BRADENTON, Fla. The request by former JPMorgan bankers Charles LeCroy and Douglas MacFaddin to dismiss a portion of the case brought by the Securities and Exchange Commission “ignores the overwhelming number of material facts” showing the men committed fraud in bond offerings by Jefferson County, Ala., the SEC said in a court filing.
The bankers, who are charged with making improper and undisclosed payments in connection with the deals and related swaps, filed a motion Oct. 7 seeking to dismiss counts related to the swaps arguing that they were not “securities-based” and are outside the SEC’s antifraud authority.
The SEC disagreed with the argument by LeCroy and MacFaddin, and said the bankers disregarded “material facts showing three of the swap agreements at issue in the complaint were security-based swap agreements.”
“LeCroy and MacFaddin bear the burden of demonstrating there is no genuine issue of material fact concerning whether the three swap agreements were security-based,” the SEC said in a court filing Monday. They “failed to meet that burden because there are numerous facts contradicting their description of the swap agreements.”
One fact that the bankers failed to address in their motion is any evidence that “they did not make the payments in connection with the bond offerings, nor have they submitted any case law stating undisclosed payments in connection with bond offerings do not violate the federal securities laws.”
The bond offerings and swap agreements were part of the same transactions, the SEC said.
Both former county finance director Steve Sayler and SEC’s own swap expert, Swap Financial LLC president Peter Shapiro, both stated that under Alabama law that Jefferson County could not enter into a swap transaction without it hedging a corresponding bond or other debt offering, the court filing said.
“The question of whether the commission can regulate swap transactions and to what extent has nothing to do with this case,” the SEC argued. “The issue here is whether the court has jurisdiction to hear claims that LeCroy and MacFaddin committed fraud by making improper payments and failing to disclose them in connection with the swap agreements” because the swaps were security-based.
The SEC said the court should deny LeCroy and MacFaddin’s motion, and allow the case to proceed to trial.
U.S. District Judge Abdul Kallon, who is presiding over the case, has refused to set a trial date because the bankers have been unable to depose CDR Financial Products Inc. senior vice president Douglas Goldberg.
Goldberg pleaded guilty to a conspiracy to rig bids for municipal bond investment contracts. Kallon has refused to allow him to be deposed until after his sentencing, which is currently set for March 20.
CDR was the swap advisor to Jefferson County as it built a portfolio of derivatives during the issuance of nearly $3.2 billion of auction- and variable-rate sewer warrants sold to rebuild an aging regional sewer system under a federal consent decree.
Jefferson County filed for bankruptcy in November 2011 citing $3.14 billion of sewer warrants among its debt.
On Friday, U.S. bankruptcy Judge Thomas Bennett issued an order confirming the county’s plan of adjustment. As part of the plan, the county sold $1.7 billion of refunding sewer warrants that are being used to pay off sewer system creditors at an aggregate loss of around 50 cents of the dollar.
Closing on the warrants is scheduled for Dec. 3, the same day as the plan of adjustment is expected to be effective, according to a market notice the county filed Tuesday.