June 17 (Bloomberg) -- JPMorgan Chase & Co., Morgan Keegan & Co. and 10 other banks, advisers and insurers were sued by a Jefferson County, Alabama, man who claims their work on county bond transactions saddled residents with soaring sewer bills.
The complaint, filed in Alabama court in Birmingham today by Charles Wilson, also alleges that seven current and former county commissioners breached their fiduciary duty. The suit seeks damages for the 146,000 sewer customers in Jefferson County, the most-populous county in Alabama, as well as the return of fees.
The ``commissioners, various investment banks, insurers and advisers have continuously failed to act in the best interests of the citizens of Jefferson County,'' according to the lawsuit.
Sewer bills for residents of Jefferson County, with a population of 659,000, have risen more than fourfold over the last 11 years as the county amassed $3.2 billion of debt to build a new sewer system. Almost all of the bonds carry adjustable interest rates and are tied to derivatives intended to protect the county from higher borrowing costs, a strategy that backfired this year and pushed the county to the brink of bankruptcy.
Morgan Keegan spokeswoman Gail Rimer had no immediate response, while JPMorgan spokesman Brian Marchiony said the bank hasn't seen the suit and declined to comment. Jeff Lloyd, a spokesman for Financial Guaranty Insurance Co., which is also named the lawsuit, said the company had yet to review the suit and declined to comment. Michael Gormley, a spokesman for XL Capital Assurance Inc., didn't immediately respond to a request for comment.
Officials Named
Commission President Bettye Fine Collins, one of the politicians named in the lawsuit along with Birmingham Mayor Larry Langford and former finance director Steve Sayler, said she had no opinion about the suit. ``It'll just have to be dealt with,'' she said.
Today's lawsuit is only the latest litigation surrounding Jefferson County's financings.
In April, the Securities and Exchange Commission sued Langford, the former commission president, for allegedly accepting undisclosed payments from the head of a regional underwriting firm that worked on some sewer deals. And bankers who worked for New York-based Bear Stearns Cos. and JPMorgan when the county bought its swaps have been told they might face criminal charges under an antitrust investigation of the municipal derivatives industry.
Gleaning Information
Kathryn Harrington, the Birmingham attorney with Hollis Wright & Harrington who filed the suit, said the lawsuit may allow her to glean new information about how much the deals have contributed to rising sewer rates.
``There's a lot that hasn't come to light,'' she said. ``The citizens feel that they haven't gotten the full story.''
The county's financial crisis began in February after FGIC and XL, which guarantee $2.8 billion of the county's sewer debt, suffered credit rating cuts because of losses on securities tied to subprime mortgages. That caused the investors to sell back the county's $850 million variable-rate bonds to banks that agreed to be buyers of last resort, and to shun about $2 billion of debt whose interest is determined by auctions. Rates on some of the county's debt increased to as high as 10 percent.
At the same time, interest-rate swaps the county bought from JPMorgan, Bear Stearns Cos., Bank of America and Lehman Brothers Holdings Inc. to shield it against rising borrowing costs stopped working. The floating rates it pays on its bonds have climbed while the variable rates banks pay the county under the agreements have declined, pushing expenses higher.
Downgrades to Junk
The surging debt costs led the credit-rating companies to cut the county's sewer bonds to below investment grade. That, in turn, triggered clauses in bond and derivative contracts that gave banks the right to force the county to terminate the swaps at a cost of $277 million and buy back $850 million of the floating-rate debt over four years.
Without restructuring its bonds, interest costs on Jefferson County's sewer debt may reach $250 million, nearly twice the $138 million the system produces in revenue, Jefferson County Commission President Collins estimated in March. Since April, the county has obtained agreements to postpone making payments to banks holding its unwanted bonds as it looks for a way to restructure its debts.
Insurers' Proposal
The insurance companies have suggested that the county levy a fee on those who use septic tanks instead of the sewer, which commissioners have rejected. The commission this month hired Merrill Lynch & Co. to advise it on how to revamp the bonds and avoid bankruptcy.
The lawsuit filed today alleges that Jefferson County's bond transactions have left customers responsible for a massive debt load.
``Through a long series of ill-conceived financial transactions, the sewer ratepayers of Jefferson County have been saddled with a debt of roughly $11,491 per residential sewer customer, which is the highest in the nation,'' the complaint says.
The case is Charles E. Wilson, v. JPMorgan Chase & Co., et. al Jefferson County Circuit Court (Alabama). The case number is 01-cv-2008-901907.00
To contact the reporters on this story: William Selway in San Francisco at wselway@bloomberg.net; Martin Z. Braun in New York at mbraun6@bloomberg.net.
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