The Securities and Exchange Commission has charged Stifel Financial subsidiary Stifel, Nicolaus & Co, along with former senior vice president David Noack, with defrauding five Wisconsin school districts by selling them unsuitably risky and complex investments funded with largely borrowed money.

The SEC complaint against Stifel, filed in a federal court in Milwaukee, relates to the sale of notes linked to the performance of synthetic CDOs to fund retiree benefits. The school districts established trusts that invested $200 million in three transactions from June to December 2006, paid for largely with borrowed funds, according to the SEC.

Stifel has responded to the lawsuit over the miss-selling claims, and also amended its cross claim against RBC over the manufacturing, origination and sale of the synthetic collateralized debt obligations.

“Stifel and Noack misrepresented the risk of the investments and failed to disclose material facts to the school districts. In the end, the investments were a complete failure, but generated significant fees for Stifel and Noack,” the Commission said in a statement.

The SEC further alleges that Stifel and Noack made “sweeping statements,” such as that for the investments to fail it would take such extreme circumstances as “15 Enrons” or for 30 of the 105 companies in the portfolio to default. It is seeking permanent injunctions, the payback of all ill-gotten gains with prejudgment interest, and financial penalties.

However, in its response to the SEC’s charge, Stifel says that in its case on misstatement the Commission has focused on “isolated comments, taken out of context.” Furthermore, the firm says that on the issue of suitability the investments were AA- rated and the school districts acknowledged in writing they were sophisticated and accredited investors, able to withstand the total loss of their investment.

In its cross claim against RBC, Stifel alleges that misrepresentations and undisclosed conflicts of interest “allowed RBC to make millions of dollars in undisclosed profits.”

“We believe the SEC filing demonstrates its failure to understand the real cause of the financial meltdown. Rather than focusing on the fundamental flaws in the creation and management of the product, the SEC is unfairly blaming Stifel as the placement agent,” Stifel said in a statement.