ENFORCEMENT PROCEEDINGS - SEC Charges Two Former Directors of J.P. Morgan Securities With Fraud in Connection With Unlawful Payment Scheme to Obtain Municipal Bond and Swap Business

The Securities and Exchange Commission today charged Charles E. LeCroy and Douglas W. MacFaddin, two former directors of J.P. Morgan Securities Inc. with fraud in connection with an unlawful payment scheme which allowed J.P. Morgan Securities to obtain $5 billion in Jefferson County, Alabama municipal bond offerings and swap agreement transactions.

The SEC complaint, filed in the U.S. District Court for the Northern District of Alabama, alleges that between October 2002 and November 2003, LeCroy and MacFaddin directed over $8 million in payments from J.P. Morgan Securities to close friends of Jefferson County commissioners (County commissioners) who either owned or worked at local broker-dealers. These broker-dealers had no official role and performed few, if any, services on the transactions. In connection with these payments, according to the SEC's complaint, the County commissioners voted to select J.P. Morgan Securities as managing underwriter and swap provider for the largest municipal auction rate securities and swap agreement transactions in J.P. Morgan Securities' history.

According to the SEC's complaint, although labeled as payments for work on the transactions, LeCroy and MacFaddin knew that these were sham transactions designed to ensure that County officials selected J.P. Morgan Securities. LeCroy and MacFaddin referred to the payments in taped telephone conversations as "payoffs," "the price of doing business" or "giving away free money." J.P. Morgan Securities incorporated the costs of these unlawful payments by charging Jefferson County higher interest rates on the swap transactions.

The SEC further alleges that LeCroy and MacFaddin failed to disclose any of these payments, and the inherent conflicts of interest raised by the payments, either to the County or investors in bond offerings, or to the County in the swap agreements at issue. This conduct deprived Jefferson County and its investors of objective and impartial bond underwriting processes and swap agreement negotiations.

The SEC's complaint charges LeCroy and MacFaddin with violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15B(c)(1) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and Municipal Securities Rulemaking Board Rules G-17 and G-20. The SEC's complaint seeks judgments against each defendant providing for permanent injunctions and disgorgement with prejudgment interest.

In April 2008, the SEC filed a civil action in the U.S. District Court for the Northern District of Alabama against Birmingham, Alabama Mayor Larry Langford (the former president of the Jefferson County commission); William B. Blount, chairman of Blount Parrish & Co, Inc., a broker-dealer based in Montgomery, Alabama; and registered lobbyist Albert LaPierre. The SEC's complaint alleged that while Langford served as president of the County Commission, he accepted more than $156,000 in undisclosed cash and benefits over the course of two years from Blount in exchange for Blount Parrish participating in every Jefferson County municipal bond offering and security-based swap agreement transaction during 2003 and 2004. Securities and Exchange Commission v. Larry P. Langford, William B. Blount, Blount Parrish & Co., Inc., and Albert W. LaPierre, Case No. Case No. cv-08-B-0761-S (N.D. Ala., filed April 30, 2008). This case was the SEC's first enforcement action involving security-based swap agreements.

On December 1, 2008, the United States Attorney for the Northern District of Alabama filed criminal charges against Langford, Blount and LaPierre. The 101-count indictment charged Langford, Blount, and LaPierre with, among other charges, conspiracy, bribery, and money laundering in an alleged long-running bribery scheme related to Jefferson County bond transactions and swap agreements. United States of America v. Larry P. Langford, William B. Blount, and Albert W. LaPierre, (United States District Court for the Northern District of Alabama, Case No. 2:08-CR-00245-LSC-PWG). On July 30, 2009, LaPierre pled guilty to the charges of conspiracy and filing a false tax return, and agreed to forfeit $371,932 and pay back taxes. On August 18, 2009, Blount pled guilty to conspiracy and bribery and agreed to forfeit $1,000,000. On October 28, 2009, Langford was found guilty on 60 counts of bribery, mail fraud, wire fraud and tax evasion. All three currently await sentencing.

For further information see Litigation Release Nos. 20400 (Dec. 17, 2007), 20545 (April 30, 2008), 20821 (Dec. 5, 2008). [SEC v. Charles E. LeCroy, and Douglas W. MacFaddin, Case No. cv-09 U/B 2238-S (N.D. Ala.)] (LR-21280)

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