WASHINGTON (AP) — JPMorgan Chase & Co. has agreed to a settlement worth more than $700 million over federal regulators' charges that it made unlawful payments to friends of public officials to win municipal bond business in Jefferson County, Ala.
The scandal over the county's $3.9 billion debt has pushed it to the brink of filing what would be the biggest municipal bankruptcy in U.S. history. The Securities and Exchange Commission on Wednesday announced the settlement with JPMorgan, which canceled interest-rate swap contracts with the county worth $700 million in March.
The Wall Street bank did not admit or deny the SEC allegations in agreeing to pay a $25 million civil fine and a $50 million payment to the county, and to forfeit $647 million in termination fees it claims the county owes from the canceled swap agreements.
Regulators have issued warnings for years over so-called "pay-to-play" relationships between investment firms and government officials in the $2.7 trillion municipal bond market, tapped by state and local governments around the country to finance schools, roads, hospitals and public works projects. The Jefferson County scandal last week brought the criminal conviction of Birmingham's former mayor on bribery, tax evasion and other charges.
In a civil lawsuit, the SEC also accused two former managing directors of JPMorgan, Charles LeCroy and Douglas MacFaddin, of securities law violations. The agency is seeking unspecified restitution from them. They will contest the charges.
The SEC alleged that JPMorgan, LeCroy and MacFaddin made about $8 million in undisclosed payments to close friends of several Jefferson County commissioners. Starting in July 2002, LeCroy and MacFaddin solicited the county for a $1.4 billion sewer bond deal.
Swayed by the payments, the county commissioners voted to select JPMorgan's securities division as managing underwriter of the bond offerings and its affiliated bank as swap provider for the transactions, the SEC said.
JPMorgan failed to disclose any of the unlawful payments or conflicts of interest in the bond offering documents, but passed on the cost of the payments by charging the county higher interest rates on the swap transactions, according to the SEC.
"The transactions were complex but the scheme was simple," SEC Enforcement Director Robert Khuzami said in a statement. "Senior JPMorgan bankers made unlawful payments to win business and earn fees."
MacFaddin's attorney, Richard Lawler, said his client "has at all times acted properly" in his dealings with Jefferson County. "He denies he has violated any securities laws and we're confident he'll be vindicated after trial," Lawler said.
LeCroy's lawyer, Lisa Mathewson, said he "believes that the SEC has overreached with this complaint, both by overstating its jurisdiction and by labeling permissible business practices as fraudulent."
New York-based JPMorgan said in a statement it has since discontinued its municipal swap-exchange business. The settlement with the SEC "does not impair any outstanding Jefferson County bonds and JPMorgan continues to work to achieve a responsible restructuring of Jefferson County's financial affairs," the statement said.
The SEC last year charged former Birmingham, Ala., mayor Larry Langford and two others for undisclosed payments to Langford related to municipal bond offerings and swap agreement transactions made while he was president of the Jefferson County Commission. On Oct. 28, Langford was found guilty in the related criminal case on 60 counts of bribery, mail fraud, wire fraud and tax evasion.
In July, the SEC proposed tightening rules governing disclosures about municipal securities to aid investors in the municipal bond market.
Brokers and dealers in municipal bonds and other securities would be required to make fuller and more timely disclosures to investors.
Retail investors increasingly participate in the municipal bond market, seeking safe investments with reliable returns. The financial crisis and tight credit have made it more difficult for some municipal securities deemed higher risk to be sold.
