UPDATE 3-JPMorgan, SEC in $720 mln muni bond settlement
* Two former bankers also charged in Alabama case
* Jefferson County faces multibillion dollar debt
* JP Morgan is county's main creditor (Revises first paragraph, adds JP Morgan statement, details)
By Melinda Dickinson
BIRMINGHAM, Ala., Nov 4 (Reuters) - J.P. Morgan Securities Inc. (JPM.N) reached agreement for more than $720 million with the Securities and Exchange Commission to settle charges in an unlawful payment scheme in the sewer financing of Jefferson County, Alabama.
The bank will pay $75 million and forfeit more than $647 million it claimed in bond swap termination fees, the U.S. agency announced in Washington on Wednesday.
The settlement could have a big impact on the county's debt of around $4 billion, of which the bank was the largest creditor. The debt threatens to force the county into the biggest municipal bankruptcy in U.S. history.
The SEC said the bank would pay a penalty of $25 million and would pay $50 million to the county, which includes Birmingham, Alabama's largest city.
Jefferson County accumulated its debts earlier this decade through swap and other bond deals to finance improvements to its sewer system.
Swaps are derivatives that are intended to lower interest rate costs but can turn against the user if rates move higher unexpectedly. The debt spiraled in February 2008 when ratings agencies downgraded the county's bond insurers.
OUTSTANDING BONDS
The bank said it was pleased to have reached a settlement with the SEC, noting that the charges principally relate to municipal derivatives transactions that occurred six or seven years ago in a business now discontinued.
"The settlement does not impair any outstanding Jefferson County bonds, and J.P. Morgan continues to work to achieve a responsible restructuring of Jefferson County's financial affairs," it said in a statement.
The SEC also charged two former managing directors at JPMorgan Securities, Charles LeCroy and Douglas MacFaddin, with making more than $8 million in undisclosed payments to close friends of "certain" Jefferson County commissioners.
"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 said.
"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," it said.
The bankers, who have not settled with the SEC, made unlawful payments to win business and earn fees, Robert Khuzami, director of the SEC's enforcement division, said in a statement.
A county official welcomed the settlement.
"Jefferson County's situation is greatly enhanced and appears to be improving every minute," County Commission President Bettye Fine Collins told reporters.
Collins wrote to the SEC in March asking that Jefferson County be included in any action taken against JP Morgan and said Wednesday she was satisfied with the outcome.
Last week former Birmingham mayor Larry Langford was convicted on federal fraud and corruption charges involving bond swap transactions he made earlier this decade when president of the county commission.
The SEC previously charged Langford in a parallel case. (Additional reporting by Lisa Lambert in Washington and Michael Connor in Miami; writing by Matthew Bigg; Editing by Kenneth Barry)
