WASHINGTON — Birmingham Mayor Larry P. Langford and Montgomery, Ala.-based securities dealer William B. Blount argued Friday that they should not be compelled to testify in the Securities and Exchange Commission’s investigation of Jefferson County’s swaps and derivatives as long as the SEC refuses to say if the U.S. Justice Department is conducting a parallel investigation, according to court documents.
Even if a Justice Department probe exists, the SEC does not have jurisdiction over interest rate swaps and derivatives, they argued in separate documents filed Friday with the U.S. District Court for the Southern District of Florida in Miami. They also urged the court to move the case to a federal court in Birmingham, where Langford and Blount work or reside, and where a federal judge, William B. Acker, has already been involved in aspects of the SEC’s investigation.
“The only link to Miami is the location of the SEC’s regional office there, and it is not even the closest SEC regional office to the subjects of the investigation — there is a closer regional office in Atlanta, Ga.,” Blount told the court.
Blount and Langford were responding to the SEC’s request that the court in Miami compel them to provide the SEC with information in depositions, in connection with the commission’s investigation of $5 billion of the county’s bond and swap transactions, or cite specific legal reasons for not doing so.
The two men told the court they are concerned if they cooperate with the SEC’s investigation and a criminal inquiry is ongoing, the information they provide could be used in both proceedings and they risk losing their due-process rights.
“The government is prohibited from using one kind of proceeding for the purpose of obtaining evidence for use in another type of proceeding,” Blount argued in his filing, while citing a 1958 Supreme Court ruling that said it is improper for the government to bring a civil action “solely to obtain evidence for its criminal prosecution.”
Langford, the former head of the Jefferson County Commission, helped select participants for county transactions, while Blount, of Blount Parrish & Co., served a lead underwriter, co-underwriter, and remarketing agent for many Jefferson County bond offerings and participated in the county’s swap agreements.
Last year, an independent report claimed the county may have overpaid broker-dealers by a much as $100 million for structuring about $5.7 billion of negotiated swap agreements.
Appearing in the SEC’s regional office in Miami last month, both Langford and Blount refused to answer questions from the commission, citing general rights under the constitution and refusing to claim protection under the Fifth Amendment privilege against self-incrimination. It was a sudden turnabout for Langford, who met with SEC officials in June and talked freely with them.
In Friday’s filing, Langford argued that the SEC’s investigation is without merit and is “an attempt to embarrass and humiliate” him. His brief blamed the SEC for leaking a copy of his June testimony to Birmingham newspapers, which in turn was used for fodder by his political enemies.
“The SEC’s actions reveal its true agenda, which in this case has less to do with its fact-finding function as it does with destroying the reputations of those who dare to be uncooperative,” the filing stated.
But the documents filed Friday mostly argue that the SEC lacks jurisdiction over derivatives and that the subpoenas are therefore unreasonable.
“The SEC appears to be proceeding under the theory that because the swaps at issue were conducted contemporaneously with warrant refunding or bond issuance, they are necessarily ‘securities-based swaps’ and within their jurisdiction to investigate for fraud or manipulation,” Blount told the court. “That argument is meritless because all of the swaps under investigation are swaps based upon fixed or floating interest rates and are, therefore, ‘non-securities-based swaps,’ which the SEC does not have jurisdiction to investigate.”
Blount and Langford also cite a May decision by an administrative law judge in an SEC administrative proceeding against two former JPMorgan bankers, Charles E. LeCroy and Anthony C. Snell, that touches on derivatives. The opinion, by Judge James T. Kelly, undercuts the commission’s argument that bond-related derivatives involve municipal bonds and are therefore subject to SEC and Municipal Securities Rulemaking Board jurisdiction as well as possible enforcement action, Blount argued.
“While an issuer might enter into a swap transaction or a swaption at the same time as it enters into a bond offering, the contemporaneous nature of the two transactions does not make them a single financial instrument with a bond component,” the administration law judge said in his opinion.
Similarly, the Jefferson County swaps under investigation may have been entered into “contemporaneously” with the county’s debt issuance, but that does not make them a “single financial instrument” with a securities component, Blount said.
“That is because the swaps in question here are not ‘based on the price, yield, value, or volatility’ of a warrant, bond, or any other securities,” Blount told the court. “They are based solely on the interest rates involved in the particular swap transactions. That is, while they may provide the mechanism whereby a warrant is essentially re-financed, the swap itself is tied to an interest rate or to the [London Interbank Offered Rate], which is not a security.”
Voluminous exhibits attached to a response brief filed by Blount show that in October attorneys for both individuals were essentially unable to agree with SEC officials on a specific date at which their clients could appear in Miami, mostly because of scheduling conflicts tied to other litigation.
When they could not set a date by about mid-October, the SEC issued subpoenas to require testimony on Oct. 30. Though Langford ultimately consented to the subpoena, Blount filed a motion with the United States District Court for the Northern district of Alabama, in Birmingham, to quash his.
After a hearing in early November, Acker, the federal judge, ruled that he did not have the jurisdiction to stop Blount from being required to talk to the SEC.
The SEC's filings last month publicly signaled for the first time the commission's investigation of the county's transactions as well as some of its concerns about Langford and Blount.
"This is the first time we've spoken publicly" about this case, David Nelson, director of the SEC's regional office in Miami, said last month. "The only reason we're speaking publicly on this matter is that they left us no other choice."
The SEC's main filing stated that the staff has obtained evidence showing Langford received at least $125,000 in payments and benefits from a registered political lobbyist and longtime friend of both him and Blount.
The SEC does not identify the lobbyist, but says he served as a consultant to Blount's broker-dealer firm, Blount Parish & Co., and received fees from the firm in connection with county bond and swap transactions.
Quarterly filings that Blount Parish filed with the MSRB show that the firm paid $300,00 to Charles E. LeCroy in the second quarter of 2004. LeCroy had been a banker at JPMorgan and had been involved in the Jefferson County transactions.
In addition, one of the documents attached to the SEC's filing is a copy of an invoice that shows B.P. Holdings paid $100,000 to Al LaPierre of Consulting Governmental Relations in Birmingham for services rendered regarding Jefferson County. But LaPierre is not listed in the quarterly forms Blount Parrish filed with the MSRB for 2003 or 2004.
LeCroy was fired from JPMorgan in early 2004. He was permanently barred from the municipal bond market and the securities industry last year as a result of a conviction on two counts of wire fraud in a criminal case involving municipal bonds corruption in Philadelphia.
While the SEC did not begin a formal investigation of the Jefferson County transactions until late last year, the commission was reported to be informally looking into the deals as far back as 2004.