Syncora Suit Alleges Fraud in Jeffco Deal

BRADENTON, Fla. — Syncora Guarantee Inc. has filed a civil suit alleging that Jefferson County, Ala., and JPMorgan “fraudulently induced” it to provide more than $1 billion in insurance coverage for the county’s nearly $3.2 billion of variable- and auction-rate sewer warrants.

The 45-page suit, filed last Thursday in New York Supreme Court, said Syncora would not have insured the warrants had it known about bribes JPMorgan paid to Jefferson County commissioners so that it would be selected as lead underwriter for the warrants and counterparty to “lucrative swap agreements,” or had it known the county could not repay the warrants.

The bribes came to light in civil court filings by the Securities and Exchange Commission and a federal criminal corruption case involving former County Commission President Larry Langford, Montgomery bond dealer Bill Blount, and Alabama lobbyist Al LaPierre. The SEC settled securities violations with JPMorgan and is pursuing civil cases against JPMorgan bankers Charles LeCroy and Douglas MacFaddin.

Langford, now serving 15 years in prison but appealing his conviction, orchestrated refinancing of the now-failed sewer debt that has caused a financial crisis for the county.

Syncora’s allegation concerning Jefferson County’s ability to repay the warrants is based on a Paul B. Krebs & Associates engineering report in March 2003 that was only uncovered in late 2008 during a federal case in which Jefferson County’s trustee, Bank of New York Mellon, Financial Guaranty Insurance Co., and Syncora unsuccessfully sought a receiver for the county’s sewer system.

The Krebs report reviewed the sewer system’s revenues and predicted a shortfall of funds to pay debt service unless the county raised rates significantly or found new sources of revenue, the suit said.

Syncora wants more than $400 million in rescissory damages and unspecified punitive damages.

“These fraud allegations are without merit as to Jefferson County,” said Joe Mays, a Birmingham attorney with Bradley Arant Boult & Cummings, which represents the county in a second suit filed by the trustee seeking a receiver for the sewer system in state court.

A hearing on dismissal motions is scheduled for tomorrow. Mays’ firm also represents Jefferson County in its lawsuit against JPMorgan.

Syncora’s suit is about acts committed by others for their personal benefit, not acts of the county, Mays said. The Krebs report contemplated capital improvements never made and was unrelated to the sewer debt insured by Syncora, he said.

“Jefferson County was current on sewer debt payments until Syncora — the party that brought this lawsuit — allowed its credit ratings to drop in early 2008,” Mays said. “That is what precipitated this ­crisis.”

JPMorgan spokesman Brian ­Marchiony declined to comment.

Syncora does not comment on litigation matters, said Michael Corbally, the insurer’s chief administrative officer. The law firm of Quinn Emanuel Urquhart and Sullivan LLP is representing Syncora.

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