Another Bond Nightmare – The Lakeside 370 Levee District Bonds & Stifel Nicolaus

Just west of St. Louis in the flood plain of the Missouri River is the City of St. Peters in St. Charles County, Missouri. In what should have remained flood plain the City built a levee for a retail and office development. In 2008 the City’s Levee District, for the purpose of improving the levee, sold $33.9 million of bonds. The project is called Lakeside 370 Business Park.

By any definition, development within a flood plain, protected only by a levee, is speculative. In 1993 historic floods along the Mississippi destroyed hundreds of so-called 100 year levees and caused billions of dollars in damages. Likewise, the Missouri River periodically causes flooding. Developing near two of the mightiest rivers in the world is highly risky.

Ignoring the lesson of 1993, the underwriter of the bond, Stifel Nicolaus, sold the bonds to its customers as both safe and conservative. Many of the customers who bought the bonds are retirees seeking conservative income. The risk of the development was shifted from the developers, where it should have been, to the bondholders.

The bonds had problems from the outset and it did not take a flood to sink them. One of the developers promptly went out of business and failed to pay its share of property taxes after 2009. It’s ownership was foreclosed upon in 2012.
When the developers failed to pay property taxes, the initial reserve was used to pay interest to the bondholders until it was exhausted. Contrary to the prospectus, the bondholders were paid interest from the bond funds, when in reality the District had not been paid property taxes by the developers. When the interest on the bonds was exhausted, the Levee District defaulted.

The bonds should have been characterized by Stifel as highly risky and speculative rather than conservative from the outset. Subsequently, Stifel failed to inform its customers of the deteriorating situation of the Levee District, that one of the partners had gone out of business, and that the reserve account was paying interest on the bonds to the bondholders. To this day the Levee District remains largely undeveloped.
In 2013 the reserve was exhausted and payments to the bondholders ended. On February 18, 2013 the IRS revoked the tax exempt status of the bonds. Most recently the District has filed bankruptcy.

Stifel, in response to at least one unhappy customer, has denied any responsibility for their customers’ losses. A FINRA claim in arbitration appears to be the only remedy available for Stifel’s customers.