Bank seizes money from school districts embroiled in risky investments

A European bank that lent money to five Wisconsin school districts that made risky investments has seized $5.6 million from district-controlled trusts to try to compel district officials to repay the debt.

DEPFA Bank took the action earlier this week after a year of fruitless efforts to work out a restructuring of $165 million worth of loans to the districts' trusts that have been in technical default for more than two years.

"We are taking the steps that we can take, and we are very much interested in restructuring the loan," DEPFA Bank spokesman Walter Allwipher said Wednesday.

Officials with the school districts - Kenosha, Kimberly, Waukesha, West Allis-West Milwaukee and Whitefish Bay - used the borrowed money plus other existing or borrowed assets to purchase $200 million worth of complex investment vehicles called collateralized debt obligations.

The districts had planned to use quarterly interest payments from the investments to help fund non-pension retirement payments, with the expectation that the full amount of the investment would be returned to them after seven years and used to pay off their debts to DEPFA.

But the investments began to lose most of their value amid the global financial crisis in 2008 and now are believed to be nearly worthless. The five school districts have sued Stifel, Nicolaus Co., Inc. and Royal Bank of Canada in Milwaukee County Circuit Court, claiming the two investment banks misled them about the nature of the districts' investments.

C.J. Krawczyk, one of the lawyers representing the districts, said DEPFA's action would have little effect on the schools' operating budgets. The money held in the trusts was likely leftover payments from the investments that had been used to pay DEPFA's interest payments, although it also could include some of the equity the districts originally contributed to the trust funds, he said.

"Frankly, we've been expecting them to take this action for some time," Krawczyk said.

Earlier this month, the districts were sent letters notifying them that DEPFA was demanding they pay the full amount of the principal and interest due on each of their loans.

That notice cleared the way for the bank to seize the trust fund assets earlier this week.

The amounts taken from each district's trust were:

• Kenosha: $632,757.61

• Kimberly: $134,233.10

• Waukesha: $2,441,826.27

• West Allis-West Milwaukee: $1,552,092.65

• Whitefish Bay: $891,615.31

"This is the means that we have, and we mean to protect our rights as best we can," Allwipher said.

Krawczyk said the bank took the action after securing its quarterly payment earlier this month. With no funds left in the trusts, he said he was unsure how the districts would make their interest payments to DEPFA in the future. "I can't speculate on how the districts will respond," he said.

Also on Wednesday, the state Assembly held a hearing to consider a bill that would omit school districts from a list of governmental entities that could be sold unregistered securities. Although this is an issue in the districts' lawsuit, Krawczyk said it might not be considered anything more than "instructive" by the judge in the ongoing lawsuit, given that such a statute was not in place when the districts were sold the investments.