JPMorgan Securities LLC was sued by an Oakland, California-based community college over claims that a $25 million bond contract will require the issuance of bonds that will give the bank a windfall.
Peralta Community College claims the bond purchase contract, which was part of a 2006 bond refinancing deal, is unconstitutional under a 2009 legal opinion by the California Attorney General. The opinion determined that so-called cash-out bond refundings violate state law, according to a lawsuit filed yesterday in state court in Oakland.
In such deals, which were once common in California, school districts refinanced existing bonds by issuing new bonds at above-market interest rates that could be sold at a premium and provide more cash than needed to retire debt for purposes other than those promised to voters when they approved the bond measures, Peralta said in the filing.
State lawyers said in 2009 the California Constitution bans school districts from taking on additional debt in a refinancing of taxpayer-approved bonds without a public vote.
The college’s 2006 contract was originally with Bear Stearns Cos., which was acquired by JPMorgan Chase & Co. in 2008. Under the “forward bond purchase contract,” the school district would redeem callable bonds, issue new non-callable bonds and sell the new bonds to Bear Stearns.
In exchange, Bear Stearns paid the college $550,000, according to the the filing. JPMorgan notified Peralta in June that it wished to exercise the contract and demanded the college issue new bonds at the states interest rates, which are much higher than current rates, according to the complaint.
“J.P. Morgan Chase’s plan would wrongly shift savings from interest rate declines away from taxpayers and to J.P. Morgan’s bottom line,” Peralta said in an e-mailed statement. “This improper money-grab comes at a time when J.P. Morgan Chase knows California schools are under significant financial pressure.”
Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan, declined to comment on the lawsuit.
JPMorgan has told the college it could make as much as $4 million on the bonds, lawyers for Peralta said in a complaint.
The case is Peralta Community College District v. JPMorgan Securities, RG12-643254, California Superior Court, Alameda County (Oakland).