The Securities and Exchange Commission claims that even if a federal court in Alabama finds the swaps Jefferson County sold earlier this decade are not "securities-based" and therefore outside the SEC's jurisdiction, the case against two former county officials and a lobbyist should still go forward because they allegedly violated anti-fraud regulations as well as Municipal Securities Rulemaking Board rules.
The SEC, which still contends that the swaps are in fact securities-based, made its arguments late Monday in a blistering, 51-page document. In it, the commission opposes a move by former county commission chairman Larry Langford, now mayor of Birmingham, broker-dealer William Blount of Blount Parrish & Co., and state lobbyist Al LaPierre to get the U.S. District Court for the Northern District of Alabama to throw out the SEC's securities fraud charges, on the grounds that the commission has no jurisdiction over the swaps. The three claim the charges are based on "innuendo and conclusory allegations."
But the SEC countered: "The fact is even if the court were to hold it does not have subject matter jurisdiction over fraudulent conduct in connection with these swap agreements (which it should not), neither a single count of the complaint nor a single defendant would be dismissed. The case would proceed on the allegations that the defendants violated the anti-fraud statutes and MSRB rules in connection with the Jefferson County bond offerings exactly as the complaint alleges."
"The defendants' motion to dismiss fails at every turn," the SEC added.
Langford and the other two individuals claim, in part, that the swaps are outside the realm of SEC jurisdiction because they were based on the Securities Industry and Financial Markets Association's municipal wwap index, which they said is not an index of securities.
But the SEC argued that the SIFMA swap index was created as an index of activity in the variable-rate demand obligation segment of the muni market, quoting liberally from a frequently-asked-questions section on the index that is posted on SIFMA's Web site. VRDOs are bonds, "which are obviously securities," the commission said in a footnote.
The latest round of briefs comes after the SEC filed securities fraud and related charges against the three individuals in late April over undisclosed payments Blount made via LaPierre to Langford in return for Blount Parrish's participation in Jefferson County's lucrative municipal bond and swap deals during 2003 and 2004.
Specifically, the commission charged them with three counts of securities fraud and alleged that Blount and his firm violated the MSRB's Rule G-17 on fair dealing and Rule G-20 on gifts, gratuities, and non-cash compensation. The SEC also charged LaPierre with one count of aiding and abetting Blount and Blount Parrish's alleged violations of the anti-fraud rules.
Langford, who was in financial distress at the time, accepted more than $156,000 in undisclosed cash and benefits over the course of two years from Blount and his firm in return for putting Blount Parrish in the deals and allowing it to earn $6.7 million in fees, the SEC said. The benefits included loans from a bank where Blount's girlfriend worked, at least one of which was ultimately paid off by Blount, not Langford.
As the former head of the Jefferson County Commission, Langford helped select participants for county transactions, while the Blount firm served as lead underwriter, co-underwriter, and remarketing agent for many Jefferson County bond offerings, as well as a consultant on its swap agreements.
In the largest swap, a $1.5 billion transaction between the county and Bear, Stearns & Co. in April 2004, Blount Parrish received $2.4 million from Bear on behalf of the county. But the SEC said that payment was not disclosed publicly and was "a significantly higher amount than the fees the county paid to its legal counsel and swap and financial advisors on the transaction."