A federal judge in Birmingham last week denied motions filed by two former JPMorgan bankers to dismiss a Securities and Exchange Commission suit that alleges they committed securities fraud in connection with municipal bond and swap transactions with Jefferson County, Ala.
Judge Abdul Kallon, of the U.S. District Court for the Northern District of Alabama, rejected the motions of Charles LeCroy and Douglas MacFaddin, who claimed the SEC does not have any jurisdiction over the swaps because they are not based on securities.
LeCroy was an investment banker who left JPMorgan in 2004, and MacFaddin was a managing director and head of the firm’s municipal derivatives department from 2001 until March 2008.
Kallon said it is too early in the legal process to rule on the issue of whether the swaps were “securities-based” because that assertion is disputed by the SEC.
“Because defendants rely on a disputed fact, their subject matter jurisdiction challenge fails,” Kallon wrote in the 22-page opinion released Wednesday.
LeCroy and MacFaddin had argued that the swaps were based on the Securities Industry and Financial Markets Association’s muni swap index, which they claim is an index of interest rates and not an index of securities.
Their arguments mirrored those made by SIFMA in a friend-of-the-court brief filed in a related case two years ago.
The SEC argues the index is securities-based because it is derived from a basket of variable-rate demand notes.
Kallon gave the two former bankers 15 days to respond to the SEC’s complaint against them, which was filed by the commission in November.
Specifically, the SEC charged that LeCroy and MacFaddin made more than $8 million in undisclosed payments to close friends of certain county commissioners and broker-dealers to ensure that JPMorgan would be selected as managing underwriter of bond offerings and that the firm’s affiliated bank would be chosen as swap provider.
The SEC brought the suit at the same time it settled securities fraud charges with the investment bank.
Without admitting or denying the SEC’s charges, JPMorgan agreed to pay $75 million in penalties and to forfeit more then $647 million of claimed termination fees.
“The opinion doesn’t foreclose the possibility of our renewing these arguments after factual development, it simply states that resolving them now would be premature,” Lisa Mathewson, who has her own practice in Philadelphia and is representing LeCroy, said Friday.
An attorney for MacFaddin could not be immediately reached.
In early 2005, LeCroy pleaded guilty to two counts of wire fraud for engaging in a scheme to make payments to obtain muni business from Philadelphia, on behalf of JPMorgan, and was sentenced to three months in prison. He was barred from the financial markets in October 2006.