SEC Disputes Langford, Blount Claims

WASHINGTON — The Securities and Exchange Commission is sharply disputing the claims of a bond dealer and Alabama city official that it does not have jurisdiction to investigate possible fraud in connection with Jefferson County, Ala.’s interest rate swaps agreements.

In a 16-page brief filed Friday with the U.S. District Court for the Southern District of Florida in Miami, the commission also rejected the claim of Birmingham Mayor Larry P. Langford and William B. Blount, of Blount Parrish & Co., that it must tell them if there is a parallel criminal inquiry in order for them to testify in the investigation.

The SEC subpoenaed the two men in October to appear before its lawyers for depositions. They refused to testify without citing a specific legal reason and the SEC asked the court to force them to provide information or cite a specific legal right for not doing so.

The SEC filed its brief a week after Langford and Blount told the court they should not be compelled to testify in the SEC’s investigation of $5 billion of Jefferson County’s municipal bonds and interest-rate swaps, because their due-process rights would be violated if their testimony before the SEC was used in a criminal investigation.

But the SEC told the court Friday, “This argument is built entirely on supposition and speculation ... The mere existence of a parallel criminal investigation, by itself, which is all Blount and Langford have alleged, is not grounds for the court to force the commission to disclose any communications with the Department of Justice, nor does it give Blount and Langford any grounds to avoid responding to the commission’s subpoenas.”

The commission denied Langford and Blount’s claim that it does not have jurisdiction over the county’s interest rate swaps and derivatives because they are tied to the London Interbank Offered Rate, or LIBOR, and are therefore considered non-securities instruments. In fact, the SEC said that many of the county’s swap agreements were based on the value of The Bond Market Association’s municipal swap index, not LIBOR.

“This makes those swap agreements security-based,” the SEC said. “The mere fact that the county made the agreements simultaneously with its bond offerings and approved them in the same resolutions as the bond deals raises questions about whether they were security-based swap agreements falling under our jurisdiction.”

The commission also stressed that it is not up to the district court to determine questions of federal jurisdiction in subpoena enforcement actions. Citing several Supreme Court rulings, the SEC said that the high court has found subpoenas are lawful as long as the information sought is not “plainly incompetent or irrelevant to any lawful purpose.”

In a separate 12-page filing Friday, the commission rejected requests by Langford and Blount that the court transfer jurisdiction of the legal dispute to a federal court in Birmingham, where a judge, William B. Acker, has already been involved in aspects of the SEC’s inquiry. Specifically, last month Acker refused to grant a motion filed by Blount that would have quashed the commission’s subpoena.

“This [Miami] court should not reward Blount for filing a meritless case in Alabama by allowing him to bootstrap that illegitimate action onto this legitimate proceeding and obtain what he otherwise could not — jurisdiction in Alabama,” the SEC said Friday.

The SEC first asked the court in Miami to force Langford and Blount to testify in its investigation on Dec. 17, about a week after both individuals appeared in the commission’s regional office in Miami but refused to answer any questions from the SEC or cite a specific legal protection for not doing so.

It was the first time the SEC publicly acknowledged its investigation of the county’s transactions as well as some of its concerns about Langford and Blount.

Langford, the former head of the Jefferson County Commission, helped select participants for county transactions, while Blount served as lead underwriter, co-underwriter, and remarketing agent for many Jefferson County bond offerings and also participated in the county’s swap agreements.

Exhibits attached to the SEC’s filing last month included the commission’s order directing staff to begin a formal investigation of the Jefferson County transactions, which is dated Dec. 6, 2006. The order states that the staff has obtained information that “tends to show” that from 2002 through 2005, certain firms or individuals on the transactions may have violated securities fraud laws and several Municipal Securities Rulemaking Board rules on fair dealing, gifts, political contributions and consultants.

Earlier this month, Langford and Blount rested their claim that the SEC lacks jurisdiction over derivatives by citing 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, which touches on the topic.

But the commission turned their argument on its head Friday, noting the decision by the administrative law judge recognized clear jurisdiction for the SEC over interest rate swaps in situations involving “fraud, manipulation, or insider trading.”

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