Corruption: SEC accuses J P Morgan of making corrupt payments

Morgans neither admitted nor denied the allegations. It has, however, settled the charges at a cost of more than USD700 million.

The SEC alleges Morgan Securities and former managing directors Charles LeCroy and Douglas MacFaddin made more than USD8 million in undisclosed payments to close friends of certain Jefferson County commissioners. The friends owned or worked at local broker-dealer firms that performed no known services on the transactions. In connection with the payments, the county commissioners voted to select J.P. Morgan Securities as managing underwriter of the bond offerings and its affiliated bank as swap provider for the transactions.

The SEC is not exercised only by the making of payments: it's also upset by alleged regulatory breaches: "J.P. Morgan Securities did not disclose any of the payments or conflicts of interest in the swap confirmation agreements or bond offering documents, yet passed on the cost of the unlawful payments by charging the county higher interest rates on the swap transactions," the SEC said in a statement.

"Senior J.P. Morgan bankers made unlawful payments to win business and earn fees," said Robert Khuzami, Director of the SEC's Division of Enforcement."

Glenn S. Gordon, Associate Director of the SEC's Miami Regional Office, said, "This self-serving strategy of paying hefty secret fees to local firms with ties to county commissioners assured J.P. Morgan Securities the largest municipal auction rate securities and swap agreement transactions in its history."

This is the second case arising out of the same facts: the SEC charged mayor Larry Langford and to others in respect of "undisclosed payments to Langford related to municipal bond offerings and swap agreement transactions that he directed on behalf of Jefferson County while serving as president of the County Commission."

Langford was found guilty on 28 October this year in a related criminal trial. There were 60 counts of bribery, mail fraud, wire fraud and tax evasion. Surprisingly enough, no money laundering charges were added.

The SEC puts its case very clearly: according to its complaint filed in the District Court for the Northern District of Alabama, LeCroy and McFaddin, former managing directors, demonstrated in taped telephone conversations that they knew the payments to local firms with ties to county commissioners were designed to obtain business for J.P. Morgan's broker-dealer and affiliated bank. LeCroy and MacFaddin referred to the payments as "payoffs," "giving away free money," and "the price of doing business."

The SEC alleges that the scheme began in July 2002, when LeCroy and MacFaddin solicited Jefferson County on behalf of J.P. Morgan Securities for a USD1.4 billion sewer bond deal. LeCroy and MacFaddin knew several county commissioners wanted to complete the transaction before November, when two commissioners would leave office and lose their ability to funnel payments to their supporters' firms. LeCroy later boasted to MacFaddin in a taped telephone conversation about his efforts to persuade the two commissioners to select J.P. Morgan Securities for the deal, beating out a rival firm. LeCroy told MacFaddin that he said to the commissioners, "Whatever you want — if that's what you need, that's what you get — just tell us how much."

J.P. Morgan Securities agreed to settle the SEC's charges without admitting or denying the allegations by paying USD50 million to the county for the purpose of assisting displaced county employees, residents and sewer rate payers; forfeiting more than USD647 million in termination fees it claims the county owes under the swap transactions; and paying a USD25 million penalty that will be placed in a Fair Fund to compensate harmed investors and the county in the municipal bond offerings and the swap transactions.The SEC has told Morgans not to do it again.

LeCroy and MacFaddin have not agreed to settle the SEC's charges.