JPMorgan faces SEC lawsuit

JPMorgan faces SEC lawsuit
By Aline van Duyn and Francesco Guerrera in New York
Copyright The Financial Times Limited 2009
Published: May 8 2009 23:52 | Last updated: May 8 2009 23:52
http://www.ft.com/cms/s/0/8c2e1fd2-3c1e-11de-acbc-00144feabdc0.html


JPMorgan Chase may be sued by US regulators for violating securities laws and market rules related to the sale of bonds and interest-rate swaps to Jefferson County, Alabama.

The potential Securities and Exchange Commission action is the latest twist in a complex debt financing saga which has already led to charges against Jefferson County officials and which has left the municipality struggling to avoid default on over $3bn of debt, much of it taken on to improve its sewage system.

JPMorgan said in a regulatory filing, made late on Thursday just as the results of bank stress tests were being released, that it had been told about the SEC action on April 21. It said it “has been engaged in discussions with the SEC staff in an attempt to resolve the matter prior to litigation”. The bank had no further comment on Friday.

Jefferson County is one of the most indebted municipalities in the US due to its expensive overhaul of its sewage system. JPMorgan is one of the lenders which has repeatedly extended the deadline on payments due by Jefferson County on its debt and derivatives.

A law is currently being considered that would create a new tax which would provide revenues to pay the sewer debt. If Jefferson County defaults, it would be the biggest by a US municipality, dwarfing the problems faced by California’s Orange County in the 1990s.

The mayor of Birmingham, Alabama, and two of his friends were last year charged by US regulators in connection with an undisclosed payment scheme related to municipal bond and swap deals.

The SEC alleged that Larry Langford, the mayor, received more than $156,000 in cash and benefits from a broker hired to arrange bond offerings and swap agreements on behalf of Jefferson County, where Birmingham is located.

Although the details of the SEC investigation are not known, it is likely to be related to the payment scheme through which banks like JPMorgan paid fees to local brokers at the request of Jefferson County.

The credit crisis has brought to light numerous problems in the municipal bond markets. Many borrowers relied on bond insurance to sell their deals, and the collapse in the credit ratings of bond insurers has made it difficult for many to raise funds or to do so at low interest rates.