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JP Morgan Coughs Up $722 Million Over “Pay-to-Play” Allegations in JeffCo Alabama Bond Deals

November 4, 2009

According to the Security and Exchange Commission, J.P. Morgan paid “hefty secret fees to local firms with ties to county commissioners” to get Jefferson County, Alabama’s bond business, catapulting the County into a public scandal, including federal convictions of former County commissioners and local businessmen and the threat of County bankruptcy. Today, J.P. Morgan agreed to pay a penalty of $25 million to the SEC, make a payment of $50 million to Jefferson County, and forfeit more than $647 million in claimed termination fees for a total of $722 million to settle the allegations.

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. The friends owned or worked at local broker-dealer firms that performed no known services on the transactions. In connection with the payments, the county commissioners voted to select J.P. Morgan Securities as managing underwriter of the bond offerings and its affiliated bank as swap provider for the transactions.

J.P. Morgan Securities did not disclose any of the payments or conflicts of interest in the swap confirmation agreements or bond offering documents, yet passed on the cost of the unlawful payments by charging the county higher interest rates on the swap transactions.

The transactions were complex but the scheme was simple. Senior J.P. Morgan bankers made unlawful payments to win business and earn fees,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Former County Commisioner and Birmingham Mayor Larry Langford was convicted last week for accepting bribes related to municipal bond offerings and swap agreement transactions that he directed on behalf of Jefferson County while serving as president of the County Commission.

Taped phone conversations indicated that J.P. Morgan’s broker-dealer and affiliated bank knew the payments were “payoffs” and J.P. Morgan directors LeCroy and MacFadden referred to the payments as “giving away free money” and “the price of doing business.” According to the SEC, the phone tapes indicate that J.P. Morgan’s attitude was: “Whatever you want — if that’s what you need, that’s what you get — just tell us how much.”

To report government fraud and abuse, contact Frohsin & Barger.

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