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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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  1. I just wanted to point out that Congressman Jim Sensenbrenner, Senator Feinstein, former Senate majority leader Bill Frist, and former attorney general John Ashcroft are responsible for this rubbish. We need to keep a eye on these corrupt, arrogant, and incompetent fools.

  2. Well I guess our politicians have decided to give these idiot federal prosecutors unlimited power. Now if I guy bounces a fifty-dollar check, the U.S. attorney can intentionally wait for twenty-five years or so and have the check swabbed for DNA and file charges. These power hungry federal prosecutors now have unlimited power to mess with people. we can thank Wisconsin's Jim Sensenbrenner and Diane Feinstein, John Achcroft and Bill Frist for this one. Way to go, idiots.

  3. I wonder if the USSR had electronic voting machines that changed the ballot after it was cast? Oh well, at least we have a free media serving as vicious watchdog and exposing all of the rot in the system! (Insert rimshot)

  4. Jose, you are assuming those in power do not wish to be totalitarian. My experience has convinced me otherwise. Constitutionalists are nearly as rare as hens teeth among the powerbrokers "managing" us for The Glorious State. Oh, and your point is dead on, el correcta mundo. Keep the Founders’ (1791 & 1851) vision alive, my friend, even if most all others, and especially the ruling junta, chase only power and money (i.e. mammon)

  5. Hypocrisy in high places, absolute immunity handed out like Halloween treats (it is the stuff of which tyranny is made) and the belief that government agents are above the constitutions and cannot be held responsible for mere citizen is killing, perhaps has killed, The Republic. And yet those same power drunk statists just reel on down the hallway toward bureaucratic fascism.

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