In a lawsuit filed Friday in Jefferson County Circuit Court, the county accused JPMorgan of colluding with local agents to dupe the county into an unsustainable and disastrous debt structure. Other defendants include former Commission President Larry Langford, Montgomery investment banker Bill Blount, lobbyist Al LaPierre, JP Morgan banker Charles LeCroy and JP Morgan banker Douglas MacFaddin.
"JPMorgan, JPMorgan Chase, and Blount Parrish were paid millions of dollars as a result of the issuance of variable rate demand warrants and auction rate warrants and the closing of interest rate swap transactions," the county says in the lawsuit. "The price the County paid for these transactions in terms of fees and interest rates was artificially inflated by millions of dollars, to account in part for the fact that JPMorgan’s scheme to secure the County’s business included bribes, kickbacks, and pay-offs the Defendants paid to or received from each other."
LeCroy and MacFaddin no longer work for JP Morgan. LeCroy has already spent time in prison for federal charges that he bribed Philadelphia officials in a similar scheme.
The county's lawsuit cribs heavily from lawsuits brought by the Securities and Exchange Commission and the criminal cases against Langford, Blount and LaPierre.
Between 2002 and 2004, Jefferson County converted almost 93 percent of its debt to auction rate securities and variable rate demand warrants. Only 7 percent was left in the form of fixed rate debt.
On top of this floating rate debt, the defendants built complicated derivatives called interest rate swaps. According to the lawsuit, these swaps did little for the county, but for the defendants, the deals generated millions in fees.
The complicated debt structure was risky and left the county exposed to a turbulent market. In early 2008, ratings agencies downgraded the county's bond insurers. That action triggered a chain reaction that left the county with staggering interest rates, sometimes greater than 10 percent, that it couldn't pay.
Last week, the SEC simultaneously filed and settled a lawsuit with JPMorgan Securities. In that settlement, JPMorgan agreed to forfeit $647 million of swap termination fees and pay $50 million to Jefferson County and $25 million to the SEC. While those numbers looked significant, it did little to free the county from a crushing $3.2 billion of debt or the interest rates.
Earlier this week, commissioners said the county was considering a lawsuit.