WASHINGTON - The Securities and Exchange Commission and the securities industry's leading lobbying group are engaged in a heated battle over the extent to which the SEC has enforcement authority over interest rate swap transactions in a court case involving Jefferson County, Ala., muni bond and swap deals.
In the latest salvo, the SEC yesterday urged a federal court in Alabama to disregard a friend-of-the-court-brief filed by the Securities Industry and Financial Market Association, claiming it is a "flawed piece of advocacy" for SIFMA's member-firms and those connected with the Jefferson County deals that seeks to negate the authority that Congress has given the commission.
The SEC made its plea in a 30-page document filed with the U.S. District Court for the Northern District of Alabama in Birmingham after SIFMA claimed the SEC does not have jurisdiction over interest rate swaps based on its municipal swap index because it is an index of interest rates, not securities.
The dispute revolves around federal law that gives the SEC enforcement authority over securities-based swaps and stems from securities fraud and other charges the SEC filed April 30 against three individuals and a firm involved in Jefferson County muni bond deals and swaps. They are Birmingham Mayor Larry Langford, who formerly headed the Jefferson County Commission, Alabama bond dealer William Blount and his firm Blount Parrish & Co., as well as Albert LaPierre, a lobbyist and close friend of Blount and Langford. The SEC charged LaPierre with aiding and abetting Blount and his firm's alleged securities fraud violations.
The SEC claims that the defendants failed to disclose that Blount and his firm provided Langford with $156,000 in payments and benefits through LaPierre, in exchange for Langford's efforts to ensure Blount Parrish participated in Jefferson County's five muni bond offerings and four swap agreements from March 2003 through December 2004.
Langford, who was having financial problems at that time, played a key role in selecting the firms that participated in those transactions. Blount and his firm reaped more than $6.7 million in fees from the transactions, according to the SEC.
Blount and Langford are fighting the SEC charges by claiming the commission has no jurisdiction over the swap agreements. Last month they filed a motion with the court to dismiss the SEC charges, arguing the swaps were not securities-based and were instead based on a municipal swap index originally created by the Bond Market Association, which in late 2006 merged with the Securities Industry Association to form SIFMA.
SIFMA echoed that argument in the friend-of-the-court brief it filed with the court earlier this month, claiming its municipal swap index was an index of interest rates, not securities. The group stressed in its brief that it was not taking sides in the case and that it was merely seeking to provide expertise on this narrow issue.
But in its response, the SEC told the court that SIFMA's brief "presents an incomplete and inaccurate portrayal of SIFMA itself and why the organization is attempting to intervene in this action."
"SIFMA attempts to paint itself as an objective third party writing for a very narrow purpose," the SEC said. "However, SIFMA is far from a disinterested organization. It represents the interests of securities firms and has a consistent track record of opposing oversight by securities regulators of swaps agreements, as well as attempts to apply the anti-fraud proscriptions of the federal securities laws to its members."
"SIFMA's membership includes just about every major U.S. broker-dealer, investment adviser, investment bank and asset manager," the SEC continued. "Included are firms such as JPMorgan, Goldman, Sachs, and (the former) Bear, Stearns & Co., all of which were parties to one or more of the four swap agreements at issue in the complaint."
The commission pointed to several instances in which SIFMA officials urged swap agreements be excluded from regulation and said the group routinely files third-party briefs arguing against positions that would expose its membership to potential liability under the securities laws. The SEC said that while it is not criticizing these SIFMA actions, "the organization's history puts [its] brief in this case in proper context."
The commission also charged that SIFMA "is not a neutral party writing only about the Municipal Swap Index," but is rather "doing what it claims not to be [doing] - taking sides and arguing on behalf of the defendants."
"The organization writes on a number of subjects that have nothing to do with the content of the Municipal Swap Index and in which it has no particular expertise," such as the legal grounds for dismissal of the charges, the SEC told the court.
"Under the guise of asking the court to take judicial notice of alleged facts about the Municipal Swap Index, SIFMA attempts a complete end-around the well-established Eleventh Circuit standards barring dismissal of claims for lack of subject matter jurisdiction when there are disputed factual issues," the SEC said.
The standards permit the court to dismiss the SEC's swap agreement allegations only if they are "wholly insubstantial and frivolous ... patently without merit," and "made solely for the purpose of obtaining jurisdiction," the commission said.
The SEC also contended that SIFMA is reading the federal law too narrowly, picking out isolated terms such as "price," "yield," and "value" in an attempt to show the index is not based on each of those terms.
The Gramm-Leach-Bliley Act, as amended by the Commodity Futures Modernization Act of 2000, gives the SEC enforcement authority over securities-based swaps and broadly defines securities-based swaps as agreements "of which a material term is based on the price, yield, value, or volatility of any security or any group or index of securities, or any interest therein."
SIFMA's claim that the Municipal Swap Index is an index of interest rates "is nothing more than a tortured linguistic interpretation that ignores the reality of what the index is comprised of and what the interest rates in question mean," the SEC said, adding the group "ignores the fact that the interest rates are on bonds, which are undisputedly securities."
Further, SIFMA's discussion of the federal law on swaps is "incomplete and flawed," the SEC said. "It focuses on the fact that the act does not give the commission the authority to pass rules regulating swap agreements, but virtually ignores the clear mandate of the [law] empowering the commission to protect investors by prosecuting fraudulent conduct in connection with security-based swap agreements."
The SEC pointed to the Congressional Record's recording of the remarks of former Senate Banking Committee chairman Phil Gramm, R-Tex., about the intent of the law. "Drawing upon the SEC's enforcement experience, the SEC is permitted, on a case-by-case basis, with respect to security-based swap agreements (as defined in the legislation) to take action against fraud, manipulation, and insider trading abuses ... The SEC is directed to focus on the wrongdoers," Gramm said.
Finally, the commission told the court that it wanted to set the record straight on a SIFMA misunderstanding. The commission said it is contending it has additional, not alternative, grounds for jurisdiction in the case of two of the swaps because they were entered into in connection with bond transactions.