DALLAS - An Oklahoma regional hospital corporation filed a lawsuit Tuesday against Stifel, Nicolaus & Co., claiming it was defrauded when the state's largest underwriter charged excessive and undisclosed fees in connection with a bond refunding issue in 1989.

Filed in Oklahoma state district court, the lawsuit seeks to recover more than $299,000 in compensation for unusual expenses and remarketing fees and other items.

"There existed a conspiracy to defraud the plaintiffs," according to the suit pressed by MidAmerica Healthcare Inc. and Shawnee Hospital Authority. "The damages suffered by virtue of the conspiracy, to the extent presently known, are payments to Stifel ... of $299,085.48."

The lawsuit was filed made one day after Stifel filed a similar legal action in federal court. The St. Louis-based investment banking firm sought a declaration by the court that Shawnee and MidAmerica are not entitled to recoup certain fees paid to Stifel in connection with the $14.8 million bond issue.

In a prepared statement, Stifel said the disputed underwriting fees were known and authorized by Shawnee and MidAmerica, that Stifel preformed all duties owed to the organizations and that its actions fulfilled legal and contractual requirements.

In addition, the firm said: The suit came about as a result of litigation threats made by Shawnee and MidAmerica over past fees paid to Stifel in spite of the fact that such fees were both disclosed and authorized in the underwriting documents which Shawnee and MidAmerica executed in 1989."

Stifel also said it was confident that the court would agree with its position and uphold the terms of the underwriting agreement.

Larry Patton, the attorney representing MidAmerica and Shawnee Hospital Authority, could not be reached for comment immediately. But the suit filed by the two organizations contends that Stifel and its investment banker, Michael Garrett, violated usual industry standards and contractual provisions by collecting compensation that surpassed the $291,826 underwriting fee.

The suit says MidAmerica and the authority employed Stifel as underwriter on five of seven bond issues from 1972 and developed a longstanding relationship of trust and confidence.

MidAmerica is a not-for-profit corporation that operates a 136-bed regional hospital in Shawnee, Okla.

In March 1989, the suit says Stifel approached MidAmerica and Shawnee with a proposal to refinance the hospital's 1982 debt and suggested that the plaintiffs employ Stifel on a non-competitive basis.

"It was expressed, implied, and understood that plaintiffs would be compensating Stifel at competitive rates, and that the compensation rate for Stifel would be more favorable than could be obtained on a solicited competitive bid basis," the suit says.

However, the suit says the contract, contrary to customary practice, did not precisely state the compensation that Stifel would receive, merely saying that Stifel's discount would not exceed 4% of the total amount of bonds issued.

In addition, the suit says Stifel reccommended that the MidAmerica and Shawnee enter into an agreement to pay the investment banking firm fees for remarketing and for an index, as well as assessing the agencies unreasonable expenses that the underwriter should have picked up. "Stifel has never presented proof that such expenses were actually incurred," the suit says.

The suit says Stifel breached its contract by making material misrepresentations and leading the plaintiffs to believe the underwriter's fees were competitive.

"When the plaintiffs elected, in 1993, to select an underwriter for a contemplated bond issue by use of competitive bids, [a choice which Garrett, Stifel, and its representative advised against and protested] bids received caused plaintiffs to reasonably inquire and compare these competitive proposals to their last non-competitive selection of Stifel," the suit says.

Negotiations with Stifel ensued, and the investment banking firm refused to pay.

In its suit, Stifel said MidAmerica and Shawnee did not object to the fees at the time of closing, and as a result, it has refused to return some of the compensation to the two agencies.

"Stifel has advised the SHA and MidAmerica that the payments will not be refunded because they were proper in all relevant respects," the suit says.

Stifel's disagreement with Shawnee Hospital Authority and MidAmerica is one of a series of controversies involving the state's largest underwriter.

It is now being investigated by the Securities and Exchange Commission for its part in Oklahoma cash management programs between 1990-92 and bond issued by the Oklahoma Turnpike Authority since 1989.

Among other items, the SEC is investigating underwriter selection and payments for several bond issues handled in the programs or by those agencies.

Stifel has been the senior manager for about 25% of the bond issues underwritten in Oklahoma.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.