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Wed Nov 04, 2009 at 23:39:24 PM CST
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| Securities and Exchange Commission press release: The Securities and Exchange Commission today charged J.P. Morgan Securities Inc. and two of its former managing directors for their roles in an unlawful payment scheme that enabled them to win business involving municipal bond offerings and swap agreement transactions with Jefferson County, Ala. This is the SEC's second enforcement action arising from Jefferson County's bond offerings and swap transactions. J.P. Morgan Securities settled the SEC's charges and will pay a penalty of $25 million, make a payment of $50 million to Jefferson County, and forfeit more than $647 million in claimed termination fees. The SEC alleges that J.P. Morgan Securities and former managing directors Charles LeCroy and Douglas MacFaddin made more than $8 million in undisclosed payments to close friends of certain Jefferson County commissioners. ... According to the SEC's complaint filed against LeCroy and McFaddin in U.S. District Court for the Northern District of Alabama, the two former managing directors demonstrated in taped telephone conversations that they knew the payments to local firms with ties to county commissioners were designed to obtain business for J.P. Morgan's broker-dealer and affiliated bank. LeCroy and MacFaddin referred to the payments as "payoffs," "giving away free money," and "the price of doing business."
The big loser in this news is County Commissioner Shelia Smoot, also a candidate for the open seat in the 7th district congressional district. She is mentioned in the complaint as being aware of some of the payments to firms who did no work and asking that the payments to two firms be increased. If you are going to read one media account on this deal and the JP Morgan settlement, read Kyle Whitmire's for the Birmingham Weekly. I highly recommend you read the actual SEC complaint against LeCroy and MacFaddin, which is fascinating. Excerpts below the fold. The firms who allegedly accepted payments for no work are Blount Parrish, Gardnyr Michael and ABI Capital. |
| mooncat :: J.P. Morgan Settles in JeffCo Case -- $722 million, total |
From the SEC complaint, emphasis mine. The official statement did not disclose to bond investors the material information concerning the payments to ABI Capital and Gardnyr Michael, or the conflict of interest raised by the agreement to make the payments to secure JPMorgan's selection as managing underwriter and swap provider.
41. On October 30, 2002, to receIve its payment, Gardnyr Michael submitted a one-line, $250,000 invoice to JPMorgan describing its role as "Co- Manager on Jefferson County, Alabama Swap." In a taped telephone call, LeCroy and MacFaddin discussed their mutual concern over the way Gardnyr Michael had worded the invoice because it made it sound like the firm had done work on the swap transaction.
42. The two agreed to re-draft the invoice because, as MacFaddin said, it contained "fairly flawed language." But they struggled for several minutes over how to characterize the $250,000 payment because Gardnyr Michael had not done any work on the transaction. ... Finally, MacFaddin concluded that "what we're saying is, it's really Jeff Germany who is directing us to pay these guys. It's not, we're not paying them because they were our advisor." MacFaddin then asked LeCroy if the firm actually advised Germany, to which LeCroy responded, "I have no idea."
44. LeCroy and MacFaddin re-crafted Gardnyr Michael's invoice to conceal the firm's lack of participation in the transaction by using the language "Directed Fee Payment Pursuant to Instructions from Commissioner Jeff Germany related to the Interest Rate Swap executed between JP Morgan and Jefferson County as part of the Series 2002-C Revenue Refunding Warrants." Gardnyr Michael and ABI Capital immediately submitted exact language. Other invoices would later use this same "Directed Fee Payment" language to describe subsequent undisclosed payments.
And in a 2003 transaction: 80. Yet just two hours after that call [detailing fees], LeCroy called the Associate while boarding a plane to tell her he met with Langford outside the swap closing, at which time both confirmed JPMorgan would pay Blount Parrish $2.6 million in connection with the 2003-C transaction. LeCroy told the Associate that at the same private meeting with Langford, the two had confirmed payments of $150,000 apiece to Gardnyr Michael and ABI Capital. LeCroy told the Associate "I haven't talked to them - that's just what we're sending them [laughing]. I hope they're, happy. I guess if they're not we'll find out."
81. Around the same time, the Associate called MacFaddin to tell him how much JPMorgan was going to pay Blount Parrish. MacFaddin responded it was "understandable," because Blount had a lot more "stroke" than others whom JPMorgan was paying.
82. One week later, on July 21, 2003, LeCroy again called the Associate, this time to tell her that Smoot had demanded that Gardnyr Michael and ABI Capital get more money. Although LeCroy said he attempted to dissuade Smoot because it was very difficult to change the amounts "after the fact," he agreed to increase JPMorgan's payments to the two firms to $250,000 each.
83. In the course of the conversation, LeCroy told the Associate he knew Smoot did not know about the $2.6 million payment to Blount Parrish, and said he had to agree to her request "because you know we're going to need her vote, and we've got to keep her happy. She's one of the three majority commissioners." He complained, however, that he would rather contribute to a commissioner's favorite charity than just "handing money to a vote."
84. Clearly troubled, the Associate replied, "But to just randomly payoff people that have nothing to do with the deal just doesn't sit well." LeCroy responded, "That's the deal-that's the price of doing business."
85. Two weeks after the 2003-C swap transaction closed, LeCroy sent a letter only to Langford, listing the payments to Blount Parrish, Gardnyr Michael and ABI Capital, and stating IPMorgan was making them "at the direction of the Commission." The letter indicated that IPMorgan was making the payments even though "you have noted that certain firms do not have the ability to underwrite, distribute or remarket tax-exempt floating rate securities or participate in providing interest rate swaps."
86. Significantly, this letter noted that IPMorgan was incorporating the $3.1 million in payments to the three firms "into the price of the interest rate swap at the time of execution." This reduced the amount of money the County would receive from the transaction.
The deals described here added to the public debt in order to benefit a few firms or individuals. It's quite strange to me, but I'm starting to believe there are people in Alabama government who don't realize this sort of transaction is wrong, both morally and legally wrong. |
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