Alabama group files suit over Jefferson County debt

BIRMINGHAM, Alabama (Reuters) - An Alabama activist group has filed a lawsuit seeking to cancel $6.6 billion in debt and related swaps issued by Jefferson County, claiming the county faces financial disaster because of misdeeds by Wall Street firms, corrupt local politicians and others.

The lawsuit, filed in Jefferson County Circuit Court under a state law that allows citizens to sue parties corrupting government, names as defendants several Wall Street banks and leading local politicians, including Birmingham Mayor Larry Langford.

Birmingham, Alabama's largest city, is located in Jefferson County.

"We intend to hold Wall Street accountable for its role in the county's auction-rate bond and swaps debacle," said James O'Neal, the lawyer who filed the suit. "The county has been victimized by unscrupulous investment bankers and faces an unprecedented financial crisis."

The banks named in the suit include JPMorgan Chase & Co. (JPM.N) and Goldman Sachs Capital Markets Inc (GS.N).

The lawsuit comes as creditors and county officials negotiate on a possible restructuring of $3.2 billion of Jefferson County debt obligations.

With the help of Alabama Gov. Bob Riley, creditors and county officials a week ago agreed to bargain further on a restructuring of the debt and backed away from a possible Chapter 9 municipal bankruptcy filing by Jefferson County.

Such a filing by Jefferson County would be the biggest by a U.S. local government since Orange County, California, filed for protection in December 1994.

The suit by the nonprofit Citizens for Sewer Accountability Inc and two Birmingham residents, Carnell Fowler and William Young, asks that the court invalidate Jefferson County's $2.2 billion in Series 2003B and C sewer auction-rate bonds, as well as $4.2 billion in related interest-rate swaps, according to the 47-page complaint.

The suit, filed on August 28, asks for unspecified damages.

The suit claims that Langford and others took payments in exchange for awarding the bonds and swaps businesses when Langford headed the county council.

The suit also names as defendants Alabama bond dealer William Blount, who was previously president of the Jefferson County Commission; his firm, Blount Parrish; lobbyist Albert LaPierre, and investment banker Charles LeCroy.

Regulators at the U.S. Securities and Exchange Commission also have sued Langford and others, saying that Langford took more than $156,000 for steering interest-rate swap agreements in 2003 and 2004 to Blount's firm.

Langford's attorney was not immediately available to comment on the activist group's suit but has in the past declined comment, other than to say the mayor was innocent and that the suits over the sewer debt were invalid.

The latest suit follows on one filed by other Jefferson County residents and seeks class-action status.

Also named as defendants in the suit are: Bear Stearns Capital Markets Inc, which has since been acquired by JPMorgan; Sterne, Agee & Leech Inc; Bank of America Corp (BAC.N), CDR Financial Services Inc, and bond insurers such as XL Capital Assurance (XL.N).

Jeff Sewell, county attorney for Jefferson County, declined to comment on the lawsuit.

JPMorgan is also under fire for another set of derivative agreements, so-called swaptions, it had with the school district of Erie, Pennsylvania.

According to a lawsuit filed on August 29 in the U.S. District Court of Western Pennsylvania, JPMorgan was part of a swap with the district during which the bank paid a fixed rate of interest to the schools and, in return, the district paid it a floating rate determined by London interbank offered rate.

But the school district alleges that the broker in the agreement lied about the amount of money JPMorgan stood to gain, made larger-than-anticipated fees, and acted in collusion with financial adviser Investment Management Advisory Group to convince the district to join a swaption that ultimately lost it large sums of money.

The school district is suing JPMorgan, along with IMAG and the brokers and advisors involved, for $1.1 million.

Both IMAG and JPMorgan are being investigated in a two-year federal probe into price-fixing for municipal derivatives.

A spokesman from JPMorgan was not immediately available for comment.

(Writing and additional reporting by Michael Connor in Miami; additional reporting by Lisa Lambert in Washington; Editing by Leslie Adler)