Stifel on its claims that the broker violated the Indiana Securities Act and committed fraud.

The judge dismissed a lesser breach-of-contract claim on Stifel’s attempt to get him to throw out Peoples’ entire case on summary judgment.

The tiny bank west of Bloomington sued St. Louis-based Stifel in late 2010. Its suit claims a Stifel broker, Michael Sullivan, called the bank in early November 2007 and within days convinced Peoples to spend $7.5 million on a security backed by federal student loans. Over the next two months, Peoples poured nearly $6.2 million more into the auction-rate investments.

Peoples’ officials never reviewed a prospectus before placing the order, according to the bank’s lawsuit, nor did they realize their investment is subordinate to another investor who bought securities on the same batch of student loans.

“Unlike federal case law, the Indiana Securities Act remains silent on the duty to read,” Young wrote. “Even so, the underlying policy of full disclosure should be considered here, too. The Act principally requires broker-dealers to disclose all material information.”

Peoples claims the auction-rate securities were marketed by Stifel as liquid, investment-grade securities that could be sold at any seven-day or 28-day auction rate. In addition, Peoples alleges that Sullivan represented them as safe, well-collateralized and guaranteed by the federal government.

Because of the market collapse, Peoples now alleges it has long-term securities that generate no interest payments and don’t mature for 35 years.

The bank's purchases represented 15 percent of its investments at the time, according to data from the Federal Deposit Insurance Corp. Peoples has 11 branches in Monroe, Brown, Owen and Morgan counties, according to the FDIC.

Within weeks of Peoples' making the deal, investors across the country bailed on the monthly auctions of the securities, which had been sold as ways to invest in corporate and municipal debt, and for those debt issuers to obtain more attractive interest rates.

The failure of the auctions kicked Peoples’ investments into default status, in which it earns little to no interest on its investments. It still has $11.8 million tied up in the auction-rate securities.

Peoples is suing Stifel in U.S. District Court in Indianapolis.


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