Archive for the “Jefferson County” Category

Ill-fated financing arrangements concocted back in 2002 by JPMorgan Chase and other Wall Street banks for a sewer project in Jefferson County, Alabama, are causing havoc once again - this time for school districts in Pennsylvania.

As reported Oct. 17 on Bloomberg.com, the Securities and Exchange Commission (SEC) is reviewing records from the Bethlehem Area School District in Pennsylvania over interest-rate swaps that the district entered into with JPMorgan and Morgan Stanley.

As in the case of Jefferson County, Alabama - which continues to teeter on the brink of bankruptcy as a result of the flawed financing deals put together by JP Morgan and others - the SEC inquiry in Pennsylvania is part of a larger investigation concerning at least $8 million in fees that Bethlehem and other school districts paid to various Wall Street banks that sold the interest-rate swaps.

Interest-rate swaps are tied to variable interest rates. The swap itself is much like a bet between the purchaser and a bank: If interest rates remain favorable, the purchaser is the winner. If market conditions create an unfavorable interest rate environment, the bank that sold the swap receives higher payments from the purchaser.

In the case of the Bethlehem Area School District, the bank is now winning. In September, the district’s weekly debt costs increased by $250,000 - nearly $1 million a month.

Just like in Jefferson Country, Alabama, Bethlehem school board members say they failed to fully understand the ramifications of interest-rate swaps at the time they approved the deal with JP Morgan and others. Only now do they realize their mistake, they say, and just how risky and speculative the derivatives market can be.

Unfortunately, hindsight is 20/20. Now, it’s left to taxpayers to pick up the pieces and pay for the error in judgment by school board members of the Bethlehem Area School District. Students, too, are going to be affected by those bad decisions. As debt costs continue to mount for the district, tough choices will need to be made, including cutbacks to educational programs and reduced services in schools.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Former Jefferson County Commissioner Mary Buckelew has pleaded guilty to obstruction of justice as part of a federal corruption investigation into bond sales used to finance the county’s controversial sewer system. When Buckelew initially was questioned by a grand jury several months ago on whether she received any payments from a Montgomery investment banker involved in the county’s sewer bond deals, she denied any wrongdoing.

In reality, however, prosecutors showed that Buckelew accepted numerous gifts - including some $4,000 worth of designer shoes and purses, as well as a $1,400 spa treatment - from an investment banker whose firm later collected millions of dollars in fees and commissions related to the county’s bond financing deals.

In pleading guilty to the charge of obstruction of justice, Buckelew could face up to 20 years in prison and fines of $250,000.

Buckelew isn’t the first Jefferson County commissioner to wind up in a federal courthouse. On Sept. 19, 2007, former Jefferson County Commissioner Chris McNair was sentenced to 60 months in prison on charges of conspiracy and taking bribes from sewer contractors. In addition, McNair was ordered to pay restitution to Jefferson County in the amount of $851,927.

Another former commissioner, Gary White, also was arrested on federal bribery charges for his alleged influence in the county’s $3.2 billion sewer work. White was convicted once and is now awaiting his second trial on charges that he took at least $20,000 from sewer contractors.

In total, 22 people have been convicted in Jefferson County’s ongoing sewer project scandal, including contractors, engineers and now three former county commissioners.

Jefferson County’s problems first began in 2002, when county commissioners sought the advice of JP Morgan Chase and other banks to finance a massive upgrade to the county’s sewer system, which was pumping raw and partially treated sewage into nearby streams. The county then borrowed money for the sewer project via the bond market in a series of complex transactions called interest-rate swaps. When the mortgage crisis began to unfold and banks subsequently tightened their lending, interest rates on the sewer debt skyrocketed out of control.

Meanwhile, upon hearing the news of Buckelew’s plea deal, Birmingham Mayor Larry Langford - who once resided on the Jefferson County Board of Commissioners at the time the sewer plans were first put together and who also is the target of an investigation by the Securities and Exchange Commission (SEC) for his connection in the bond swap transactions - offered his support for the commissioner, describing her as “an exceptionally fine person,” according to a Sept. 23 article in The Birmingham News.

The citizens of Jefferson County may have a different opinion. Because of the corrupt actions of their elected officials and Wall Street banks, water rates have gone up more than 350%, with the average customer now paying about $65 a month. On top of that, Jefferson County still cannot meet its payment obligations for the overpriced sewer work, meaning it is looking at the biggest municipal bankruptcy in U.S. history.

To read Buckelew’s plea agreement in its entirety, go to http://blog.al.com/spotnews/2008/09/buckelewplea.pdf.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Unresolved financial issues over a $3.2 billion sewer debt in Jefferson County, Alabama, have caused the project’s bond insurers - Syncora Guarantee and Financial Guaranty Insurance Co. - to file a lawsuit in U.S. District Court in Birmingham and ask the judge to strip Jefferson County Commissioners of their duties and appoint an independent receiver to take charge.

The lawsuit is the latest controversy in an ongoing battle between county commissioners and creditors over how to resolve Jefferson County’s outstanding sewer debt obligations. In August, Alabama Governor Bob Riley convened a meeting with the county’s creditors in which he offered a plan to restructure the debt at a lower, fixed rate over a longer term. The banks, led by JPMorgan Chase, agreed that the county could delay interest payments on the debt until the end of September.

Now that deadline is fast approaching. If a resolution is not reached soon, Jefferson County will be forced to declare Chapter 9 bankruptcy. It would be the biggest bankruptcy by a municipality government since 1994 when Orange County, California, filed for protection from a $1.7 billion debt.

For years, the sewer project in Jefferson County has been an ongoing source of frustration for Birmingham residents. A combination of risky financing arrangements and complex interest-rate swaps ended up creating a fiscal nightmare for local officials, with sewer debt payments spiraling out of control and residents forced to pay sewer rates that have gone up nearly 330% since 1997.

More troubles unfolded when local officials - including Birmingham Mayor Larry Langford - were accused of accepting money under the table in exchange for awarding bonds and swaps businesses when Langford headed the Jefferson County Council. At least two lawsuits also have been filed against banks by taxpayer groups.

In 2007, former Jefferson County Commissioner Chris McNair, who oversaw the county’s sewer department, pleaded guilty to conspiracy and bribery for accepting money from a contractor.

In a related development, Standard & Poor’s Ratings Services recently lowered its rating three notches on some of Jefferson County’s sewer bonds. According to a statement from the agency’s credit analyst, the downgrade reflects the likelihood that the county will be unable to meet its future payment obligations.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

An Alabama activist group is taking banking giant JPMorgan Chase, 11 other firms and prominent Jefferson County, Alabama, officials to court, charging that the deals behind a $3.2 billion sewer debt were tainted in corruption, bribery and other wrongdoings.

The Citizens for Sewer Accountability and two Jefferson County residents - Carnell Fowler and William Young - filed the lawsuit on Aug. 28, and are asking the Jefferson County Circuit Court to cancel $6.6 billion in debt and related interest-rate swaps issued by the county because the arrangements were tied to public contracts allegedly obtained through bribing one or more public officials.

The 47-page suit seeks unspecified damages.

Among the charges, the lawsuit claims that former Jefferson County Commissioner and current Mayor Larry Langford and others engaged in improper conduct concerning the county’s bond deals in 2002 and, specifically, accepted money under the table to ensure sales of interest-rate swaps - risky financing arrangements that exchange one type of interest rate for another - would happen.

The lawsuit cites similar claims against William Blount, the previous president of the Jefferson County Board of Commissioners; Albert LaPierre, a lobbyist; and investment banker Charles LeCroy.

To date, Jefferson County has paid JP Morgan and other Wall Street banks that advised the county on refinancing $3.2 billion of fixed-rate debt into variable-rate bonds some $120 million in fees and commissions - six times the prevailing rate.

Today, Jefferson County is on the verge of bankruptcy, unable to make interest rate payments that have skyrocketed into the double digits following the subprime crisis and the ongoing credit crunch.

On Sept. 5, Alabama Governor Bob Riley negotiated a deal with the county’s creditors to restructure the sewer debt at lower, fixed interest rates over a longer term. The banks have yet to respond to the proposal, but agreed that the county could postpone making interest payments until Sept. 30.

That agreement comes not a moment too soon. Lawyers for Jefferson County already were preparing the paperwork for Chapter 9 bankruptcy. If the county did declare bankruptcy, it would become the largest municipality default in the history of the United States.

Meanwhile, the sewer debacle continues to hit Jefferson County residents where it hurts the most: in their wallets. Sewer rates have increased by 329 percent since 1996 - two to three times the rate of inflation.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Many issuers of municipal bonds, including Jefferson County, Alabama, take a ‘don’t’ ask, don’t tell’ stance when it comes to filing financial disclosures, according to a leading provider of municipal bond disclosure data. Findings from a groundbreaking study, “Estimating Municipal Securities Continuing Disclosure Compliance: A Litmus Test Approach,” reveal startling problems over transparency and disclosure of financial data in the municipal bond market. It’s so bad that investors who hold municipal securities - individually or in a mutual fund - often have no way of knowing when their investments are in trouble.

The study, conducted by DPC Data, shows that more than 50% of the municipal bonds sold between 1996 and 2005 have one or more years of disclosure delinquency. More than 25% are considered to be in the “chronic” stage, failing to file disclosure for three or more years.

The lax attitude regarding secondary market disclosure stems from the fact that issuers of the bonds suffer virtually no consequences, let alone enforcement, for not filing.

For investors, the lack of transparency can have devastating results. As reported Aug. 30 in the New York Times, the failure of municipal issuers to report material changes in their annual filings of financial statements and other reports essentially leaves investors in the dark regarding key information concerning their investments - information like a potential ratings downgrade by a credit ratings agency.

“Our findings indicate that nondisclosure is an established practice and a growing trend,” says Peter J. Schmitt, the author of the study and CEO of DPC Data. “The implications of any failure to disclose are serious. At a minimum, it is a breach of the fundamental principles of investor protection, suggesting hidden problems or potential fraud.”

Case in point: Jefferson County, Alabama. On Aug. 29, county commissioners barely eked out a one-month reprieve with creditors to renegotiate a $3.2 billion sewer debt. Had the commission failed to garner the extension, Jefferson County would have become the biggest municipal default in United States history.

Jefferson County illustrates the problems disclosure delinquency can cause in the municipal securities market. Until Sept. 30, 2007, the Jefferson County filed regular financial statements. After that date, however, filings came to an abrupt halt, according to the New York Times article.

It wasn’t until a February 2008 filing that investors became aware that Moody’s Investors Service had downgraded the county’s sewer credit rating for the second time in less than a month. As a result of the downgrades, Jefferson found itself deeper in debt and facing bankruptcy.

Based on the study by DPC Data, the situation in Jefferson County is hardly isolated. The number and proportion of failures to file are increasing every year. Between 1997 and 2003, delinquencies were in the 16% to 20% range. Beginning in 2004, however, the percentage of delinquencies skyrocketed, reaching 25% in 2006.

Other than taking action against an issuer that fails to meet disclosure commitments, bondholders have few solutions at their disposal. And even taking action is unlikely to make a difference. As reported Sept. 3 in Bond Buyer, the Securities and Exchange Commission (SEC) has never taken action against a broker-dealer for underwriting the bonds of an issuer that failed to file its annual disclosures.

Findings from the DPC Data study are disturbing on many fronts. The municipal securities market has some $2.6 trillion of debt outstanding, most of which is held by individual investors. The fact that any market can operate with ‘voluntary’ credit transparency - and a municipality or other entity has no obligation to reveal its financial circumstances on a consistent and predictable basis so that investors who risk capital, or want to risk capital, on that debt are fully aware of the overall financial situation at hand - is nothing short of ludicrous.

The DPC DATA research report can be obtained for free at www.DPCDATA.com.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

For the moment, Jefferson County, Alabama, has successfully avoided filing for the largest municipal bankruptcy in the United States. Jefferson County commissioners will find out next week if their proposal to restructure the county’s $3.2 billion sewer debt at lower, fixed interest rates over a longer term meets the approval of creditors.

The temporary reprieve allows the county to delay making further interest payments to lenders.

Jefferson County commissioners were joined by Alabama Governor Bob Riley when they presented the proposal at an Aug. 29 meeting with creditors. Reportedly, lenders and others involved in the sewer project plan to hold off in taking any legal action against Jefferson County until Sept. 30 while they study the proposal’s merits.

Today was a critical day for Jefferson County, with county commissioners facing the possible end of its financial road. At 5 p.m., a forbearance agreement between Jefferson County and lenders for the sewer debt was set to expire. Following months of trying to work out a new financing deal with lenders, bondholders and others - as well as having taken several forbearances to delay making interest-rate payments on the debt - county officials were set to file for bankruptcy.

A bankruptcy for Jefferson County would almost double the previous municipal bankruptcy record set in 1994 by Orange County, Calif., which had debts of $1.7 billion.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

With a 5 p.m. deadline looming for Jefferson County commissioners to make an interest payment on $3.2 billion in sewer debt, Alabama Governor Bob Riley is heading to the negotiating table with Wall Street creditors.

If the governor’s last-ditch effort to strike a deal fails and Jefferson County is unable to extend its forbearance agreement or make a payment, the county becomes left with no alternative but to file the largest bankruptcy ever sought by a municipality.

As reported Aug. 29 in The Huntsville Times, the consequences of a bankruptcy move would not only affect Jefferson County, but potentially the entire state of Alabama.

“The municipal bond market has a long memory and would penalize the county, the state and other Alabama local government jurisdictions, raising borrowing costs for all for many years,” according to Lamont Financial Services Corp., a New Jersey-based company that prepared a recent report for one of the bond insurers involved in the sewer project.”

The Lamont report went on to say that if Jefferson County does in fact go broke, it impairs the state’s efforts to recruit jobs, as well as creates possible interest rates increases on taxpayer debt for public improvements in the future.

If Jefferson County can’t meet its 5 p.m. deadline on Friday and files Chapter 9 bankruptcy, it would join a small roster of municipalities to default over the years. Earlier in the day, the Wall Street Journal reported that since 1934, when the first municipal bankruptcy legislation was passed, there have been fewer than 600 total Chapter 9 filings.

High-Finance Deals

Jefferson County’s financial troubles began innocently enough. In 1996, the county decided to update some 3,000 miles of sewers to stop the discharge of raw sewage into nearby streams. Wall Street banks were called in to devise a financing plan. Using a strategy that involved refinancing fixed-rate bonds into variable-rate bonds and then hedging the debt through complex interest-rate swaps, the plan ultimately went haywire.

Today, more than $3 billion of the bonds, including $2.2 billion of auction-rate securities, have interest rates that reset periodically, leaving Jefferson County unable to pay its debts.

Things are so bad that Jefferson County’s long-term debt-sewer, school and general obligation bonds - is now more than $7,000 for every man, woman and child, according to The Birmingham News. That’s 30 times Mobile’s long-term per capita debt of $236, and 38 times Montgomery’s $186 per capita debt, the paper says.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The clock is ticking for Jefferson County, Alabama. Unable to pay $3.2 billion in sewer-system debt bills, Jefferson County, Alabama, Commissioners have until August 29, at which time a forbearance agreement with Wall Street creditors, led by JP Morgan Chase, expires.

The next likely step for Jefferson County is to file for Chapter 9 bankruptcy, a move which will go down as the biggest municipal bankruptcy in U.S. history, surpassing the financial mess and bankruptcy of Orange County, California, in 1994.

As financial troubles go, Jefferson County’s are beyond serious. In 2002, needing to repair an outdated sewer system, local officials were wooed by a group of savvy investment banks to take on a financing arrangement that involved converting the county’s debt from fixed interest rates to adjustable rates and using exotic interest-rate swaps.

The financing plan was supposed to protect Jefferson County from rising interest rates on its sewer bonds. That didn’t happen, and county commissioners were forced to pay interest rates as high as 10 percent.

In the process, the county turned over more than $120 million in fees and commissions to the Wall Street banks that initially concocted the disastrous financing arrangement.

Now unable to negotiate another payment extension with lenders, Jefferson County commissioners are considering filing Chapter 9 bankruptcy. As reported Aug. 26 in The Birmingham News, the county says it fully expects to default on its $3.2 billion sewer debt this Friday. The next step is to authorize attorneys to begin bankruptcy proceedings, according to Jefferson County Commission President Bettye Fine Collins.

Jefferson County’s filing of Chapter 9 would be the largest municipal bankruptcy in the nation’s history. Currently, the record is held by Orange County, California, which declared Chapter 9 bankruptcy on Dec. 6, 1994, following massive losses of at least $1.5 billion from complex investments in financial derivatives. Federal criminal charges eventually were brought against the county’s treasurer at the time, Robert Citron, who pled guilty to six felony counts. Citron was sentenced to five years of supervised probation, and ordered to perform 1,000 hours of community service. He served no time in prison.

According to The Birmingham News, extending the forbearance agreement set to expire on Aug. 29 for Jefferson County means Alabama’s Governor Bob Riley must call a special session of the Legislature to consider property and sales taxes, among other revenue increases. Riley declined to invoke that session because of strong opposition from lawmakers and the public.

If an extension is not signed, Jefferson County faces higher interest costs, penalties and principal payments on its sewer debt.

In the event Jefferson County defaults on its payment obligations as expected, its bond insurers - Financial Guaranty Insurance Corp. (FGIC) and Syncora Guarantee, Inc. - are required to cover the payments under a previous agreement with the county. Both insurers say they expect the county to reimburse those payouts in full, as outlined in that agreement.

If the county cannot honor the agreement, FGIC and Syncora contend they will consider legal action, and sue the county for reimbursement. The county must then either make payments as scheduled or file for protection under Chapter 9 bankruptcy.

David Bronner, who heads the Retirement Systems of Alabama, thinks the county should take the latter step, selling him the sewer system and putting the losses firmly with the bond insurers that he says reaped countless benefits over the years when Jefferson County renegotiated bond swaps in order to get a better - yet more expensive - rate and ultimately created the financial mess it is in today.

In the meantime, Aug. 29 is fast approaching. Unable to pay the piper - in this case, Wall Street banks and creditors - default appears to be the most likely scenario for Jefferson County. For its residents, that unfortunate reality could mean yet another string of troubles - this time in the form of possible tax increases, spending reductions or job cuts.

All of which sounds like a repeat performance of Orange County, California, in 1994. While in bankruptcy, nearly every county program budget was cut, approximately 3,000 public employees discharged and other community services drastically reduced.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Jefferson County, Alabama, serves as a prime example of Wall Street financing gone bad. Money troubles for the county, which is home to the state’s largest city, Birmingham, began in 2002. It was then that several Wall Street investment banks, including JP Morgan Chase, devised an elaborate financing arrangement to pay for the county’s new sewer system.

The $5.8 billion arrangement that JP Morgan and other banks designed for Jefferson County was a risky venture - and one that rejected fixed-rate debt and borrowed at variable interest rates using interest-rate swaps. Failing to anticipate a future credit crunch, the plan backfired miserably. More than $3 billion of the sewer bonds have interest rates that reset frequently, with rates going as high as 10 percent.

Today, Jefferson County is on the brink of financial disaster. By some reports, the county has become one of the most indebted municipal governments in the history of the United States, with a current debt of approximately $9,000 for each resident in the county.

Meanwhile, the Wall Street banks that arranged the initial financing deal for Jefferson County have been rewarded to the tune of $120 million in fees and commissions - six times the standard rate.

Faced with few options to resolve its $3.2 billion sewer debt crisis, Jefferson County is now looking at filing Chapter 9 bankruptcy. In doing so, the county would be able to hold off paying banks and creditors while it figures out a restructuring plan for its debts.

On August 15, David Bronner, head of the Retirement Systems of Alabama, said his pension fund would be willing to buy the sewer system for up to $1.4 billion. The deal would require the county to file bankruptcy but essentially leave banks, investors, and insurers with the losses.

Bronner says in seven years he would sell the sewer system back to the county for the same price he initially paid.County commissioners are debating Bronner’s proposal. Some says the move could potentially create even more problems for Jefferson County, including tax increases, job losses, and lessen its ability to finance future infrastructure projects.

On Aug. 1, Jefferson County succeeded in winning a fourth forbearance agreement from the various Wall Street banks. In the end, however, many say the county is simply prolonging the inevitable fate of bankruptcy.

Until then, Jefferson County’s reputation is on the line. As a steward of taxpayers’ money, its future decisions have monumental consequences - and serve as a costly lesson for other municipalities to learn from.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.