SEC investigation into Jefferson County bond swaps

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The SEC investigation into Jefferson County bond swaps is an ongoing probe by the United States Securities and Exchange Commission (SEC) into possible improprieties during a series of complex financial transactions undertaken by Jefferson County while Larry Langford was President of the County Commission and Chair of its Finance Committee. The SEC began its investigation in 2004 as part of a broader inquiry into the municipal bond business in the United States.

Transactions

During the period from 2003 to 2006 the County initiated five separate bond offerings and interest rate swap agreements totaling more than $5.7 billion, all of which involved the participation of Bill Blount and his firm, Blount Parrish, Inc. as underwriter and agent, for which the firm was paid several million dollars in fees. Blount had previously assisted Langford in financing for the VisionLand theme park.

The aim of those deals was to reduce the cost of debt service on the county's outstanding principal of over $4.6 billion ($3.3 billion of which went to the construction of new sewers mandated by violation of the Federal Clean Water Act). Reducing debt service would help slow the rise of consumer sewer rates and protect the county from instability in the securities interest market. The result, it could be argued, was exactly the opposite as sewer rates have continued to climb and a national crisis in mortgage lending has damaged the liquidity of bond insurers, causing interest rates to shoot upwards. Another effect of the swaps was to expose the sewer debt, which had been secured to sewer system revenues, to a broader liability for the county.

Notice of investigation

The deals, along with certain personal transactions, attracted the notice of the SEC which subsequently reported that it was "investigating whether any persons or entities, including but not limited to Langford and Blount, committed violations of the antifraud provisions of the federal securities laws relating to the offer, purchase or sale of Jefferson County, Alabama, municipal bonds or security-based swap agreements." (SEC - December 17, 2007)

In 2007 the SEC launched a civil investigation into possible irregularities with those transactions and subpoenaed Langford and County finance director Steve Sayler, as well as Commissioners Shelia Smoot, Bettye Fine Collins, Mary Buckelew and Gary White, requesting e-mails, travel records, expense reports and other documents related to the bond swaps since 2002.

Depositions

Langford was interviewed as part of the investigation by attorneys working on behalf of the SEC on June 21, 2007.

On December 6, responding to a "Formal Order Directing Private Investigation and Designating Officers to Take Testimony in the Matter of Jefferson County Municipal Bonds", Langford and Blount were subpoenaed again to answer questions of investigators in Miami. Langford and Blount appeared in Miami for a second interview on December 11, but both refused to answer questions or to cite a specific constitutional protection justifying their silence. The SEC subsequently filed an action in federal court seeking to compel their answers, or to require them to cite a specific constitutional privilege under which their testimony could not be compelled so that the claim could be reviewed by SEC lawyers. Attorneys for Langford and Blount countered that the SEC did not have the authority to investigate the deals it was reviewing because they were not securities transactions and challenged them to reveal whether a criminal probe was proceeding alongside the civil investigation. The agency responded that it does have a mandate to investigate potential fraud or misconduct, the the interest rate swaps were based on securities markets, and that it is not compelled to divulge the status of any criminal investigation.

In February 2008, the Birmingham News and Birmingham Weekly obtained a transcript of the June interview, during which Langford made admissions to financial improprieties which, in addition to the potential federal securities violations, could subject him to prosecution under Alabama's ethics laws for public officials.

According to that transcript, Langford was asked to explain contributions to charities he controlled and the repayment by other individuals of loans he took out himself. According to Langford, lobbyist and long-time friend Al LaPierre loaned him $125,000 so that he could repay bank loans he had taken out to pay off accumulated debts and for over $50,000 in dental work. Langford said that he put up some commercial property as collateral. He stated that LaPierre was never paid for county business, but did admit to helping him secure business from the city of Fairfield while he was mayor. LaPierre also received hundreds of thousands of dollars from Blount's firm during the same time period. The SEC asked several other questions about communications between Blount, LaPierre, Langford's loan officer at Colonial Bank, Bobby Lowder, the bank president, and gambling promoter Milton McGregor who is a board member at Colonial and the single largest contributor to Langford's mayoral campaign. (After becoming mayor, Langford proposed a site owned by McGregor, next to his struggling Birmingham Race Course for a proposed new domed stadium.)

When questioned about whether Blount, who did receive county business, was funneling the money to LaPierre, Langford pleaded ignorance. When presented with e-mails from Blount to LaPierre talking about Langford's requests for contributions to "his ministry" he explained that he asked everybody he knew to contribute to various charities, including a church summer camp for kids. The checks went to his church, not to Langford. Langford himself controlled other charities, including a scholarship fund and a skeet shoot organized to raise money for United Cerebral Palsy. He admitted to soliciting contributions from LaPierre, Blount, and others for those charities.

Langford was asked about correspondence between Blount and J. P. Morgan Chase banker Charles LeCroy, who advised the County on its interest rate swaps. During the summer of 2003 Blount communicated Langford's charity requests to LeCroy and, in August, told him by email that Langford was "setting up a committee to effect the swaps without Commission approval." Langford has denied any such plan.

Langford was also questioned about personal debts. His store credit for clothes alone amounted to more than $40,000. He also has a mortgage on his Fairfield home, and two or three unpaid car notes. Subsequent to his interview with the SEC, Langford amended his filings with the Alabama Ethics Commission to reflect participation in an LLC which owns property in Hoover. He was also questioned about his income from a direct-sales company for which he sold telephone systems to County contractors and recruited other officials to serve as sales representatives, earning commissions on their sales.

Lawsuit

SEC attorneys notified Langford, LaPierre and Blount in April 2008 that they could be named in civil lawsuits regarding the issues of their investigation. Langford responded by expressing confidence that he would be vindicated and hinting that the investigations were personal attacks.

On April 30 the SEC did file suit against all three parties. The suit accuses Langford of accepting $156,000 in cash and benefits from Blount for his help in steering $6.7 million in Jefferson County bond and financial business to Blount Parrish and Company. LaPierre is accused of accepting $219,500 from Blount to secure Langford's help.

Federal corruption trial

On December 1, 2008 Langford was arrested and, along with Blount and LaPierre, charged with 101 counts of fraud and conspitacy in violation of federal securities laws. Blount and LaPierre later agreed to plead guilty in exchange for their testimony against Langford. After two delays and a change of venue, Langford's criminal trial opened in Tuscaloosa Federal Court on October 19, 2009. A week later the jury returned a guilty verdict on all 60 counts. Langford stated that he would appeal the verdict.

JP Morgan settlement

On November 4, 2009 J. P. Morgan Chase & Company agreed to a settlement in a lawsuit filed by the SEC as part of its probe of its financial dealings with Jefferson County. The SEC had alleged that JP Morgan's Charles LeCroy and municipal derivatives head Douglas McFaddin made millions of dollars of illicit payments to bankers considered "friends" of Jefferson County officials in order to secure the county's bond business. The firm then charged the county higher fees and interest in order to make up for those payments. Officials named in the lawsuit included Larry Langford, Shelia Smoot, Mary Buckelew, Steve Small and Jeff Germany. Firms named in the suit included Gardnyr Michael Capital, ABI Capital Management, CDR Financial Products, and Blount Parrish.

Under the terms of the agreement the investment bank will cancel $647 million on fees it would have charged the county to terminate and refinance its auction-rate security debts and make a one-time restitution payment of $50 million to the county. JP Morgan will also pay a $25 million penalty to the SEC. LeCroy and McFaddin, who had been targets of wiretaps in the investigation, were also sued individually.

References

  • Richardson, Karen (June 8, 2005) "Sweet Hedge Alabama: A County Defends Rate-Swap Strategy". Wall Street Journal
  • U. S. Securities and Exchange Commission (December 17, 2007) "Litigation Release No. 20400. Securities and Exchange Commission v. Larry P. Langford and William B. Blount, Case No. 07-23271-MC-Huck-Simonton. filed in United States District Court for the Southern District of Florida.
  • Wright, Barnett (December 18, 2007) "SEC wants to force Larry Langford, Bill Blount to testify in Jefferson County bond swap deals." Birmingham News
  • Walton, Val (January 19, 2008) "SEC disputes Langford's reasons for not testifying." Birmingham News
  • Blackledge, Brett J. (February 14, 2008) "In previous elected positions, Birmingham Mayor Larry Langford asked contractors to contribute to charities he controlled." Birmingham News
  • Whitmire, Kyle (February 14, 2008) "Langford's Wheel of Misfortune". Birmingham Weekly
  • Hubbard, Russell (March 14, 2008) "Jefferson County bankruptcy still an option." Birmingham News
  • Hansen, Jeff and Eric Velasco (March 23, 2008) "Jefferson County sewer debt crisis contained key players." Birmingham News
  • Bryant, Joseph D. & Brett J. Blackledge (April 30, 2008) "Birmingham Mayor Larry Langford blasts U.S. Securities and Exchange Commission, accuses it of smear campaign." Birmingham News
  • Blackledge, Brett (April 30, 2008) "SEC files civil complaint against Birmingham Mayor Larry Langford, banker and lobbyist." Birmingham News
  • Hansen, Jeff (July 18, 2009) "Jefferson County, Alabama special masters fail to resolve sewer debt fracas." Birmingham News
  • Braun, Martin Z. and William Selway (November 4, 2009) "JPMorgan Ends SEC Alabama Swap Probe for $722 Million" Bloomberg.com
  • Whitmire, Kyle (November 4, 2009) "JPMorgan settles with SEC over Jefferson County bonds business" Birmingham Weekly

External links