The Birmingham News, June 12, 2008 (Barnett Wright)
A Chicago lawyer specializing in investment fraud says he intends to take on the Wall Street financial houses that had a role in Jefferson County’s cash crisis, saying the bankers duped “unsophisticated” county officials into taking on investments that carried extreme risk.
Lawyer Andrew Stoltmann said he is working with about 50 investors holding Jefferson County bonds – ranging from institutional investors to retirees – who stand to lose a substantial amount on the bonds, which were issued to finance the county sewer program, which is now swamped in debt.
Those sewer bonds are in peril amid a growing financial crisis that could prompt the nation’s largest municipal bankruptcy.
The legal maneuvers stemming from the county’s financial emergency reflect a growing movement among investors taking aim at Wall Street bankers who sold local governments on complex, unregulated financial instruments such as interest rate swaps that have come crashing down amid the nationwide credit crunch, set off by the meltdown of subprime home loans.
“You’re beginning to see investors getting together because they don’t think there’s action by the U.S. Securities and Exchange Commission or the old National Association of Securities Dealers or anybody to help them out of these auction-rate securities,” said Christopher “Kit” Taylor, a former Municipal Securities Rulemaking Board director and now a financial consultant in Alexandria, Va. “Investors are getting very exercised and they are talking about suing right and left and center.”
`Pitched as ultra-safe’:
Stoltmann said investors in Jefferson County bonds could be looking at steep losses because of the sales practices of financial advisers and brokers at JPMorgan Chase & Co., Bank of America, Bear Stearns, Lehman Brothers and others that sold the sewer securities, Stoltmann said.
“These firms made misrepresentations and omissions,” he said Wednesday. “They didn’t disclose the full risks of these investments or they affirmatively misstated the risks. This was pitched as an ultra-safe, ultra-secure investment and in fact it wasn’t.”
Investors in auction-rate bonds around the country have seen access to their cash cut off since the market for the securities collapsed amid the credit crisis that emerged early this year. Jefferson County has about $2 billion in the securities.
Brian J. Marchioney, a spokesman for JPMorgan, declined comment. Efforts to reach spokesmen for Bank of America and Lehman Brothers were unsuccessful. Bear Stearns is now part of JPMorgan.
Jeffery Cohen, a Denver-based lawyer who advises municipalities on bankruptcy, said the argument against the brokerage firms may be difficult to prove.
“You may have a claim against the county,” he said. “The county issued the debt to the bondholder. Did the county do all the investigation it should have done? It had its professionals providing advice. It would seem the claim would go against the county and the county would in turn sue the investment banks.”
Stoltmann, who has brought similar cases against firms Merrill Lynch, Smith Barney, Morgan Stanley, Wachovia and Prudential Securities, said the county had exposure to swaps that were higher than some hedge funds.
Look at Houston:
“The bankers saw an easy target for their high-commissioned swaps in the unsophisticated members of the Jefferson County, Alabama, board,” he said.
The swaps are agreements to exchange one type of interest payment for another on an agreed-upon amount of debt, or a bond in Jefferson County’s case.
Jefferson County, with a population of more than 656,000, had 18 interest-rate swaps with an underlying value of more than $5.7 billion, Stoltmann said. “To grasp the massive scope of the county’s exposure, consider that the city of Houston with a population of 2 million has two swaps with a total value of $850 million,” he said.
Jefferson County owes swap counterparties $200 million, including half to JPMorgan.
Stoltmann said he doesn’t buy the argument that the county had legal and financial expertise at the time of the transactions to avoid the crisis.
“Some really smart people, some really financially sophisticated people have been swindled out of life savings and huge sums of money,” hesaid. “And even at the very, very sophisticated high levels these people still rely on their brokerage firms to give them honest, ethical straightforward advice.”
Stoltmann is not the only one talking legal action against Wall Street firms. Jefferson County Commissioner Shelia Smoot this week said the county should consider legal action against the banks that profited from the county’s money-losing swap transactions.
“They knew the risk and they didn’t share it,” she said.