BRADENTON, Fla. — Jefferson County, Ala. on Friday filed a lawsuit against JPMorgan, Blount Parrish & Co., Charles LeCroy, Douglas MacFaddin, Larry Langford, William Blount, and Albert LaPierre for their roles in the county’s $3.2 billion of troubled sewer refinancings and swaps.
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The county is demanding a jury trial.
All those named in the suit participated in some way with the soured sewer deals. The legal action comes within weeks of a flurry of legal activities involving most of the defendants in various pay-to-play schemes when the county refinanced fixed-rate sewer debt into variable- and auction-rate debt and swaps in 2002 and 2003.
JPMorgan, in a statement, said it believes the suit has no merit and that it intends to defend itself vigorously. “Meanwhile, we continue to work to achieve a responsible restructuring of Jefferson County’s financial affairs," said the statement from spokesman Brian Marchiony.
Officials familiar with the county’s deals said the transactions and swaps performed until late 2007 and early 2008 when the bond market melted down and bond insurers were downgraded because of subprime investments.
Jefferson County’s sewer debt incurred penalty interest rates and could not be remarketed. The non-performing swaps were terminated by four counterparties that said the county owed $766 million in termination fees. The county, whose credit ratings are at junk levels, has defaulted on its payments.
“The real purpose of these [sewer] transactions was to generate hundreds of millions of dollars in fees and interest payments for JPMorgan and JPMorgan Chase,” Jefferson County’s lawsuit alleges. “These transactions provided no value to the county or its citizens and created an inherently flawed financial structure that imploded within just a few years.”
“The illicit activities…placed the county in an untenable, unwarranted, and ultimately disastrous financial situation, which has resulted in substantial damages to the county,” the suit said.
Last week, Jefferson County received a $50 million payment from JPMorgan as a result of a settlement the bank entered with the Securities and Exchange Commission on Nov. 4 over securities fraud and other charges over JPMorgan’s failure to disclose payments it made to assure its participation in the county’s sewer bond and swap deals.
In addition to the $50 million, JPMorgan agreed to pay $25 million to the federal government and to forfeit more than $647 million in swap termination fees the firm claimed Jefferson County owed.
On Oct. 28, Langford, who was president of the Jefferson County commission when he masterminded the refinancings, was found guilty by a federal jury on 60 federal charges of bribery, fraud, money laundering, conspiracy, and filing false tax returns.
Langford was convicted for taking $236,000 in gifts and money from Blount, a Montgomery bond dealer, and LaPierre, a lobbyist and mutual friend. According to testimony in court, Langford used his influence to steer bond business to Blount and his firm, Blount Parrish, which earned $7 million in fees from the county’s bond and swap deals.
Blount and LaPierre were indicted on dozens of federal charges along with Langford. They pleaded guilty before trial. LaPierre will be sentenced Thursday on one count each of conspiracy and filing a false tax return. Blount pleaded guilty to one count each of bribery and conspiracy and will be sentenced Dec. 17.
The SEC on Nov. 4 also filed a civil suit against LeCroy and MacFaddin - two of the JPMorgan’s former managing directors – alleging that they made more than $8 million in undisclosed payments to various people and at least one other investment bank to ensure that JPMorgan would be selected as managing underwriter of the bond offerings and that its affiliated bank would be chosen as a swap counterparty.
