JPMorgan settles SEC charges over ‘pay-to-play’ in Ala. county; deal worth over $700 million

JPMorgan settles SEC ‘pay-to-play’ charges in Ala.

WASHINGTON — 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 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 move lowers the county’s bond debt to about $3.2 billion from $3.9 billion, but officials had no immediate comment on whether that was enough to help the county avoid filing what would be the largest municipal bankruptcy ever.

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. JPMorgan also was censured and agreed to refrain from future violations of the securities laws.

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 has roiled Alabama’s most populous county and last week brought the federal bribery conviction and ouster of Birmingham’s mayor.

In a civil lawsuit filed Wednesday, 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 plan to contest the charges.

The SEC alleged that JPMorgan, LeCroy and MacFaddin made about $8.2 million in undisclosed payments in 2002 and 2003 to close friends of several Jefferson County commissioners. The money went to local brokerage firms whose principals or employees were friends of the county officials, the SEC said. 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.

The $5 billion in municipal bond business and swap agreements awarded to JPMorgan was the largest such deal in its securities division’s history, according to the SEC.

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, the SEC said.

“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 now-ousted Birmingham 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.