Waukesha and other school districts compensated in big settlement

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Five Wisconsin school districts, including the Waukesha School District, announced a comprehensive final settlement with the Royal Bank of Canada in their long-pending Milwaukee County Circuit Court lawsuit to recover failed investments in collateralized debt obligations.

At the same time, the U.S. Securities and Exchange Commission announced that it had resolved its regulatory case against Stifel Nicolaus & Company arising out of the same transactions in a federal case that has been pending in Milwaukee for the past five years.

These settlements resolve all pending litigation relating to $200 million – including $65 million for Waukesha schools – in synthetic collateralized debt obligations that were manufactured by the Royal Bank of Canada and sold to the five districts’ trusts in 2006. The districts’ total final recovery from settlement of the cases for all five districts is $217.9 million in cash and debt forgiveness, the second largest civil settlement in state history, lawyers said.

Waukesha’s gain

For the Waukesha district, the final settlement of $5.5 million adds to previous settlement amounts, for a total of slightly over $65 million. Its ongoing litigation dated back to August 2008 with investment companies that were involved in the sale of certain investments within the failed Post Employment Benefits plan that had been initiated in 2006.

Local officials are satisfied with the settlement.

“When we first filed suit, our objective was to be made whole again, and I’m happy that we were able to achieve it and also after eight plus years, this issue is fully behind us,” said Waukesha Superintendent Todd Gray. “We were fortunate to have a strong legal team in Kravit Hovel & Krawczyk on this case, and I am thankful for their efforts.”

School Board President Joe Como added: “This was a complicated case, and the decisions that had to be made along the way were far from obvious. I commend the members of each school board for their willingness to make some tough calls that ultimately led to this very successful outcome. I’d also like to thank Stifel Nicolaus, who stepped up early to make things right with us in 2012 and who has been a good partner to the districts over the past four years.”

West Allis too

The $7.3 million the West Allis-West Milwaukee School District gets from the settlement of the nearly decade-long lawsuit will go in the bank, school officials said.

“It was long overdue,” said West Allis-West Milwaukee School Board President Jeff Sikich. “I’m glad the SEC helped us in our fight.”

Board member Pat Kerhin said, “It’s about time.”

Both board members said the money will go to the district fund balance that is $2.4 million in the hole, said Andrew Chromy, WAWM district business administrator.

The deficit happened because the district operated for two years in the red, under the previous administrations. Overspending brought the fund balance down to below zero, Chromy said.

The $7.3 million infusion will wipe out that deficit and bring the fund balance up to $4.9 million, he said.

Having even a small fund balance should help the district get better interest rates for the short-term borrowing it does. Like many school districts, West Allis schools borrow money to operate the schools until property tax money comes in, Chromy said.

The district borrowed enough to bridge that revenue gap last year and this year, but in the school year starting next fall, it should see somewhat better interest rates, he said.

Originally, the districts invested $35 million in cash and their trusts borrowed $165 million – for a total of $200 million. With it, they bought the investments, known as collateralized debt obligations or CDOs in 2006. The $63.9 million in cash recovered by the school districts from settlements is nearly twice (182 percent) their initial cash investment.

The investments were more risky than anyone in any of the districts believed and were worth nothing after the recession.

This article includes press release information provided by the Waukesha School District.

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