In its latest crackdown on improper use of collateralized debt obligations, the Securities and Exchange Commission on Tuesday charged RBC Capital Markets LLC for misconduct in the sale of unsuitable investments to five Wisconsin school districts. RBC Capital agreed to pay more than $30 million to settle the charges.
According to the SEC’s order instituting administrative proceedings, RBC Capital marketed and sold to trusts created by the school districts $200 million of credit-linked notes that were tied to the performance of synthetic CDOs.
The SEC says the school districts contributed $37.3 million of district funds to the investments with the remainder of the investment coming from funds borrowed by the trusts. “The sales took place despite significant concerns within RBC Capital about the suitability of the product for municipalities like the school districts,” the SEC said. The SEC also said that RBC Capital’s marketing materials failed to adequately explain the risks associated with the investments.
RBC Capital agreed to settle the SEC’s charges by paying $30.4 million that will be distributed in varying amounts to the school districts through a Fair Fund.
Last month, the SEC separately charged St. Louis-based brokerage firm Stifel, Nicolaus & Co. and a former senior executive with fraudulent misconduct in connection with the same sale of the CDO investments to the school districts. Other SEC enforcement actions related to the offer and sale of CDOs include Goldman Sachs, ICP Asset Management, J.P. Morgan, and Wachovia Capital Markets.