NEW YORK -- J.P. Morgan Securities Inc. on Wednesday settled charges with the Securities and Exchange Commission for two former managing directors' alleged roles in an unlawful payment scheme that enabled them to win business involving municipal-bond offerings and swap-agreement transactions with Jefferson County, Ala.
J.P. Morgan Securities, a unit of J.P. Morgan Chase & Co., will pay a penalty of $25 million, make a payment of $50 million to Jefferson County, and forfeit more than $647 million in claimed termination fees.
The settlement comes as the SEC is examining municipal investment contracts. Jefferson County has faced credit-rating downgrades and possible bankruptcy after its investments in over-the-counter derivatives. Even after the $50 million payment and cancellation of the swap termination fees, Jefferson County still faces a $3.2 billion sewer debt burden. The county -- which includes Birmingham, the state's largest city -- has spent nearly two years trying to refinance the debt after its aggressive financing strategies and use of interest-rate swaps backfired amid widespread credit-market problems.
The settlement with J.P. Morgan is the latest chapter an often-adversarial and sometimes litigious saga that has pitted the county against its creditors, Wall Street underwriters and bond insurers. Along the way, the county has received payment extensions from its creditors and counterparties in its effort to avert bankruptcy. Should an actual default be declared, it would be the largest in municipal-bond history. J.P. Morgan said in a statement: "The charges relate principally to municipal derivatives transactions that occurred six and seven years ago. J.P. Morgan has since discontinued that business."
Lawyers for the two former managing directors, Charles LeCroy and Douglas MacFaddin, said they will challenge the SEC's allegations at trial. "We think the complaint is overstating the SEC's jurisdiction and the character of permissible business practices as fraudulent," said Lisa Mathewson, Mr. LeCroy's attorney, who runs her own practice in Philadelphia
LeCroy was the man who later went on to Gulf Breeze Florida and who helped orchestate they sewar swaps that all but destroyed Jefferson County Alabama. Considering his alleged role in black box deals and how sweeping the damage has been, don't expect to much from his challenge to the SEC in court. In related news the Jefferson County Commission is pushing claims against many of the players who orchestrated these deals as a means to repair some of the financial damage.
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