JP Morgan Learns Settling with the SEC Doesn't Always Mean "Getting Away With It"

Monday, November 16, 2009 , , , 0 Comments

Settle with the SEC all you want, JP Morgan, you're not getting out of this one that easily.


Jefferson County, Alabama, sued JPMorgan Chase & Co. and the former president of the county commission, alleging they engineered a more than $3 billion refinancing of the county’s sewer debt to generate hundreds of millions in fees and interest payments.

JPMorgan bankers Charles LeCroy and Douglas MacFaddin used payments to a local bond underwriter and a close friend of Larry Langford, the former commission president, to “entice the county to purchase ruinous financial products and services.” Langford was convicted of taking bribes from the banker, William Blount, on Oct. 29.

“This is a suit for fraud and fraudulent suppression, conspiracy, and unjust enrichment against those who have brought the county and its citizens to the brink of financial disaster while lining their own pockets,” the complaint, filed in the Circuit Court of Jefferson County in Birmingham, said.

The suit comes a week after JPMorgan, the second-biggest U.S. bank by assets, agreed to a $722 million settlement with the U.S. Securities and Exchange Commission over a probe into the sales of floating-rate bonds and derivatives, which have nearly bankrupted the state’s most-populous county.

“We believe the claims are meritless and we intend to defend ourselves vigorously,” JPMorgan spokesman Brian Marchiony said. “Meanwhile, we continue to work to achieve a responsible restructuring of Jefferson County’s financial affairs.”

Jefferson County is no stranger to banking shenanigans.

Birmingham News (February 2009):

Jefferson County Commission President Bettye Fine Collins said Wednesday she sees no reason to pull the county's bank accounts from Regions Bank, responding to an inquiry from the county treasurer about the bank's soundness.

Jefferson County Treasurer Jennifer Champion asked the commission in a letter Wednesday to advise her if the county's bank accounts should be removed from Regions, whose holding company has been suffering from financial losses, falling share prices and credit downgrades.

"I see no reason for concern about the county's deposits or the bank's safety and soundness," Collins wrote.

Collins also wrote that Birmingham-based Regions is well capitalized and that county deposits are 100 percent backed by a state-managed guarantee fund. The city of Birmingham also said Wednesday it isn't concerned about deposits at the state's largest bank.

Champion, elected treasurer last year to administer Jefferson County's $660 million budget, said the county's 12 accounts with Regions hold tens of millions of dollars at any one time.

Her concern about Regions' soundness comes after a $6.2 billion quarterly loss, downgraded credit ratings and an 89 percent drop in the stock price in the past year.

"I need to do what I can to protect the taxpayer," Champion said. "It appears this bank has serious financial problems."

Then in May, a Jefferson County judge sues Regions as an investor:

A Jefferson County judge has filed a lawsuit against Regions Financial Corp.'s chief executive and board, accusing them of mismanagement that caused the bank's poor financial performance.

David N. Lichtenstein, a judge in the Jefferson County Circuit Court's criminal division, filed the lawsuit in the court's civil division this month. In the complaint, Lichtenstein blames Regions' Chief Executive Dowd Ritter and the board for failing to take action that would have prevented the bank's shares from falling from $38 in 2006 to less than $5 today.

The suit names Ritter and 17 current and former board members, including Birmingham business figures Charles McCrary, head of Alabama Power Co., and Claude Nielsen, chief of Coca-Cola Bottling United.

Lichtenstein's lawyer, Tom Baddley Jr. of Baddley & Mauro LLC in Birmingham, said his client became upset after Regions awarded bonuses to Ritter and others despite financial losses and a slumping stock price. The judge owns a stock fund that holds Regions shares, the complaint says.

The suit is a so-called "derivative action," filed on behalf of all Regions shareholders. Any financial relief would go to the company, not shareholders, Baddley said.

By September, bankrupt Jefferson County was looking for a $25 million Regions loan. How are those 12 accounts working out for the county?

Birmingham Weekly answers that question for us:

Just a few years ago this scenario was all too common. A man walks into a bank. He has lousy credit. He’s not current on any of his bills. In fact, he’s on the brink of bankruptcy. 

And yet, he asks for more money, and he gets it, no questions asked. 

That was then.

This is now. Jefferson County walks into a bank. The $3.8 billion of debt it has on its books already has fallen to junk bond status. It’s in technical default on all its debt and in actual default on some of it. Wall Street has given it one forbearance agreement after another for more than a year and a half. It is almost a year behind on its statutory requirement for producing audited financial statements. It’s revenue streams are in tatters. It can’t make payroll. It’s on the brink of bankruptcy. 

And yet, the county asks Regions Bank for another $25 million. The county says it needs this “bridge loan” to pay employees until the new occupational tax kicks in. The county should begin collecting that revenue next month. At some point after that, it would pay back the loan. 

To make matters worse, Jefferson County hasn’t yet produced an audited financial statement for the 2008 fiscal year which ended last October. Only in January did the county finally release an audited financial statement for 2007. 

In other words, not only does the county have lousy credit, but it can’t even balance its own checkbook.

And then there’s the matter of Regions Bank itself. 

The last two years have seen Regions’ stock fall through the basement. To be fair, banks have had a rough ride recently. Regions isn’t as bad off as some others, such as Colonial. But it’s not JPMorgan or Bank of America, either. The federal government won’t yet let Regions pay its TARP money back — a sign that it’s not out of the woods. 

The bank is under fire from stockholders and investors. Last week its investment arm, Morgan Keegan, was ordered by an arbitrator to pay $1.4 million to former LA Laker Horace Grant as reparations of crumby investments it made with his money. That was the largest settlement the bank has had so far, but not the only one. 

Meanwhile, stockholders are suing, too. Last week, I asked one of the plaintiffs’ attorneys, Tom Baddley, what he thought of a possible Regions loan to Jefferson County. He summed it up in one word: “Insane.” 

Yeah, that sounds about right.

Regions also has a problem with respecting the reasonable limits of "disclosures" on their financial statements but who's judging? Blame the auditors?

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.