The U.S. Securities and Exchange Commission plans to file an enforcement action against JPMorgan Chase & Co., a Wall Street firm that arranged interest rate swap deals for Jefferson County in 2002 and 2003. The SEC is alleging violations of federal securities laws and rates set by the Municipal Securities Rulemaking Board with respect to “certain transactions executed in 2002 and 2003 with Jefferson County.” JPMorgan has been “engaged in discussions with the SEC staff in an attempt to resolve the matter prior to litigation,” according to media reports.
The SEC’s actions could make a settlement between JPMorgan and the County over the $3.9 billion sewer debt more likely. Settlement negotiations have been going on for about 18 months between JPMorgan and the County. It’s very likely that the SEC will settle on federal securities law violations and MSRB violations with JPMorgan.
It was also reported that the County is still negotiating with JPMorgan and other creditors in an effort to solve its financial crisis. JPMorgan is one of several parties that have offered $1.3 billion in concessions to help solve Jefferson County’s sewer crisis. JPMorgan bankers were among the financial advisers who persuaded Jefferson County officials in 2002 to replace traditional fixed-rate bonds with bonds having floating interest rates, including auction-rate securities whose terms are set through periodic bidding. Those auctions failed last year, causing interest rates to soar and pushing the County to the brink of bankruptcy.
JPMorgan and other firms have been at the center of parallel Justice Department and SEC criminal and civil probes of the municipal derivatives markets, according to reports. Bid-rigging and price-fixing are involved in the probes. The announcement of the enforcement action is a good indication that the SEC investigation is coming to a close.
A bill in the Alabama Legislature, which failed, would have allowed excess school sales tax revenue to go toward retiring Jefferson County’s sewer debt. This seemed to be the best chance to solve the County’s sewer crisis and reach a settlement with creditors. That bill’s failure leaves raising rates to generate revenue for the sewer system as the only choice – albeit a poor choice – to help the County avoid bankruptcy.
Source: Birmingham News
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