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JPMorgan Loses Motion to Dismiss Alabama Sewer Bond Fraud Suit

May 10 (Bloomberg) -- JPMorgan Chase & Co. lost a bid to dismiss a lawsuit filed by Jefferson County, Alabama, that claims the bank enticed it into a risky refinancing of about $3 billion of sewer debt by making $8 million in payments to friends of county officials.

Circuit Judge Caryl Penney Privett in Birmingham rejected the New York-based bank’s arguments that the county is barred by the statue of limitations, a time limit for bringing action, and its contention that the county failed to show that JPMorgan was involved in a conspiracy, in a ruling issued May 7.

Jefferson County, in the suit filed in November, alleged fraud, 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.”

JPMorgan, the second-biggest U.S. bank by assets, advised the state’s most populous county in 2002 and 2003 to enter into a series of floating-rate bond and interest-rate swaps that created an “inherently flawed financial structure that imploded within just a few years,” according to the county’s complaint.

Brian Marchiony, a JPMorgan spokesman, declined to comment today.

Charles LeCroy and Douglas MacFaddin, also named in the suit, were the managing directors at New York-based JPMorgan who oversaw the sewer-debt transactions. LeCroy and MacFaddin are accused of arranging $8.2 million in illegal payments to local broker-dealers who were friends of county commissioners, in exchange for the county’s business.

Larry Langford, former mayor of Birmingham and president of the county commission at the time of the debt refinancing, is serving a 15-year sentence in a federal prison in Kentucky for accepting $241,000 in bribes from William Blount, of Montgomery investment firm Blount Parrish & Co. Blount was paid $2.8 million by JPMorgan during the bond transactions.

Bankruptcy Brink

Jefferson County, home to Birmingham, has teetered on the brink of bankruptcy after interest rates on $3.2 billion in bonds soared in 2008, when companies that insured them lost their credit ratings because of losses on unrelated mortgage-backed securities.

In November, JPMorgan agreed to a $722 million settlement with the U.S. Securities and Exchange Commission to end a probe into derivative sales to the county.

The bank paid $50 million outright to the county, and agreed to cancel $647 million in fees the county faced to unwind the transactions. JPMorgan, which also paid $25 million to be placed in a fund to compensate affected investors, neither admitted nor denied wrongdoing.

To contact the reporter on this story: Kathleen Edwards in Birmingham, Alabama, at ;

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

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