* Stifel shares lose 10 percent in Monday trading
* St Louis broker's Q2 earnings fell 84 percent
* Adjusted Q2 earnings rose 30 pct before charges (Adds CEO comment from conference call)
By Joseph A. Giannone
NEW YORK, Aug 8 (Reuters) - Stifel Financial Corp (SF.N) on Monday said second-quarter profit fell 84 percent as the investment bank and brokerage absorbed charges related to a lawsuit and a regulatory probe as well as costs stemming from its Thomas Weisel Partners takeover last year.
Positive results across most of Stifel were wiped out by an ongoing lawsuit related to its sales of collateralized debt obligations to five Wisconsin school districts. Stifel on Monday said it purchased notes with a face value of $162.5 million at a significant but undisclosed discount.
The charges also reflect estimated future litigation costs and a related regulatory investigation into these sales, which generated substantial losses for the schools. Stifel is suing Royal Bank of Canada (RY.TO), which underwrote the securities.
The Securities and Exchange Commission is investigating Stifel to determine whether the CDO deals were suitable for the school districts.
The St. Louis-based investment bank, which bought Thomas Weisel Partners Group last year, said profit for the quarter ended June 30 fell to $3.42 million, or 5 cents a share, from $21.1 million, or 40 cents, in the year-earlier period.
Excluding charges, Stifel said net income rose 30 percent to $31.3 million, or 50 cents a share. Quarterly revenue rose 9.4 percent to $358.9 million.
Analysts on average had forecast 54 cents a share in earnings, according to Thomson Reuters I/B/E/S estimates.
"Our investment banking group generated their second-best revenue quarter, which was offset by pressure in our brokerage and private client businesses due to a lack of investor conviction, coupled with lower industry-wide volumes," Stifel Chief Executive Ronald Kruszewski said in a statement.
Stifel's brokerage business boosted revenue by 13 percent to $226 million from a year earlier, reflecting increased assets, higher broker productivity and management fees.
The ranks of financial advisers climbed 2.2 percent from the previous year to 1,958, while client assets surged 26 percent to $116 billion, reflecting acquisitions.
Capital markets and investment banking revenue by 7 percent to $133 million from the year earlier, paced by an increase in stock-underwriting work.
Still business was down from the first quarter, as negative headlines about the economy, Europe's debt markets and Washington budget battles drove investors to the sidelines.
"Starting in June, the markets began to feel like they did last summer -- a lack of conviction, then a ton of uncertainty starting with the European debt crisis and into the debt ceiling. It has contributed to a cyclical turn away from risk-based assets," Kruszewski said in a conference call.
Kruszewski said investors are devoting large parts of their cash into deposits and money markets earning no interest.
"You can make an argument that today presented a buying opportunity, but I see a lot more caution than I see risk taking. So fear is still trumping greed at this point," he said.
Stifel has boosted its revenue five-fold since 2005, fueled by a series of acquisitions. Last month it announced the takeover of Stone & Youngberg, a municipal finance specialist, and in June agreed to buy restructuring firm Miller Buckfire.
Stifel also is speculated to be in the hunt for Morgan Keegan, a broker dealer unit of Regions Financial (RF.N). Kruszewski said the firm is still capable of pursuing deals.
"These kinds of markets present opportunities, and I believe we're positioned in all respects to evaluate and take advantage of opportunities as they present themselves," he said.
Shares of Stifel closed Monday trade at $29.48, down nearly 10 percent and back to its November 2010 levels, on a day when investors unnerved by Standard & Poor's downgrade of the United States' sovereign credit rating fled stocks and snapped up safe-haven bonds. Stifel stock is down 29 percent this year.
Reporting by Joseph A. Giannone; editing by Gunna Dickson