BRADENTON, Fla. - The Securities and Exchange Commission and two former JPMorgan bankers used similar arguments in their attempts to exclude different expert witnesses in the pay-to-play federal suit involving Jefferson County, Ala.'s sewer deals.
Both sides claim in recent court documents that some experts are not qualified to testify in the SEC's case alleging that Charles LeCroy and Douglas MacFaddin arranged $8.2 million in payments to friends of certain county commissioners and local broker-dealers who had no official role when more than $3.2 billion of sewer refunding warrants were issued in 2002 and 2003. The alleged payments were made to ensure that JPMorgan would win bond underwriting and swap business from the county, the SEC has said.
The witnesses at the heart of recent allegations are Robert Doty, president and owner at municipal bond consulting firm AGFS in Annapolis, Md., and Robin Kole, a former municipal banker and muni derivatives market specialist who said she left the business in 2001.
Attorneys for LeCroy and MacFaddin said that Doty, the SEC's witness, is not qualified as an expert in the municipal derivatives industry. They acknowledged that Doty is a lawyer, law professor, and financial advisor.
"While Mr. Doty may be qualified as an expert in the municipal securities industry, his reports indicate no qualifications in the municipal derivatives industry," attorneys said, adding "Doty admitted that he was not offering opinions about the relevant swap transactions."
LeCroy and MacFaddin cited other reasons that they believed Doty should be excluded as an expert in their case, including his views on the facts and offering legal opinions that are for the court to determine.
"Because Mr. Doty has no expertise in the derivatives industry, his proposed testimony about industry practice in that industry is pure speculation about a matter about which he has not been qualified," attorneys for LeCroy and MacFaddin said.
Kole, hired by LeCroy and MacFaddin, wrote a 14-page report that said the former bankers and JPMorgan disclosed the payments in accordance with prevailing standards, customs, and practices in the municipal swap market in 2002 and 2003. She concluded that there were no strict disclosure guidelines for swaps, that certain county officials received letters about the swap transactions, that those who received payments were advisors to the county, and the payments were only in connection with the swaps.
In addition to lacking the "requisite training, background, and experience" to render many of her opinions, the SEC said all of them are based "on assumptions she made that are factually inaccurate."
When Kole was employed in the investment banking industry, "she had limited formal training in municipal swap and bond transactions" and she left employment in the field before the transactions took place, the SEC said.
Kole's report also said that "disclosure guidelines in the municipal bond market during the relevant time period would have applied only to municipal securities and not to municipal interest rate swaps."
However, the SEC said that "substantial evidence" has been presented that shows that the payments were made as part of the bond transactions, not just the swaps.
While discovery is proceeding in the five-year-old case, Federal Judge Abdul Kallon has not set a trial date because the bankers have been unable to depose CDR Financial Products Inc. senior vice president Douglas Goldberg. He 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 adviser to Jefferson County as it issued warrants and entered derivatives to rebuild an aging sewer system under a federal consent decree.
Jefferson County filed for bankruptcy in November 2011 and exited Dec. 2, 2013 after selling refunding warrants to write down the 2002 and 2003 sewer warrants.
