A lawsuit filed by Kenosha Unified and four other districts to recover millions lost in an investment will continue after a Milwaukee County Circuit Court judge denied motions by investment firms to dismiss it.

Judge William Brash denied the dismissal motions Thursday, which had been filed by attorneys of Stifel Nicolaus and the Royal Bank of Canada in response to the districts’ lawsuit filed last year. The other districts suing the firms include Kimberly, Waukesha, West Allis and Whitefish Bay School districts.

The districts had invested a combined $200 million in collateralized debt obligation bonds through Stifel Nicolaus. They have lost at least $190 million combined. According to attorneys representing the districts, their investment is valued at less than $10 million. Kenosha Unified’s portion of the investment was $37.5 million, an amount last valued at an estimated $98,000.

“The judge denied all their motions to dismiss,” said Steve Kravit, an attorney representing the districts. “The defendants will need to answer by the end of next month and it is expected there will be a trial within the year.”

Kravit added all claims brought by the districts in the suit remained to be tried, “including claims that seek triple damages and attorney fees.”

A dozen counts

The districts’ lawsuit includes a dozen counts that allege they were defrauded by the firms. The districts seek to recover all of the money they invested and subsequently lost.

The investments were meant to bolster post-retirement teacher benefits through a Stifel product.

The school districts maintain the firm misled them into buying what they thought were AA- and AAA-rated bonds that would pay off by December 2013. Instead, the districts bought risky credit default swaps, which are insurance plans taken out between two parties, with one party paying money as insurance in case a bond defaults, while another party agrees to pay money if it does.

A nine-page Power Point presentation shown to all five districts and previously obtained by the Kenosha News showed the credit default swaps had an average rating of BBB+. Board members maintained that information was glossed over while they repeatedly were assured the investment was conservative and safe. Stifel-Nicolaus has argued the school districts signed papers acknowledging they had legal representatives and advisers who went over the investment.

Stifel responds

Dan Callahan, a spokesman for Stifel Nicolaus, said the litigation is still in its early stages and the denial of the motions means Stifel Nicolaus and the Royal Bank of Canada will again formally respond to the lawsuit now going forward.

In a statement, Callahan said the districts’ complaint, however, contained inaccuracies and “fails to paint an accurate picture of Stifel’s limited role in the transactions.”

“There were many parties involved in the creation and review of the investments, many of whom the districts have chosen not to sue, including the districts’ legal advisers and school board members,” he said.

Callahan also alluded to the involvement of an Irish bank, Depfa, that provided loans for the trusts holding the funds for the post-retirement benefits.

“Stifel was placement agent and had no role in creating the investment, monitoring it, or recommending changes to the investment,” he said.

Depfa officials, who are not part of the lawsuit, have said they played no role in the investment decisions made on behalf of the trusts.

Callahan maintains the investment, which was created by Royal Bank of Canada, was AA- rated at the time of purchase and was operating as expected at the time Stifel terminated its relationship with the districts more than two years ago.

“The worldwide financial crisis has caused the problems the districts are now experiencing,” he said.

Kenosha Unified School Board President Pam Stevens said the judge’s decision reflects what board members and their attorneys believed all along.

“We were positive going in there and we’re really glad the judge sees what we see — that we were defrauded,” she said. “This is a really positive step for us. We’re happy. It couldn’t have gone better and that all 12 counts are going through,” she said. “That’s a great outcome for us.”