JPMorgan Bankers Lose Bid to Dismiss SEC Pay-to-Play Suit on Alabama Swaps

A federal judge denied a motion by two former JPMorgan Chase & Co. bankers to dismiss a Securities and Exchange Commission suit alleging a pay-to-play scheme in Jefferson County, Alabama, that allowed the bank to win almost $5 billion in bond and interest-rate swap business.

U.S. District Judge Abdul Kallon in Birmingham rejected arguments by Douglas MacFaddin, the former head of JPMorgan’s municipal derivatives desk, and investment banker Charles LeCroy that the SEC doesn’t have jurisdiction over interest-rate swaps. The unregulated derivatives were used by the county to lower borrowing costs on debt issued to rebuild its sewer system.

Kallon said it was too early in the case to resolve the question of whether the swaps were “security-based” and therefore subject to SEC oversight.

MacFaddin’s and LeCroy’s challenge to the SEC’s jurisdiction failed because they relied on a disputed fact, that the swaps were based on an interest-rate index, rather than an index of securities, Kallon wrote in a 22-page opinion.

The SEC filed suit against the pair last year, alleging the New York-based bank made more than $8 million in undisclosed payments to friends of county commissioners. The associates owned or worked at local broker-dealer firms that didn’t do any work on the deals, which have nearly bankrupted the county, the state’s most populous.

Larry Langford, the former president of the Jefferson County Commission and former mayor of Birmingham, is serving 15 years in prison after being convicted of accepting $235,000 in designer clothes, Rolex watches and cash from an Alabama banker who was paid almost $3 million by JPMorgan.

The case is Securities and Exchange Commission v. Charles E. LeCroy and Douglas W. MacFaddin., 09-CV-02238, U.S. District Court for the Northern District of Alabama (Birmingham).

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net

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