ARE MONITARY PAYMENTS SUFFICIENT TO PREVENT A REPETITION?
The Commission brought two more actions in a series of civil and criminal cases arising out of the payments made by a brokerage firm to obtain municipal bond underwriting and interest rate swap agreement business in Jefferson County, Alabama. The criminal case is resolved. Two of the Commission’s actions are on-going, while an administrative proceeding is settled. That settlement with the securities firm raises a critical question about the adequacy of the relief.
The first is a settled administrative proceeding captioned In the Matter of J.P. Morgan Securities Inc., Adm. Proc. File No. 3-13673 (Filed Nov. 4, 2009). This action alleges that, over a two year period beginning in 2002, the securities firm, through former managing directors Charles LeCroy ad Douglas MacFaddin, paid more than $8.2 million at the direction of local county commissioners essentially to obtain business.
The payments were made to close friends of the county commissioners who either worked at, or owned, local broker dealers. The individuals who received the payments had no official role in the transactions and typically performed few if any services. These fees, in many instances, dwarfed those paid to others involved in the deals such as the lawyers and bankers who advised the county and worked extensively on the transactions. In taped telephone conversations Messrs. LeCroy and MacFaddin referred to the payments as “payoffs,” “giving away free money” or “the price of doing business.”
In return for the payoffs, the county commissioners were instrumental in directing the offering and swap business to J.P. Morgan Securities. In the offerings, not only did the firm fail to disclose the payments made to direct the business to it, but the “payoffs” were incorporated into higher swap interest rates charged to the county thereby increasing the transaction costs for the government and the taxpayers. The Order for Proceedings states that J.P. Morgan Securities willfully violated Section 17(a)(2) and 17(2)(3) of the Securities Act as well as Section 15B(c)(1) of the Exchange Act and MSRB Rule G-17.
To settle the case, the securities firm agreed to make a $50 million payment to Jefferson county and to terminate all obligations of the county to make any payments to J.P. Morgan Chase Bank under the swap agreements. In addition, the firm consented to the entry of a cease and desist order, a censure and to pay a penalty of $25 million which will be placed in a Fair Fund.
A second case was brought against Messrs. LeCroy and MacFaddin, SEC v. LeCroy, Civil Action No. CV – 09-U/B 2238-S (N.D. Ala. Filed Nov. 4, 2009). The complaint in this action is based on the same conduct detailed in the J.P. Morgan Securities action. The complaint however, alleges violations of Section 17(a) of the Securities Act and Sections 10(b) and 15B(c)(1) of the Exchange Act as well as violations of rules of the Municipal Securities Rulemaking Board. See also Litig. Rel. 21280 (Nov. 4, 2008). This case is currently in litigation.
Previously, the SEC brought an action based on essentially the same conduct against certain local officials, discussed here. SEC v. Langford, Civil Action No. cv-08-B-0761-S (N.D. Ala. April 30, 2008). That action is pending. The defendants in that action were also charged in a criminal case, discussed here, U.S. v. Langford, Case No. 2:08-CR-00245 (N.D. Ala. Filed Dec. 1, 2008). Defendants Albert LaPierre and William Blount have pleaded guilty and agreed to pay certain forfeitures. Mr. Langford was convicted on 60 counts of bribery, mail fraud, wire fraud and tax evasion. The three defendants are awaiting sentencing.
In these cases, the taxpayers were the victims of greedy local officials who obtained millions of dollars for the friends and a broker hungry for business. The settlement in the administrative proceeding against the broker should help local taxpayers recoup their losses. It does not however, provide any significant assurance against a replication of the conduct in the future.
A key point of a Commission action is not only to discover and halt violations, but to ensure that they do not reoccur. While the payment to the county and the penalty have, respectively, a remedial impact in the nature of restitution and a punitive, deterrent effect neither assures against future repetition.
The conduct here, at its core, is a simple bribery scheme using millions of dollars of money belonging to the securities firm. The repeated bribes over a two year period raise a critical question regarding the adequacy of the firm’s compliance procedures and its controls. Yet, no new procedures are being instituted. No safeguards have been undertaken to prevent a reoccurrence. To ensure against a future repetition of this kind of conduct appropriate procedures should have been included in the settlement.