Ex-JPMorgan Bankers Want Pay-to-Play Case Dismissed

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BRADENTON, Fla. — Citing recent court rulings, two former JPMorgan bankers filed a motion seeking dismissal of the SEC's pay-to-play case for their roles in Jefferson County, Ala.'s failed sewer deals and swaps.

In a July 9 court filing, Charles LeCroy and Douglas MacFaddin said that two decisions, including a Supreme Court ruling, provide the basis for determining that the SEC's charges are outside the five-year statute of limitations.

The SEC's 2009 case is based on swap transactions and sewer warrant offerings between Jefferson County and JPMorgan in 2002 and 2003.

In a July 15 response, the SEC said LeCroy's and MacFaddin's motion for dismissal is a belated and procedurally improper challenge of the court's jurisdiction to hear the case about their fraud in "a billion-dollar predatory swap deal."

The former bankers said that the U.S. District Court for the Northern District of Alabama lacks "subject matter jurisdiction" over the SEC's case because of the U.S. Supreme Court's Feb. 27, 2013 ruling in Gabelli v. SEC, and the May 12, 2014 ruling in SEC v. Graham by the U.S. District Court for the Southern District of Florida.

In Gabelli, the Supreme Court held that under Section 2462 of the U.S. Code, "the five-year clock begins to tick when the fraud is complete," not "when the fraud is discovered," according to a client memorandum by Paul, Weiss, Rifkind, Wharton & Garrison LLP.

"On that basis, the Supreme Court in Gabelli held that the SEC's claims for civil monetary penalties, which were brought more than five years after the relevant conduct, were time-barred under Section 2462," the memo said.

In Graham, the court said that the SEC claims for injunctive relief, declaratory relief, and disgorgement also fell within Section 2462, and are subject to the five-year statute of limitations. The court also held that after the five-year period expired, a court no longer has subject matter jurisdiction, according to the Paul, Weiss memo.

The Gabelli ruling does not apply to the case against LeCroy and MacFaddin because the commission is not seeking civil penalties against them, according to the SEC's filing.

"Graham, for the first time anywhere, expanded the holding of Gabelli to apply Section 2462's five-year statute of limitations to claims for injunctive relief and disgorgement," the filing said, arguing that it contradicts a binding precedent set by the 11th Circuit Court of Appeals.

The SEC also said there have been cases since the Gabelli ruling that came to the opposite conclusion in Graham. Those cases found that Section 2462 does not apply to claims for injunctive relief or disgorgement, including two rulings this year.

The SEC also said that it is considering an appeal of "Graham's incorrect conclusion."

In 2009, the SEC filed suit against LeCroy and MacFaddin alleging that the former JPMorgan bankers paid more than $8.2 million to Jefferson County commissioners and their friends to assure that JPMorgan would be selected to underwrite the sewer deals and to be the counterparty on related swaps.

The complaint asks the court to find that the former bankers committed fraud and violated federal securities law, issue a permanent injunction against future violations, and order disgorgement of all profits or proceeds received as a result of their actions, with prejudgment interest.

The sewer debt was one reason Jefferson County filed for bankruptcy in November 2011. The county closed on $1.8 billion of new sewer refunding warrants to write down $3.14 billion on Dec. 3 and emerged from Chapter 9 bankruptcy. The case is being appealed.

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