- Securities & Commodities

- Fraud
- Working Group
- Meeting
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April 12, 2010
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- Materials
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Hosted by:
- u.s. Securities and Exchange
_. Commission

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- Agenda
TABLE OF CONTENTS

Tab 1

- Panel I: Cooperation Tools: Possible Impact of SEC's New Cooperation Initiative

- SEC's January 13,2010 Press Release Announcing New

Cooperation Initiative " . '" Tab 2

- SEC Enforcement Manual Materials on Cooperation Tab 3

- SEC Templates Related to Cooperation Agreements Tab 4

- Panel II: Structured Products and Derivatives: Current Issues and Priorities

SEC's Press Release and Complaint against Former Countrywide

- Executives for Fraud and Insider Trading Tab 5

SEC's Press Release and Proceeding against State Street Bank:

- & Trust Company for Fraud Tab 6

- ISDA Credit Default Swaps, 2005-March 3, 2010

Panel III: Municipal Securities and Pay-to-Play Schemes: Emerging Trends

.Tab 7

- in a Growing Area of Enforcement Concern

Indictment, Complaint, and Press and Litigation Releases

- Relating to United States v. Langford, CV-08-B-0761-S

(N.D. Ala.) Tab 8

- Administrative Proceeding, Complaint, Press and Litigation

Releases Relating to Securities and Exchange Commission v.
- LeCroy and MacFaddin, CV-09-U/B-2238-S (N.D. Ala.) Tab 9

- Administrative Proceeding and DOJ Press Release Relating to

Securities and Exchange Commission v. Robert J. Bradbury, et al.
2:06-CV-3435 Tab 10
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Panel IV: Investigating Sophisticated Trading Platforms and Strategies
- Litigation Releases for Securities and Exchange

Commission v. Nico Achilleas Stephanou, Ramesh Chakrapani, et al.

- 09 CV 1043 (S.D.N.Y.) involving an insider

trading ring Tab 11

- Litigation Release for Securities and Exchange Commission

v. Khaled Mohammed SharifAl Sayed Al Hashemi
- a.k.a. Khaled Al Hashemi, 09-CV-6650 Tab 12

- Litigation Releases for Securities and Exchange Commission

v. Igor Poteroba, et al., 10-CIV-2667 Tab 13

- Litigation Releases for u.s. v. George Georgiou, Criminal Action

No. 09-88 (E.D. Pa.) and SEC v. George Georgiou, Civil Action

- No. 09-CV-616 (E.D. Pa.)related to a Market Manipulation Scheme..Tab 14

Litigation Releases for Securities and Exchange Commission

v. Oleksandr Dorozhko, et al.,
Civil Action No. 07 CIV-9606 (S.D.N.Y.) : Tab 15

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- Financial Fraud Enforcement Task Force
Securities & Commodities Fraud Working Group

Agenda for April 12, 2010 Meeting

Securities and Exchange Commission

- 100 F Street, NE, Washington, DC

Proposed Schedule

- 9:00am

9: 15-10:00
Welcome and Introductory Remarks (Chairman Schapiro, Rob Khuzami)

Panel I

10:00-10: 15 Break

10:15-11:00 PanelII

]] :00-11:15 Break

II: 15-12:00 Panel III

12:00-12:45 Panel IV
- 12:45-1 :30 Working Lunch: Working Group Planning/Process Issues

- 1:30-1 :45

1:45
Closing remarks

Adjourn

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Panel I. Cooperation Tools: Possible Impact of SEC's New Initiative on

Cooperation

- Moderator:

Panelists:
Rob Khuzami, Director ofEnforcement, SEC

Lanny Breuer, Assistant Attorney General, DOl

- Preet Bharara. Us. Attorney, SDNY

Denis McInerney, Chief, Fraud Section, DOl
Stephen Obie, Acting Director, CFTC

- Lorin Reisner, Deputy Director ofEnforcement, SEC

Kevin Perkins, Assistant Director, Criminal Investigative Division,
FBI

- Earlier this year, the SEC announced a series of measures to strengthen its
enforcement program by encouraging greater cooperation from individuals and entities in
the agency's investigations and enforcement actions. The new tools (including
- cooperation agreements, deferred prosecution agreements and non-prosecution
agreements) are similar to cooperation tools that have been used successfully by the
Department of Justice for many years. This panel will provide an overview of the SEC
- cooperation initiative and a discussion of how the new program may impact coordinated
investigations. It also will provide an opportunity to learn from the varied experiences of
criminal prosecutors with cooperators and potential cooperators. Issues to be covered

- include: (I) sharing information developed by SEC cooperators/potential cooperators

with DOJ and other agencies; .(2) raising criminal exposure concerns expressed by
potential SEC cooperators with criminal investigators and prosecutors; (3) the potential

- for parallel cooperation agreements; (4) standards for determining whether a cooperator
has provided "substantial assistance" in connection with an investigation or
prosecution/enforcement proceedings; (5) strategies for developing and using information

- from cooperators.

- Panel II. Structured Products and Derivatives: Current Issues and Priorities

Moderator: Ken Lench, ChiefofStn/ctured and New Products Unit, SEC

Enforcement Division
- Panelists: Dan Berkovitz, CFTC General Counsel

- Adam Glass, Co-ChiefCounsel, Division ofRisk, Strategy and

Financial Innovation, SEC
Reid Muoio, Deputy ChiefofStroctured and New Products Unit,

- SEC Enforcement Division

Bonnie Jonas. Senior Litigation Counsel, Securities Fraud Unit,
US. Attorney's Office. SDNY

Structured products and derivatives are an area of intense public focus in the wake
of the financial crisis and recent events involving international sovereign financial

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- transactions. Pending legislation would expand opportunities for regulation by the SEC
and CFTe. This panel will discuss law enforcement opportunities involving complex
derivatives and financial products, including collateralized debt obligations, credit default

- swaps and securitized products.

- Panel III. Municipal Securities and Pay-to-Play Schemes: Emerging Trends in a

Growing Area of Enforcement Concern

Moderator: Elaine Greenberg, ChiefofMunicipal Securities and Public

- Pension Unit, SEC Enforcement Division

- Panelists: Glenn Gordon, Associate Directorfor Enforcement, SEC Miami

Regional Qlfice
George Martin, Assistant United States Attorney, Northern District
ofAlabama
- Fraud involving municipal securities and public pension funds is a growing area of
enforcement concern due to the size of the market, the complexity of the products, the

- number of retail investors, increasing market stresses and the opportunities for
corruption. There are currently approximately $2.8 trillion of municipal bonds
outstanding and more than $409 billion of new bonds were issued in 2009, the second­

- highest annual volume on record. The market is critical to the nation's infrastructure­
the majority of our environmental, educational, transportation and health-care facilities
have been financed with municipal bonds issued by more than 50,000 state and local

- entities. Public pension funds present similar concerns, with assets totaling about $2
trillion. This panel will focus on recent cases involving municipal securities and public
pension fraud. Panelists will also discuss market activities that present potential law

- enforcement priorities including offering and disclosure fraud, valuation issues,

disclosure of unfundedlunder-funded liabilities and pay-to-play and public corruption
violations.

- Panel IV. Investigating Sophisticated Trading Platforms and Strategies

- Moderator: Dan Hawke, ChiefofMarket Abuse Unit, SEC Enforcement

Division.

- Panelists: Reed Brodsky, Assistant United States Attorney, Securities Fraud

Unit, SDNY
David Nallz, Chit;f, Economic Crimes Unit. FBI
- Dan Gray, Senior Special Counsel, Division ofTrading and
Markets, SEC

- This focus of this panel will be large-scale market abuses and complex
manipulation schemes by institutional traders, market professionals and others. The

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- panel will discuss recent law enforcement actions charging insider trading and market
manipulation. In addition, the panel will address current trends and challenges involving
sophisticated trading activities occurring across different trading platfonns, including

- alternative trading systems, and different markets (equity, debt and derivatives).

Working Lunch: Working Group PlanninglProcess Issues

- Participants: Lanny Breuer, Assistant Attorney General, DOl
Preet Bharara. u.s. Attorney, SDNY
- Rob Khuzami, Director ofEnforcement, SEC
Stephen Obie, Acting Director, CFTC

- Robb Adkins, Executive Director ofthe Financial Fraud

Enforcement Task Force, DOl

- Topics to Discuss:
a.
b.
c.
Structure of SCFWG
Coordination and Infonnation Sharing
Training and Outreach
- d.
e.
Future SCFWG Meetings
National conferencellistening sessions

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- Press Release: SEC Announces Initiative to Encourage Individuals and Companies to Co... Page 1 of 3

- Home I PrevIous Page

- .S. Securities and Exc hange Commissio

SEC Announces Initiative to Encourage Individuals and

Companies to Cooperate and Assist in Investigations
- FOR IMMEDIATE RELEASE
2010-6

Washington, D.C., Jan. 13, 2010 - The

Securities and Exchange Commission today Video: News

announced a series of measures to further Conference

strengthen its enforcement program by

encouraging greater cooperation from
individuals and companies in the agency's
investigations and enforcement actions.

The new initiative establishes incentives for

individuals and companies to fully and
truthfully cooperate and assist with SEC
investigations and enforcement actions, and SEC Enforcement

- prOVides new tools to help investigators

develop first-hand evidence to build the
strongest possible cases. The cooperation
Director Robert Khuzami
announces Enforcement
Cooperation Initiative

-
initiative is expected to result in invaluable Windows Media Player
and early assistance in identifying the
scope, participants, victims and ill-gotten
gains associated with fraudulent schemes.

-
Additional Materials

- )0 Spotlight on Enforcement Cooperation Initiative

- "This is a potential game-changer for the Division of Enforcement," said

Robert Khuzami, Director of the Division of Enforcement. "There is no
substitute for the insiders' view into fraud and misconduct that only
- cooperating witnesses can provide. That type of evidence can expand our
ability to conduct our investigations more SWiftly, and to act qUickly to file
charges, freeze assets, and protect investors."

- To improve the quality, quantity, and timeliness of information and

assistance it receives, the SEC approved the folloWing measures:

- First, the Division of Enforcement is authorizing its staff to use various tools
to encourage individuals and companies to report violations and provide

-
assistance to the agency. The new tools are laid out in a revised version of
the Division's enforcement manual in a new section entitled "Fostering
Cooperation." For many years, similar cooperation tools have been

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http://www.sec.gov/news/press/2010/2010-6.htm 4/9/2010
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Press Release: SEC Announces Initiative to Encourage Individuals and Companies to Co... Page 2 of 3

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regularly and successfully used by the Justice Department in its criminal
investigations and prosecutions. The new cooperation tools, not previously

- available in SEC enforcement matters, include:

• Cooperation Agreements - Formal written agreements in which the

- Enforcement Division agrees to recommend to the Commission that a

cooperator- receive credit for cooperating in investigations or related
enforcement actions if the cooperator prOVides substantial assistance
such as full and truthful information and testimony.

• Deferred Prosecution Agreements - Formal written agreements in

which the Commission agrees to forego an enforcement action

- against a cooperator if the individual or company agrees, among

other things, to cooperate fully and truthfully and to comply with

express prohibitions and undertakings during a period of deferred

prosecution.

• Non-prosecution Agreements - Formal written agreements, entered

- into under limited and appropriate circumstances, in which the

Commission agrees not to pursue an enforcement action against a
cooperator if the individual or company agrees, among other things,

to cooperate fully and truthfully and comply with express

-
undertakings.

Second, the SEC streamlined the process for submitting witness immunity

- requests to the Justice Department for witnesses who have the capacity to

assist in its investigations and related enfol-cernent actions.

- Third, the Commission has set out, for trle first time, the way in which it
will evaluate whether, how much, and in what manner to credit cooperation
by individuals to ensure that potential cooperation arrangements maximize
the Commission's law enforcement interests. This pronouncement is

- expected to prOVide gUidance and serve as an incentive for individuals to

report violations and to cooperate fUlly and promptly in enforcement cases.
It ;s similar to the so-called "Seaboard Report" that was issued in 2001 and

- detailed the factors the SEC considers when evaluating cooperation by

companies.

- In the newly issued policy statement,

considerations:
U1C SEC identifies four general

• The assistance provided by the cooperating individual.

- • The importance of the underlying mattei- in which the individual

coope,-ated.
• The societal interest in ensuring the Individual is held accountable for

- tlis or tier- misconduct.

• The appropnateness of COOpNCltion credit based upon the risk profile
of the coopETating individual.

- I-he developments announced today are the latest in a series of initiatives

that are part of the most significant reorganization of the Enforcement
Division in more than 30 years. These reforms include vastly expanding

- staff tl-aining programs, hiring staff with new skifi sets, streamlining
management, adding more experienced investigators to the front lines,

- http://www.sec.gov/news/press/2010/2010-6.htm 4/9/2010
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Press Release: SEC Announces Initiative to Encourage Individuals and Companies to Co... Page 3 of 3

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revising internal enforcement procedures, restructuring processes to ensure
better sharing of information, leveraging the knowledge of third parties,
and revamping the way tips are handled.

- ###

- For more information, contact:

Robert S. Khuzami - Director of the Division of Enforcement ­ (202) 551­

4500

Lorin L. Reisner - Deputy Director of the Division of Enforcement - (202)

- 551-4500

Jordan A. Thomas - Assistant Chief Litigation Counsel - (202) 551-4475

- http://www.sec.gov/news/press/2010/2010-6.htm

Home I Previous Page Modified: 01/13/2010

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- http://www.sec.gov/news/press/2010/2010-6.htm 4/9/2010
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- 6. Fostering Cooperation

The staff should carefully consider the use of cooperation by individuals and

- companies to advance its investigations and related enforcement actions.

6.1. Initial Considerations

- 6.1.1. Framework for Evaluating Cooperation by Individuals

- 17 CFR § 202.12 Policy Statement of the Securities and Exchange Commission

Concerning Cooperation by Individuals in its Investigations and Related

Enforcement Actions.

- Cooperation by individuals and entities in the Commission's investigations and

related enforcement actions can contribute significantly to the success of the agency's
- mission. Cooperation can enhance the Commission's ability to detect violations of the
federal securities laws, increase the effectiveness and efficiency of the Commission's
investigations, and provide important evidence for the Commission's enforcement

- actions. There is a wide spectrum of tools available to the Commission and its staff for
facilitating and rewarding cooperation by individuals, ranging from taking no
enforcement action to pursuing reduced charges and sanctions in connection with

- enforcement actions. As with any cooperation program, there exists some tension
between the objectives of holding individuals fully accountable for their misconduct and
providing incentives for individuals to cooperate with law enforcement authorities. This
policy statement sets forth the analytical framework employed by the Commission and its
- staff for resolving this tension in a manner that ensures that potential cooperation
arrangements maximize the Commission's law enforcement interests. Although the

- evaluation of cooperation requires a case-by-case analysis ofthe specific circumstances

presented, as described in greater detail below, the Commission's general approach is to
determine whether, how much, and in what manner to credit cooperation by individuals
by evaluating four considerations: the assistance provided by the cooperating individual
- in the Commission's investigation or related enforcement actions ("Investigation"); the
importance of the underlying matter in which the individual cooperated; the societal
interest in ensuring that the cooperating individual is held accountable for his or her
- misconduct; and the appropriateness of cooperation credit based upon the profile of the
cooperating individual. In the end, the goal ofthe Commission's analysis is to protect the
investing public by determining whether the public interest in facilitating and rewarding

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- an individual's cooperation in order to advance the Commission's law enforcement

interests justifies the credit awarded to the individual for his or her cooperation.

- (a) Assistance provided by the individual. The Commission assesses the

assistance provided by the cooperating individual in the Investigation by
considering, among other things:

- (I) The value of the individual's cooperation to the Investigation

including, but not limited to:

- (i) Whether the individual's cooperation resulted in substantial

assistance to the Investigation;

- (ii) The timeliness of the individual's cooperation, including

whether the individual was first to report the misconduct to
the Commission or to offer his or her cooperation in the
- Investigation, and whether the cooperation was provided
before he or she had any knowledge of a pending
investigation or related action;

- (iii) Whether the Investigation was initiated based on

information or other cooperation provided by the

- (iv)
individual;

The quality of cooperation provided by the individual,

- including whether the cooperation was truthful, complete,

and reliable; and

(v) The time and resources conserved as a result of the

- individual's cooperation in the Investigation.

(2) The nature of the individual's cooperation in the Investigation

- including, but not limited to:

(i) Whether the individual's cooperation was voluntary or

- required by the terms of an agreement with another law
enforcement or regulatory organization;

- (ii) The types of assistance the individual provided to the

Commission;

- (ii) Whether the individual provided non-privileged

information, which information was not requested by the
staff or otherwise might not have been discovered;

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 (iv) Whether the individual encouraged or authorized others to

assist the staff who might not have otherwise participated
in the Investigation; and

- (v) Any unique circumstances in which the individual provided

the cooperation.

(b) Importance of the underlying matter. The Commission assesses the

importance of the Investigation in which the individual cooperated by
considering, among other things:
- (I) The character of the Investigation including, but not limited to:

(i) Whether the subject matter of the Investigation is a

Commission priority;

-
(ii) The type of securities violations;

(iii) The age and duration of the misconduct;

(iv) The number of violations; and

- (v) The isolated or repetitive nature of the violations.

(2) The dangers to investors or others presented by the underlying

- violations involved in the Investigation including, but not limited

to:

.. (i) The amount of harm or potential harm caused by the

underlying violations;

(ii) The type of harm resulting from or threatened by the

underlying violations; and

- (c)
(iii) The number of individuals or entities harmed. g

Interest in holding the individual accountable. The Commission assesses

the societal interest in holding the cooperating individual fully accountable
for his or her misconduct by considering, among other things:

(1) The severity of the individual's misconduct assessed by the nature

of the violations and in the context of the individual's knowledge,

- g Cooperation in Investigations that involve priority matters or serious, ongoing, or

widespread violations will be viewed most favorably.

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education, training, experience, and position of responsibility at the

time the violations occurred;

- (2) The culpability of the individual, including, but not limited to,
whether the individual acted with scienter, both generally and in

relation to others who participated in the misconduct;

- (3) The degree to which the individual tolerated illegal activity

including, but not limited to, whether he or she took steps to

- prevent the violations from occurring or continuing, such as

notifying the Commission or other appropriate law enforcement

agency of the misconduct or, in the case of a violation involving a

- business organization, by notifying members of management not

involved in the misconduct, the board of directors or the equivalent
body not involved in the misconduct, or the auditors of such
business organization of the misconduct;

(4) The efforts undertaken by the individual to remediate the harm

caused by the violations including, but not limited to, whether he
or she paid or agreed to pay disgorgement to injured investors and
other victims or assisted these victims and the authorities in the
recovery of the fruits and instrumentalities of the violations; and

(5) The sanctions imposed on the individual by other federal or state

authorities and industry organizations for the violations involved in
the Investigation.

(d) Profile of the individual. The Commission assesses whether, how much,

- and in what manner it is in the public interest to award credit for

cooperation, in part, based upon the cooperating individual's personal and
professional profile by considering, among other things:

- (I) The individual's history oflawfulness, including complying with

securities laws or regulations;

- (2) The degree to which the individual has demonstrated an

acceptance of responsibility for his or her past misconduct; and

- (3) The degree to which the individual will have an opportunity to

commit future violations of the federal securities laws in light of

- his or her occupation -- including, but not limited to, whether he

or she serves as: a licensed individual, such as an attorney or
accountant; an associated person of a regulated entity, such as a
broker or dealer; a fiduciary for other individuals or entities
- regarding financial matters; an officer or director of public
companies; or a member of senior management -- together with

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126

any existing or proposed safeguards based upon the individual's

particular circumstances.

- Note to § 202.12. Before the Commission evaluates an individual's cooperation,

it analyzes the unique facts and circumstances of the case. The above principles are not
listed in order of importance nor are they intended to be all-inclusive or to require a

.- specific detennination in any particular case. Furthermore, depending upon the facts and
circumstances of each case, some of the principles may not be applicable or may deserve
greater weight than others. Finally, neither this statement, nor the principles set forth

- herein creates or recognizes any legally enforceable rights for any person.

6.1.2. Framework for Evaluating Cooperation by Companies

- In October 2001, the Commission issued a Report of Investigation and Statement

explaining its decision not to take enforcement action against a public company it had
investigated for financial statement irregularities. Report ofInvestigation Pursuant to
- Section 2i(a) ofthe Securities Exchange Act of 1934 and Commission Statement on the
Relationship of Cooperation to Agency Enforcement Decisions, SEC ReI. Nos. 34-44969
and AAER-1470 (Oct. 23, 2001) (http://l-111.llw.sec.gov/litigation/investreport/34­
44969.htm.) In this report, commonly referred to as the Seaboard Report, the
Commission articulated an analytical framework for evaluating cooperation by
companies. The report detailed the many factors the Commission considers in

- detennining whether, and to what extent, it grants leniency to investigated companies for
cooperating in its investigations and for related good corporate citizenship. Specifically,
the report identifies four broad measures of a company's cooperation:

- • Self-policing prior to the discovery of the misconduct, including

establishing effective compliance procedures and an appropriate tone at

- •
the top;

Self-reporting of misconduct when it is discovered, including conducting a

- thorough review of the nature, extent, origins and consequences of the

misconduct, and promptly, completely and effectively disclosing the
misconduct to the public, to regulatory agencies, and to self-regulatory

- •
organizations;

Remediation, including dismissing or appropriately disciplining

- wrongdoers, modifying and improving internal controls and procedures to

prevent recurrence of the misconduct, and appropriately compensating
those adversely affected; and

- • Cooperation with law enforcement authorities, including providing the

Commission staff with all information relevant to the underlying

-
violations and the company's remedial efforts.

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- Since every enforcement matter is different, this analytical framework sets forth
general principles but does not limit the Commission's broad discretion to evaluate every
case individually, on its own unique facts and circumstances. Similar to the

- Commission's treatment of cooperating individuals, credit for cooperation by companies

may range from taking no enforcement action to pursuing reduced charges and sanctions
in connection with enforcement actions. For greater detail regarding the analytical
framework used by the Commission to evaluate cooperation by companies, the staff
- should review the Seaboard Report (http:IA"wlv.sec.govllitigationlinvestreportI34­
44969.htm.).

- 6.2. Cooperation Tools

There is a wide spectrum of tools available to the staff for facilitating and
- rewarding cooperation in its investigations and related enforcement actions. A non­
exclusive list of cooperation tools appears below. Since every enforcement matter is
unique, the appropriate use of a cooperation tool invariably depends upon a careful
analysis of the facts and circumstances of each case. In some cases, multiple cooperation
tools may be appropriate.

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6.2.1. 6.2.2. 6.2.3. 6.2.4. 6.2.5.

- 6.2.1. Proffer Agreements

- Introduction:

- Proffers by attorneys and cooperating individuals are an important vehicle used

by the staff to assess the probable value of cooperation by individuals and companies and
for those individuals and companies to initiate discussions regarding the benefits that may

- be available if they cooperate. Proffer agreements are regularly used by the staff to
facilitate proffer sessions.

- Basics:

A proffer agreement is a written agreement providing that any statements made by

- a person, on a specific date, may not be used against that individual in subsequent
proceedings, except that the Commission may use statements made during the proffer
session as a source of leads to discover additional evidence and for impeachment or

- 128

- rebuttal purposes if the person testifies or argues inconsistently in a subsequent

proceeding. The Commission also may share the information provided by the proffering
individual with appropriate authorities in a prosecution for petjury, making a false

- statement or obstruction ofjustice.

Procedures:

- Proffer agreements must be signed by a supervisor at or above the level of

Assistant Director.

- Considerations:

- • In most cases, the staff should require a potential cooperating indi vidual to make a
detailed proffer before selecting and utilizing other cooperation tools.

• The Commission may use information provided at a proffer session to advance its
- investigation or to generate leads to new evidence that the staff might not
otherwise have discovered.

- • To avoid potential misunderstandings regarding the nature of proffer sessions,

with few exceptions, proffer sessions should be conducted pursuant to written
proffer agreements.
- • The staff uses a standard proffer agreement. Modifications to the standard
agreement should not be made without first consulting with staff in the Office of

- Chief Counsel or the Chief Litigation Counsel.

• If the staff conducts a joint proffer session with criminal authorities, the

- staff should address any potential substantive or procedural issues with his or her
supervisors, as well as the Assistant United States Attorney or state prosecutor on
the case, before the proffer begins. In cases where the staff participates in a

- proffer with the criminal authorities and the cooperating individual has not asked
for a proffer letter from the Commission, the staff should remind the individual
that the proffer agreement with the criminal authorities does not apply to the

- Commission.

Related Tool:

- • Oral Assurances-Where the available evidence indicates that an individual or

company has not violated the federal securities laws such as to warrant an

- enforcement action, Assistant Directors, with the approval of a supervisor at or

above the level of Associate Director, may orally inform the individual or
company that the Division does not anticipate recommending an enforcement

- action against the individual or company based upon the evidence currently
known to the staff.

- 129

-
- o Oral assurances are only authorized when the investigative record is
adequately developed. Accordingly, prior to providing an oral assurance,
the staff should preferably receive proffers from the potential cooperating

- individuals and companies or have sufficient information regarding the

potential cooperators' conduct and their ability to provide substantial
assistance to the Commission's investigations or related enforcement

- actions.

o Whenever oral assurances are provided, the staff should clearly inform the

- potential cooperating individual or company that oral assurances are based

upon the evidence currently known to the staff, the Division's
enforcement recommendations may change if new evidence is

- subsequently discovered and that the Commission has final authority to

accept or reject enforcement recommendations.

o After an oral assurance has been provided, the staff should

- contemporaneously prepare and retain a brief memorandum to file
summarizing the assurance provided.

- Basics:
6.2.2. Cooperation Agreements

- A cooperation agreement is a written agreement between the Division of

Enforcement and a potential cooperating individual or company prepared to provide

- substantial assistance to the Commission's investigation and related enforcement actions.

Specifically, in a cooperation agreement, the Division agrees to recommend to the
Commission that the individual or company receive credit for cooperating in its

- investigation and related enforcement actions and, under certain circumstances, to make
specific enforcement recommendations if, among other things: 1) the Division concludes
that the individual or company has provided or is likely to provide substantial assistance

- to the Commission; 2) the individual or company agrees to cooperate truthfully and fully
in the Commission's investigation and related enforcement actions and waive the
applicable statute of limitations; and 3) the individual or company satisfies his/her/its

- obligations under the agreement. If the agreement is violated, the staff may recommend
an enforcement action to the Commission against the individual or company without any
limitation.

- Procedures:

- • Prior to seeking authority to enter into cooperation agreements, the staff should
preferably receive proffers from the potential cooperating individuals and
companies or have sufficient information regarding their ability to provide
substantial assistance to the Commission's investigations or related enforcement
-
actions.

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-
- • The Director and those senior officers designated by the Director have the

authority to enter into cooperation agreements on behalf of the Division.

- • The staff should prepare a contemporaneous memorandum to the file

documenting the basis for entering into the cooperation agreement. This
memorandum, along with a copy of the executed agreement, should be

- maintained by the senior officer who executed the agreement.

Considerations:

- • In addition to the standard cooperation analysis set forth in Section 6.1 of the
Manual, when assessing whether to recommend that the Division enter into a

- cooperation agreement with an individual or company, the staff should consider:

o whether other means of obtaining the desired cooperation are available

and likely to be timely and effective; and
- o whether the individual or company has entered into or is likely to enter
into a plea agreement with criminal prosecutors that will require the
- individual or company to cooperate in the Commission's investigation and
related enforcement actions.

- • The staff should advise potential cooperating individuals or companies that

cooperation agreements entered into with the Division do not bind the
Commission and that the Division cannot, and does not, make any promise or
- representation as to whether or how the Commission may act on enforcement
recommendations made by the Division.

- • Cooperation agreements should generally include the following terms:

o the cooperating individual or company agrees to cooperate truthfully and

- fully, as directed by the Division's staff, in investigations and related

enforcement proceedings including, but not limited to, producing all
potentially relevant non-privileged documents and materials to the

- Commission, responding to all inquiries, appearing for interviews, and

testifying at trials and other judicial proceedings as requested by the staff,

and waiving the territorial limits on service contained in Rule 45 of the

- Federal Rules of Civil Procedure;

o the cooperating individual or company agrees to waive the applicable

statute oflimitations period;

- o the cooperating individual or company agrees not to violate the securities

laws;

- o the cooperating individual or company acknowledges that the agreement

does not constitute a final disposition of any potential enforcement action;

- 131

-
- o the Division will bring the assistance provided by the cooperating

individual or company to the attention of the Commission and other

- regulatory and law enforcement authorities requested by the cooperating

individual or company; and

- o the cooperating individual or company acknowledges that, although the

Division has discretion to make enforcement recommendations, only the
Commission has the authority to approve enforcement dispositions and

- accept settlement offers.

• If the Division agrees to make a specific enforcement recommendation to the

- Commission, the staff should consider the settlement terms of other similar cases
to identify prior precedent involving similar alleged misconduct and include the
following terms in the cooperation agreement:

- o the federal securities laws alleged to have been violated;

o the cooperating individual or company agrees to resolve the matter

without admitting or denying the alleged violations;

o the specific enforcement recommendation the Division expects to make if

- the cooperating individual or company satisfies the terms of the

agreement; and

- o any agreement to make a specific enforcement recommendation to the

Commission shall be conditioned upon the Division's assessment that the
cooperating individual or company has rendered substantial assistance in a

- •
Commission investigation or related enforcement action.

The Division uses a standard form of cooperation agreement to be adapted to the

- specific circumstances of the investigation or related enforcement action.

Related Tools:

- • Settlement Recommendations-Even in the absence of a cooperation agreement,

the staff may take into account an individual or company's cooperation in

- connection with recommending sanctions or charges associated with the alleged

misconduct and, under certain circumstances, forgoing enforcement actions
against a cooperating individual or company.

- o To determine whether, how much, and in what manner to recommend

cooperation credit, the staff should consider the settlement terms of other

-
similar cases to identify prior precedent involving similar alleged
misconduct and apply the factors outlined in Section 6.1 of the Manual.

-
132

 -
-
- o Where cooperation credit is being recommended to or has been authorized
by the Commission in settlements, the staff should include standard
language relating to cooperation in the related Offers or Consents, unless

- such disclosure would not advance the goals of the Commission's

cooperation program or would adversely affect related ongoing
investigations or proceedings. Modifications to this standard language

- should not be made without first consulting with staff in the Office of
Chief Counselor the Chief Litigation Counsel.

o Where cooperation language is included in settlement papers, the staff

generally should include a reference to the individual or company's
cooperation in the Commission's related litigation and/or press releases.

- • Cooperation Letters-Upon the written request of cooperating individuals and

companies, supervisors at or above the level of Associate Director may submit
letters describing the fact, manner and extent of assistance provided by such
- cooperating individuals and companies to the attention of courts, regulatory
organizations, or law enforcement authorities. Requests for cooperation letters
and copies of the letters sent by Commission staff should be retained by the senior
-
officers who sign them.

Further infonnation:

- • For assistance in drafting cooperation agreements, please consult with staff in the
Office of the Chief Counsel or the Chief Litigation Counsel.

- 6.2.3. Deferred Prosecution Agreements

- A deferred prosecution agreement is a written agreement between the

- Commission and a potential cooperating individual or company in which the Commission

agrees to forego an enforcement action against the individual or company if the
individual or company agrees to, among other things: 1) cooperate truthfully and fully in

-
oJ
the Commission's investigation and related enforcement actions; 2) enter into a long-tenn
tolling agreement; 3) comply with express prohibitions and/or undertakings during a
period of deferred prosecution; and 4) under certain circumstances, agree either to admit

- or not to contest underlying facts that the Commission could assert to establish a violation
of the federal securities laws. If the agreement is violated during the period of deferred
prosecution, the staff may recommend an enforcement action to the Commission against

- the individual or company without limitation for the original misconduct as well as any
additional misconduct. Furthennore, if the Commission authorizes the enforcement
action, the staff may use any factual admissions made by the cooperating individual or

company to file a motion for summary judgment, while maintaining the ability to bring
an enforcement action for any additional misconduct at a later date.

-
133

-
-
-
Procedures:

• Prior to seeking authority to enter into a deferred prosecution agreement, the staff

- should receive proffers from the cooperating individual and/or company.

• Deferred prosecution agreements must be approved by the Commission.

- • Unless the Commission directs otherwise, deferred prosecution agreements will

be made available to the public upon request.

- Considerations:

- • To determine whether to recommend that the Commission enter into a deferred

prosecution agreement, the staff should use the standard cooperation analysis set
forth in Section 6.1 of the Manual.

• An admission or an agreement not to contest the relevant facts underlying the

alleged offenses generally is appropriate and should be carefully considered for

- the following:

o licensed individuals, such as attorneys and accountants;

- o regulated individuals, such as registered brokers or dealers;

- o fiduciaries for other individuals or entities regarding financial matters;

o officers and directors of public companies; and

- o individuals or companies with a prior history of violating the securities

laws.

- • A deferred prosecution agreement should generally include the following terms:

o the cooperating individual or company agrees to cooperate truthfully and

- fully, as directed by the Division's staff, in investigations and related

enforcement proceedings including, but not limited to, producing all
potentially relevant non-privileged documents and materials to the

- Commission, responding to all inquiries, appearing for interviews, and

testifying at trials and other judicial proceedings as requested by the staff,

and waiving the territorial limits on service contained in Rule 45 of the

-
Federal Rules of Civil Procedure;

o the cooperating individual or company agrees to toll the applicable statute

-
of limitations period;

- 134

 -
-
- o the cooperating individual or company agrees not to violate the securities
laws;

- o the cooperating individual or company shall make any agreed upon

disgorgement or penalty payments;

- o if the cooperating individual or company satisfies the terms of the deferred

prosecution agreement during the term of the agreement, the Commission
will not pursue any further enforcement action concerning the matter
.',­ referenced in the agreement;

o if the individual or company violates the agreement during its term, the

- Division may recommend and the Commission may pursue an

enforcement action against the individual or company without limitation;

o the cooperating individual or company agrees that the Commission may

- use statements, information, and materials provided pursuant to the

agreement against him/her/it if the individual or company violates the

terms of the agreement; and

- o additional prohibitions and undertakings designed to protect the investing

public.
- • The term of a deferred prosecution agreement should not exceed five years. In

- determining the appropriate term, the staff should consider whether there is
sufficient time to ensure that the undertakings in the agreement are fully
implemented and the related prohibitions have adequately reduced the likelihood
of future securities law violations.

- Further information:

- • For assistance in drafting deferred prosecution agreements, please consult with

the staff in the Office of the Chief Counsel or the Chief Litigation Counsel.

- Basics:
6.2.4. Non-Prosecution Agreements

- A non-prosecution agreement is a written agreement between the Commission

and a potential cooperating individual or company, entered in limited and appropriate

- circumstances, that provides that the Commission will not pursue an enforcement action
against the individual or company if the individual or company agrees to, among other
things: I) cooperate truthfully and fully in the Commission's investigation and related

- enforcement actions; and 2) comply, under certain circumstances, with express

undertakings. If the agreement is violated, the staff retains its ability to recommend an

- 135

- enforcement action to the Commission against the individual or company without

limitation.

- Procedures:

• Prior to seeking authority to enter into a non-prosecution agreement, the staff

- should receive proffers from the cooperating individual and/or company.

• Non-prosecution agreements must be approved by the Commission.

Considerations:

• In virtually all cases, for individuals who have previously violated the federal
- securities laws, non-prosecution agreements will not be appropriate and other
cooperation tools should be considered.

- • Non-prosecution agreements should not be entered into in the early stages of an

investigation when the role of the cooperating individuals or companies and the

- importance of their cooperation are unclear.

• In addition to the standard cooperation analysis set forth in Section 6.1 of the

- Manual, when attempting to determine whether to recommend that the

Commission enter into a non-prosecution agreement, the staff should consider:

o whether the individual or company has entered into or is likely to enter

- into a plea agreement with criminal prosecutors that will require them to
cooperate in the Commission's investigation and related enforcement
actions; and

- o whether other means of obtaining the desired cooperation are available

and likely to be timely and effective.

- • A non-prosecution agreement should generally include the following terms:

- o the cooperating individual or company agrees to cooperate truthfully and

fully, as directed by the Division's staff, in investigations and related
enforcement proceedings including, but not limited to, producing all

- potentially relevant non-privileged documents and materials to the

Commission, responding to all inquiries, appearing for interviews, and
testifYing at trials and other judicial proceedings as requested by the staff,

- and waiving the territorial limits on service contained in Rule 45 of the

Federal Rules of Civil Procedure;

-
o the cooperating individual or company shall make any agreed-upon
disgorgement or penalty payments;

-
136

-
-
- o additional undertakings designed to protect the investing public; and

o ifthe individual or company violates the agreement, the Division may

- recommend and the Commission may pursue an enforcement action

against the individual or company without limitation and not subject to the
applicable statute of limitations; and

- o the cooperating individual or company agrees that the Commission may

use statements, information, and materials provided pursuant to the

- Related Tool:
agreement against him/her/it if the individual or company violates the
terms of the agreement.

- • Termination Notices-When an investigation has been completed as to a potential

- cooperating individual or company and the Division has determined, for any
reason, not to recommend to the Commission an enforcement action against the

individual or company, supervisors at or above the level of Assistant Director

may, and in some cases are required, to send a letter informing the individual or

- company of the determination. If the potential cooperating individual or company

is likely to provide substantial assistance and the Division has not entered into a
cooperation agreement with the individual or company, these notices may be

- provided before the Commission's investigation is closed or before a

determination has been made as to every other po.tential defendant or respondent
in the case.

- Further information:

- • For assistance in drafting non-prosecution agreements, please consult with staff in

the Office of the Chief Counsel or the Chief Litigation Counsel.

- • For additional information about termination notices, please consult Section 2.6.2
of the Manual.

- Introduction:
6.2.5. Immunity Requests

- In certain circumstances, individuals may not be willing to provide testimony or

cooperate without receiving protection against criminal prosecution. In appropriate

- circumstances, to obtain testimony and/or facilitate cooperation that will substantially

assist in the enforcement of the federal securities laws, the staff may seek immunity
orders or letters in order to obtain testimony and/or witness cooperation.

-
137

-
When witnesses assert their Fifth Amendment privilege against self-incrimination

- in enforcement proceedings, the Commission may seek one of two types of immunity:
statutory immunity or letter immunity. Statutory immunity permits the Commission,
pursuant to 18 U.S.C. Sections 6001-6004, to seek a court order compelling the

- individual to give testimony or provide other information that may be necessary to the
public interest, if the request is approved by the U.S. Attorney General. In contrast, letter
immunity is immunity conferred by agreement between the individual and a U.S.
\.
- Attorney's Office. Both types of immunity prevent the use of statements or other
information provided by the individual, directly or indirectly, against the individual in
any criminal case, except for perjury, giving a false statement, or obstruction ofjustice.
Neither an immunity order nor an immunity letter, however, prevents the Commission
- from using the testimony or other information provided by the individual in its
enforcement actions, including actions against the individual for whom the immunity
order or letter was issued.
- Procedures:

- • Prior to seeking approval to request an immunity order or letter from the

Department of Justice, the staff should preferably receive a proffer of the
individual's expected testimony or have significant and reliable evidence

- regarding his or her ability to provide substantial assistance to the Commission's

investigation or related enforcement actions.

- • The Commission has delegated authority to the Director and authority has been
sub-delegated to senior officers to make immunity requests to the Department of
Justice. 17 C.F.R. Section 200.30-4(a).

- • Prior to requesting authorization to seek an immunity order or letter from the

Director of Enforcement or a designated senior officer, unless exigent

- circumstances exist, the staff should complete the Department of Justice witness
immunity request form found at
http://WHl l1-'.usda!.gov/llsaa/eollsa/foia reading roomlllsam/title9Icrm00711.pdt:

- This form will be used for three purposes.

o First, the form will help the staff document its basis for seeking an

- immunity order or letter.

o Second, the completed form will assist senior leadership in the Division

- and the U.S. Department of Justice in evaluating the appropriateness of

seeking an immunity order or letter.

- o Finally, if an immunity order is appropriate, the completed form will be

submitted by the relevant federal prosecutor's office to the Witness
Immunity Unit of the Office of Enforcement Operations at the Department

- 138

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

COOPERATION AGREEMENT

1. In connection with an {investigation/enforcement action} relating to

_ _ _ _ _ [PRIMARY AREAS OF INQUIRY] from [DATE

- RANGE] ("Investigation"), the Division ofEnforcement ("Division") of the United

States Securities and Exchange Commission ("Commission") and - - - - - - -
[FULL NAME] ("Respondent") enter into a cooperation agreement ("Agreement") with

- the following terms and conditions:

COOPERATION
- 2. The Respondent agrees to cooperate fully and truthfully in the Investigation and

any other related enforcement litigation or proceedings to which the Commission is a

- party (the "Proceedings"), regardless ofthe time period in which the cooperation is
required. {In addition, the Respondent agrees to cooperate fully and truthfully, when
directed by the Division's staff, in an official investigation or proceeding by any federal,
state, or self-regulatory organization ("Other Proceedings). [NOTE: Although this
provision is not required, the staff is encouraged to include it-particularly where there is
a parallel federal criminal prosecution.]} The full, truthful, and continuing cooperation of

- the Respondent shall include, but not be limited to:

a. producing all non-privileged documents and other materials to the

- Commission as requested by the Division's staff, wherever located, in the possession,

custody, or control ofthe Respondent;

b. appearing for interviews, at such times and places, as requested by the

Division's staff;

c. responding fully and truthfully to all inquiries, when requested to do so by

the Division's staff, in connection with the Proceedings {or Other Proceedings};

d. testifying at trial and other judicial proceedings, when requested to do so

by the Division's staff, in connection with the Proceedings {or Other Proceedings};

e. accepting service by mail or facsimile transmission of notices or

subpoenas for documents or testimony at depositions, hearings, trials or in connection
with the Proceedings {or Other Proceedings};

- f appointing {his/her} undersigned attorney as agent to receive service of

such notices and subpoenas; and

 g. waiving the territorial limits on service contained in Rule 45 ofthe Federal

Rules of Civil Procedure and any applicable local rules, when requested to appear by the
Division's staff
VIOLATION OF AGREEMENT

3. The Respondent understands and agrees that it shall be a violation of this

Agreement if {he/she} knowingly provides false or misleading information or materials
in connection with the Proceedings {or Other Proceedings}. In the event of such
misconduct, the Division will advise the Commission ofthe Respondent's misconduct
and may make a criminal referral for providing false information (18 U.S.C. § 1001),
perjury (18 U.S.C. § 1621), making false statements or declarations in court proceedings
(18 U.S.C. § 1623), contempt (18 U.S.C. §§ 401-402) and/or obstructing justice (18
U.S.C. § 1503 et seq.).

4. The Respondent understands and agrees that it shall be a violation of this

Agreement if {he/she} violates the federal securities laws after entering into this
agreement. It is further understood and agreed that should the Division determine that
the Respondent has failed to comply with any term or condition ofthis Agreement, the
Division will notify the Respondent or {his/her} counsel ofthis fact and provide an
opportunity for the Respondent to make a submission consistent with the procedures set
forth in the Securities Act of 1933 Release No. 5310. Under these circumstances, the
Division may, in its sole discretion and not subject to judicial review, recommend to the
Commission an enforcement action against the Respondent for any securities law
violations, including, but not limited to, the substantive offenses relating to the
Investigation. Nothing in this agreement limits the Division's discretion to recommend
to the Commission an enforcement action against the Respondent for future violations of
the federal securities laws, without notice, to protect the public interest.

5. The Respondent understands and agrees that any statute oflimitations applicable
to any action or proceeding against {him/her} authorized, instituted, or brought by or on
behalfof the Commission or to which the Commission is a party arising out of the

-
Investigation, including any sanction or reliefthat may be imposed therein, is tolled or
suspended from the date the Agreement is executed until the commencement of an
enforcement action against the Respondent related to the Investigation or the Respondent
provides written notice of unilateral termination ofthe Agreement to the Division.

COMPLIANCE WITH AGREEMENT

-
6. Subject to the full, truthful, and continuing cooperation ofthe Respondent, as
described in Paragraph 2, and compliance with the federal securities laws, ifthe Division

-
recommends an enforcement action or proceeding against the Respondent arising from
the Investigation, it will inform the Commission of the fact, manner, and extent of
{his/her} cooperation during the Proceedings {or Other Proceedings} and recommend

-
appropriate credit based upon the analytical framework set forth by the Commission in 17
CFR § 202.12 {and any specific recommendations set forth below}. Upon the written
request of the Respondent, the Division also may issue a letter to other federal, state or

-
self-regulatory organizations detailing {his/her} cooperation during the Proceedings {or

- Other Proceedings}.

7. The Respondent understands and agrees that this Agreement does not constitute a

- grant of immunity by the Commission, nor is it any other form of final disposition. If the
Respondent fully satisfies {his/her} obligations under this Agreement, among other
alternatives, the Division may recommend and the Commission may accept a settlement

- offer from the Respondent in the form of an Offer or Consent, or agree to such other
disposition deemed appropriate by the Division and the Commission.

- 8. The Respondent understands and agrees that this Agreement does not bind the
Commission or any other federal, state or self-regulatory organization. The Division
cannot, and does not, make any promise or representation as to whether or how the

- Commission may act on enforcement recommendations associated with this Investigation

or the Respondent. The Commission has absolute discretion to accept or reject any
enforcement recommendations made by the Division.

- 9. The Respondent understands and agrees that the Agreement only applies to
enforcement actions arising from the Investigation and does not relate to any other

- violations or any individual or entity other than the Respondent.

SPECIFIC RECOMMENDATIONS

- [NOTE: As discussed in Section 6.2.2 of the Manual, this section is neither required nor
likely to be common in cooperation agreements. However, ifthis section is appropriate,

- subsequent paragraph numbering and references to paragraphs will need to be corrected

to reflect this addition.]

- XX. The Division agrees to make the specific enforcement recommendation {s} to the
Commission set forth in paragraph _ [#] if (i) the Division determines to recommend
an enforcement action or proceeding against the Respondent arising from the

- Investigation; (ii) the Respondent agrees to enter into a settlement with the Commission
incorporating the terms of paragraph _ [#]; and (iii) the Division determines that the
Respondent has provided substantial assistance to the Commission during the

- Proceedings {or Other Proceedings}. The Respondent understands and agrees that the
determination of whether {he/she} has provided "substantial assistance" is within the sole
discretion ofthe Division and not subject tojudicial review.

- xx. If the Division recommends an enforcement action or proceeding against the

Respondent, {he/she} agrees to enter into a settlement with the Commission in an

- {injunctive action/administrative proceeding} that {alleges/finds} {, as set forth in the

attached {Complaint/Offer},} the Respondent, on or about
{willfully} violated Section(s) - ofthe [ACT] and Rule(s) -
[DATE],
thereunder

- by [BRIEF DESCRIPTION OF ALLEGED MISCONDUCT].

-
-
-
- xx. In exchange for the Respondent's compliance with the terms and conditions of
- this Agreement, the Division will include the following specific recommendation{s} in
any enforcement recommendation to the Commission including:

- [NOTE: Consider inserting any appropriate enforcement recommendations. Some

potential recommendations include, but are not limited to ...]

- x. {an injunction/a cease and desist order} providing that

[DETAILS];

- x. requiring payment ofa civil {monetary} penalty {of$

[AMOUNT] Inot to exceed $ [AMOUNT]};
_

- x. a {denial of the privilege [102(e)(l) MATTERS]/suspension [102(e)(3)

MATTERS]} from appearing or practicing before the Commission

- pursuant to Rule 102(e) of the Commission's Rules ofPractice for a

period of [RELEVANT PERIOD];

x. a bar from acting as an officer or director of any issuer that has a class of
securities registered pursuant to Section 12 of the Exchange Act or that is
required to file reports pursuant to Section 15(d) ofthe Exchange Act for a

- x.
period of [RELEVANT PERIOD];

a bar from participating in any offering of any penny stock, except as

- provided in Rule 3a5l-1 under the Exchange Act, including engaging in

activities with a broker, dealer, or issuer for purposes of issuing, trading,
or inducing or attempting to induce the purchase or sale ofthe security for

- x.
a period of [RELEVANT PERIOD];

a bar from serving, acting as, or associating with any broker or dealer

- registered under Section 15(b) ofthe Exchange Act for a period of

_ _~ [RELEVANT PERIOD];

- x. a bar from serving or acting as an employee, officer, director, member of

the advisory board, investment adviser or depositor of, or principal
underwriter for, a registered investment company or affiliated person of

- such investor adviser, depositor, or principal underwriter for a period of

_ _ _ [RELEVANT PERIOD];

- x. no other penalties or sanctions except as set forth herein.

VOLUNTARY AGREEMENT

- 10. The Respondent's decision to enter into this Agreement is freely and voluntarily
made and is not the result of force, threats, assurances, promises, or representations other
than those contained in this Agreement. .
-

- 11. The Respondent has read and understands this Agreement. Furthermore, {he/she}
has reviewed all legal and factual aspects of this matter with {hislher} attorney and is
fully satisfied with {his/her} attorney's legal representation. The Respondent has

- thoroughly reviewed this Agreement with {hisfher} attorney and has received satisfactory
explanations concerning each paragraph of the Agreement. After conferring with
{his/her} attorney and considering all available alternatives, the Respondent has made a

- knowing decision to enter into the Agreement.

ENTIRETY OF AGREEMENT

- 12. This Agreement constitutes the entire agreement between the Division and the
Respondent, and supersedes all prior understandings, if any, whether oral or written,

- relating to the subject matter herein.

13. This Agreement cannot be modified except in writing, signed by the Respondent

- and a representative ofthe Division.

14. In the event an ambiguity or a question of intent or interpretation arises, this

- Agreement shall be construed as if drafted jointly by the parties hereto, and no

presumption or burden of proof shall arise favoring or disfavoring the Division or the
Respondent by virtue of the authorship of any of the provisions of the Agreement.

- The signatories below acknowledge acceptance ofthe foregoing tenns and conditions.

- RESPONDENT

- Date [RESPONDENT'S FULL NAME]

The foregoing instrument was acknowledged before me this _day of ,20_,

by , who _ is a personally known to me or _ who has
produced a valid driver's license as identification and who did take an oath.

-
- Notary Public

State:

Commission number:

- Commission expiration:

-
- RESPONDENT'S COUNSEL

- Approved as to fonn:

- Date [ATTORNEY'S FULL NAME]

[ATTORl'JEY'S MAILING ADDRESS]

- [ATTORNEY'S TELEPHONE NUMBER]

SECURITIES AND EXCHANGE COMMISSION

- DIVISION OF ENFORCEMENT

Date [SENIOR OFFICER'S FULL NAME]

[SENIOR OFFICER'S TITLE]

-
UPDATED MARCH 4,2010
-
-

 Press Release: SEC Charges Fonner Countrywide Executives With Fraud; 2009-129; Jun... Page 1 of3

....
Home I PrevIous Page

u.s. Securities and Exchange Commissio

- SEC Charges Former Countrywide Executives With Fraud

- Former CEO Angelo Mozilo Additionally Charged With Insider

Trading

- FOR IMMEDIATE RELEASE

2009-129

- Washington, D.C., June 4, 2009 - The

Securities and Exchange Commission today
charged former CountryWide Financial CEO
Video:

SEC News Conference

,
- Angelo Mozilo and two other former
executives with securities fraud for
deliberately misleading investors about the
significant credit risks being taken in efforts
to build and maintain the company's market
share. Mozilo was additionally charged with
insider trading for selling his CountryWide
stock based on non-public information for
nearly $140 million in profits.
SEC Enforcement

Director Robert Khuzami

The SEC alleges that Mozilo along with

-
former chief operating officer and president
David Sambol and former chief financial
\N10QQw~Media

Re_~ll'1e~Ua

WindowsMedia caJ2tLQm~Q

officer Eric Sieracki misled the market by

RealMedia captioneq

falsely assuring investors that Countrywide

was primarily a prime quality mortgage
Text of statemenUrorn

lender that had avoided the excesses of its Robert Khuzami

com petitors.

The SEC's enforcement action alleges that

Excerpt$

-
from 2005 through 2007, Countrywide
engaged in an unprecedented expansion of
its underwriting guidelines and was writing
riskier and riskier loans, which these senior
of E-Mails From

Angelo Mozilo

-
executives were warned might ultimately
curtail the company's ability to sell them. Countrywide was required to
disclose these important trends to its investors in the Management
Discussion and Analysis portion of its SEC filings, but failed to do so.

"This is the tale of two companies," said Robert Khuzami, Director of the

-
SEC's Division of Enforcement. "Countrywide portrayed itself as
underwriting mainly prime quality mortgages using high underwriting
standards. But concealed from shareholders was the true Countrywide, an
increasingly reckless lender assuming greater and greater risk. Angelo
Mozilo privately described one Countrywide product as 'toxic,' and said
another's performance was so uncertain that Countrywide was 'flying
blind.'''

httn:llwww.sec.Qov/news/nress/2009/2009-129.htm 4!-;f)O] 0
 Press Release: SEC Charges Former Countrywide Executives With Fraud; 2009-129: Jun... Page 2 aD

Rosalind Tyson, Director of the SEC's Los Angeles Regional Office, added,
"Angelo Mozilo had access to detailed and alarming information about
.... Countrywide's operations. He knew that Countrywide was gambling with
increasingly risky mortgages and he kept those details from investors while
he was actively taking his own chips off the table."

-
Additional Materials
> Litigation Release No. 21068
> S.ECCQ.ffiRJ.aJot

-
According to the SEC's complaint, filed in federal district court in Los
Angeles, Countrywide's annual reports for 2005, 2006, and 2007 misled

-
investors in claiming that Countrywide "manage[d] credit risk through
credit policy, underwriting, quality control and surveillance activities." Its
annual reports for 2005 and 2006 falsely stated that the company ensured

-
its "access to the secondary mortgage market by consistently producing
quality mortgages." The annual report for 2006 also falsely claimed that
Countrywide had "prudently underwritten" its Pay-Option ARM loans.

-
The SEC alleges that Mozilo, Sambol, and Sieracki actually knew, and
acknowledged internally, that Countrywide was writing increasingly risky
loans and that defaults and delinquencies would rise as a result, both in
loans that Countrywide serviced and loans that the company packaged and
sold as mortgage-backed securities.

-
According to the SEC's complaint, CountryWide developed what was
internally referred to as a "supermarket" strategy that widened
underwriting gUidelines to match any product offered by its competitors. By
the end of 2006, CountrYWide's underwriting guidelines were as wide as
they had ever been, and Countrywide made an increasing number of loans
based on exceptions to those already wide guidelines, even though
exception loans had a higher rate of default.

-
The SEC's complaint alleges that Mozilo believed that the risk was so high
that he repeatedly urged that Countrywide sell its entire portfolio of Pay­
Option loans. Despite these severe concerns about the increasing risks that
Countrywide was undertaking, Mozilo, Sambol, and Sieracki hid these risks
from the investing public.

-
The SEC further alleges that Mozilo engaged in insider trading of
CountryWide stock that he owned. Mozilo established four executive stock
sale plans for himself in October, November, and December 2006 while he
was aware of material, non-public information concerning Countrywide's
increasing credit risk and the expected poor performance of Countrywide­
originated loans. From November 2006 through August 2007, Mozilo
exercised more than 5.1 million stock options and sold the underlying
.... shares for total proceeds of nearly $140 million, pursuant to written trading
plans adopted in late 2006 and early 2007.

The SEC's complaint alleges that each of the defendants violated Section 17
(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange

httn-//www <:;pr o()v/nf'w<:;/nn~<:;s/7009/7009-129 _htm 4/5/2010

 Press Release: SEC Charges Former Countrywide Executives With Fraud; 2009-129; Jun... Page 3 of 3

-
Act of 1934 and Rule 10b-5 thereunder, and aided and abetted violations of
Sections 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13
thereunder. The complaint further alleges that Mozilo and Sieracki violated
Rule 13a-14 under the Exchange Act. The SEC's complaint seeks
permanent injunctive relief, officer and director bars, and financial penalties
against all of the defendants and the disgorgement of ill-gotten gains with
prejudgment interest against Mozilo and Sambol.

- For more information, contact:

# # #

- Rosalind R. Tyson
Regional Director, SEC's Los Angeles Regional Office
(323) -965-3893

- Michele Wein Layne

Associate Regional Director-Enforcement, SEC's Los Angeles Regional Office
(323) 965-3850
- John McCoy
Regional Trial Counsel, SEC's Los Angeles Regional Office
(323) 965-3890

- http://www.sec.gov/news/press/2009/2009-129.htm

- Home I Previous Page Modified: 06/04/2009

..
-

httn://www.sec.gov/n~ws/nr~ss/?OOQI?OOQ-l?Q htm
-

1 J.O~ M:McqOY, ill, Cal. Bar No. 166244

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6, Attomeys for Plaintiff
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7 Securities and Exchange Comm:iJssion

- Rosalind R. Txson, Regional Director

8 Micnele Wein LaYtle, Associate Rc~giona1 Director
567o--Wilshire Boulevard. 11th Floor
9 Los Angeles. California 90036
,Telephone: (323) 965-3998
- 10 facsimile: (323) 965-3908

11 UNITED STATES DISTRICT COURT

- 12 CENTRAL DISTRICT OF, CALmORNIA 11 AJ~
~I~.~"~ 0 ~ q ~ ~ VB. 'X
- 13 SECURITIES AND EXCHANGE
14 COMMISSION, I

COMPL!AINT FOR VIOLATIONS

11!

15 Plaintiff. OF TBEiFEDERAL SECURITIES

- 16 VS.
LAWS:I
DEMAN\D FOR JURY TRIAL

- 17 -ANGELO MOZIL~RA VID SAi.\ffiOL,

18 AND ElUC SlERA~.lU,

19 II ~
Defendants.
....J

- 20

-
21
22
23
- 24

25"

26 .

- 27
28

-
j.

...

1 Plaintiff Securities and Exchange Commission ("Commission") alleges as

-
2
3
follows:
JURISDICTION AND VENUE

-
4 1. This Court has jurisdiction over this action pursuant to Sections 20(b),

-
5
6
20(d)(I), 20(e) and 22(a) of the Securities Act of 1933 ("Securities Act"), 15
U.S.c. §§ 77t(b), 77t(d)(1), 77t(e), and 77v(a), and Sections 21(d)(1), 21(d)(2),

-
7
8
21(d)(3)(A), 21(e), and 27 of the Securities Exchange Act of 1934 ("Exchange
Act"), 15 U.S.C. §§ 78u(d)(I), 78u(d)(2), 78u(d)(3)(A), 78u(e) & 78aa.
9 Defendants have directly or indirectly made use of the means or instrumentalities
-
10 of interstate commerce, of the mails, or of the facilities of a national securities
11 exchange in connection with the transactions, acts, practices and courses of
12. business alleged in this complaint.

- 13
14
2. Venue is proper in this district pursuant to Section 22(a) of the
Securities Act, 15 U.S.C. §. 77v(a), and Section 27 of the Exchange Act, 15 U.S.C.

- 15 § 78aa, because defendants reside and transact business within this district and

- 16
17
18
certain of the transactions, acts, practices and courses of conduct constituting
violations of the federal securities laws alleged in this complaint occurred within
this district.
- 19 SUMMARY

- 20
21
3. 1bis matter involves a disclosure fraud by the three most senior
executives of Countrywide Financial Corporation, a mortgage lender formerly
.. 22 based in Calabasas, California, and insider trading by Countrywide's former
23 . chairman of the board and chief executive officer, Angelo Mozilo.
24 4. From 2005 through 2007, Mozilo,.alongwith David Sambol, chief
25 operating officer and president, and Eric Sieracki, chief financial officer, held
- 26
27
Countrywide out as primarily a maker of prime quality' mortgage loans,
qualitatively different from competitors who engaged primarily in riskier lending.
- 28 To support this false characterization, Mozilo, Sieracki, and Sambol hid from
-2­
-

1 investors that Countrywide, in an effort to increase market share, engaged in an

-
2
3
unprecedented expansion of its underwriting guidelines from 2005 and into 2007.
Specifically, Countrywide developed what was referred to as a "supermarket"

-
4 strategy, where it attempted to offer any product that was offered by any
5 competitor. By the end of2006, Countrywide's underwriting guIdelines were as
6 wide as th<;y had ever been, and Countrywide was writing riskier and riskier loans.

-
7
8
Even these expansive underwriting guidelines were not sufficient to support
Countrywide's desired growth, so Countrywide wrote an increasing number of

-
9
10
loans as "exceptions" that failed to meet its already wide underwriting guidelines
even though exception loans had a higher rate of default.

-
11
12
5. Countrywide was more dependent than many of its competitors on
selling loans it originated into the secondary mortgage market, an important fact it

-
13
14
disclosed to investors. But Mozilo expected that the deteriorating quality of the
loans that Countrywide was writing, and the poor performance over time of those

-
15
16
loans, would ultimately curtail the company's ability to sell those loans in the
secondary mortgage market. Mozilo and the company's chief risk officer warned
-
17 Sambol and Sieracki about the increased risk that Countrywide was assuming.
18 Thus, each of the defendants was aware, but failed to disclose, that COWltrywide's
19 current business model was Wlsustainable.

-
20
21
6. Mozilo, Sambol, and Sieracki were responsible for Countrywide's
fraudulent disclosures. From 2005 through 2007, these senior executives misled

-
22 the market by falsely assuring investors that Countrywide was primarily a prime
23 quality mortgage lender which had avoided the excesses ofits competitors.

-
24
25
COlmtrywide's Fonns lO-K for 2005, 2006, and 2007 falsely represented that
Countrywide "manage[d] credit risk through credit policy, underwriting, quality

-
26
27
control and surveillance activities," and the 2005 and 2006 Fonns 10-K falsely
stated that COlmtrywide ensured its continuing access to the mortgage backed
28 securities market by "consistently producing quality mortgages."

-
-3­
-

....

1 7. In fact> the credit risk that COlmtrywide was taking was so alanning to
..
2 Mozilo that he internally issued a series of increasingly dire assessments of various
3 Countrywide loan products and the risks to Countrywide in continuing to offer or

-
·4 hold those loans, while at the same time he,·Sambol> and Sieracki continued to
5 .make public statements obscuring COlmtrywide' s risk profile and attempting to
-
6 differentiate it from other lenders. In one internal email, Mozilo referred to a
7 particularly profitable subprime product as "toxic," and in another he stated that
8 the company was Hflying blind," and had "no way" to predict the perfonnance of

-
9 .its heralded product> the Pay-Option ARM loan. Mozilo believed that the risk was
10 so high and that the secondary market had so mispriced Pay-Option ARM loans

-
11 that he repeatedly urged that Countrywide sell its entire portfolio of those loans.
12 Despite their awareness of> and Mozilo's severe concerns about, the increasing risk
13 Countrywide was undertaking, Mozilo, Sambol, and Sieracki hid these risks from
14 the investing public.

-
15
16
8. Defendants misled investors by failing to disclose substantial negative
infonnation regarding Countrywide's loan products, including:
-
17 • the increasingly lax underwriting guidelines used by the company in
18 originating loans;
19 • the company's pursuit ofa "matching strategy" in which it matched the

-
20
21
terms of any loan being offered in the market, even loans offered by
primarily subprime originators;

-
22
23
• the high percentage of loans it originated that were outside its own already
widened underwriting guidelines due to loans made as exceptions to
guidelines;

-
24
25
• Countrywide's definition of"prime" loans included loans made to
borrowers with FICO scores well below any industry standard definition

-
26
ofprime credit quality;

• the high percentage of Countrywide's subprime originations that had a

27
-
28
loan to value ratio of 100%, for example, 62% in the second quarter of .
. ·2006; and
-4­
-
-
1 • Countrywide's subprime loans had significant additional risk factors,
beyond the subprime credit history of the borrower, associated with
- 2
3
increased default rates, including reduced documentation, stated income,
piggyback second liens, and LTVs in excess of 95%.

- 4 Mozilo, Sambol, and Sieracki knew this negative information from numerous
5 reports they regularly received and from emails and presentations prepared by the

- 6

7
comp~y's chief credit risk officer.· Defendants nevertheless hid this negative
information from investors.

- 8 9. During the course of this fraud, Mozilo engaged in insider trading in

Countrywide's securities. Mozilo established four sales plans pursuant to Rule
- 9
10 10b5-1 ofthe Securities Exchange Act in October, November, and December 2006
while in possession of material, non-public information concerning COlU1trywide's
- 11
12 increasing credit risk and the risk that the poor expected performance of

- 13
Countrywide-originated loans would prevent Countrywide from continuing its
14 business model ofselling the majority of the.loans it originated into the secondary

- 15

16
mortgage market. From November 2006 through August 2007, Mozilo exercised
over 5.1 million stock options and sold the Underlying shares for total proceeds of
over $139 million, pursuant to lOb5-1 plans adopted in late 2006 and amended in
17
18 early 2007.
- 19 DEFENDANTS
10. Angelo Mozilo, age 70, is a resident ofThousand Oaks, California.
- 20
21 Mozilo was a founder of Countrywide and was its chairman and chief executive

- 22 officer ("CEO") from its formation in 1969 until Countrywide was acquired by

23 Bank ofAmerica in 2008.

- 24
25
11. David Sambol, age 49, is a resident of Hidden Hills, California. He
was Countrywide's president and chief operating officer ("COO") from September

- 26
27
2006 until its acquisition by Bank of America in 2008. Sambol was Countrywide's
executive managing director, business segment operations from April 2006 until

- 28 September 2006, and executive managing director and chief ofmortgage banking

-5­
-
-

- 1 and capital markets from January 2004 until April 2006. Samba1was a member of

- 2 the Countrywide board ofdirectors from 2007 until July 2008. Sambol also held
3 executive positions at certain Countrywide subsidiaries, including Countrywide

- 4
5
Ban1<.
12. Eric Sieracki, age 52, is a resident ofLake Sherwood, California.

- 6
7
Sieracki was Countrywide's chief financial officer ("CPO") from the first quarter
of 2005 until its acquisition by Bank of America in 2008.
... 8 RELATED PARTY
9 13. Countrywide Financial Corporation, a Delaware corporation, was a
10 mortgage lender based in Calabasas, California. During all times relevant to this

- 11
12
complaint, its stock was registered pursuant to Section 12(b) of the Exchange Act
and was listed on the New York Stock Exchange, and, until the demise of the
13 Pacific Stock Exchange, it was listed on that Exchange as well. On July 1,2008,
14 Countrywide merged with Bank of America and is now a wholly owned subsidiary

- 15 of Bank of America. Countrywide'S remaining operations and employees. have

16 been transferred to Bank of America, and Bank of America ceased using the

- 17 Countrywide name in April 2009. On July 1,2008, the NYSE filed a Fonn 25 to

18· deregister and delist Countrywide's common stock, and on July 22, 2008

- 19 Countrywide filed a Fonn 15 deregistering its common stock IDlder Section 12(g)

- 20
21
of the Exchange Act

FACTS

- 22
23
14. From 2005 through 2007, in Countrywide's periodic filings with the
Commission and in other public statements, Mozilo, Sambol, and Sieracki held

- 24
25
Countrywide out as primarily a maker of prime quality mortgage loans,
qualitatively different from competitors who engaged primarily in riskier lending.

- 26
27
To support this false characterization, the proposed defendants hid from investors
that Countrywide was engaged in an effort to increase market share and sustain

- 28
-6­
-

-
-
- 1 revenue generation through unprecedented expansions of its underwriting

- 2
3
guidelines, taking on ever-increasing credit risk.
A. Countrywide's Business

- 4
5
15. Countrywide originated, sold, and serviced both prime and subprime
(which Countrywide's periodic :filings referred to as "nonprime") mortgage loans.

- 6 By 2005, Countrywide was the largest U.S. mortgage lender in the United States,
7 originating over $490 billion in mortgage loans in 2005, over $450 billion in 2006,

- 8· and over $408 billion in 2007. Countrywide recognized pre-tax earnings of$2.4
9 billion and $2 billion in its loan production divisions in 2005 and 2006,
- 10 respectively, and a pre-tax loss of $1.5 billion in its loan production division in
11 2007.
- 12 16. Countrywide pooled most of the loans it originated and sold them in
13 secondary mortgage market transactions. Countrywide sold the pooled loans either
14 through whole loan sales or securitization. In whole loan sales, Countrywide sold

- 15 the loans to investors and recorded gains on the sales. In securitizations,

16 Countrywide sold interests in the pooled loans, i.e., mortgage-backed securities.

- 17
18
Countrywide's loan sales were run out of its capital markets division. In 2005,
Countrywide reported $451.6 million in pre-tax earnings from capital market sales,
- 19 repres.enting 10.9% ofits pre-tax earnings; in 2006, it recognized $553.5 million in
20 pre-tax earnings from that division, representing 12.8% ofits pre-tax earnings, and
21 in 2007 it recognized a mere $14.9 million in pre-tax earnings from that division,­

- 22
23
reporting a pre-tax loss overall.
.17. Historically, Countrywide's primary business had been originating

- 24pririIe conforming loans that were saleable to the Government Sponsored Entities
25 ("GSEs"). In the fiscal years 2001, 2002, and 2003, Countrywide's prime

- 26
27
conforming originations were 50%, 59.6%, and 54.2% of its total loan originations,
respectively. In 2003, United States residential mortgage production reached a

- 28 record level of$3.8 trillion. Countrywide experienced record earnings in that year,
-7­
-

-
1 . with net earnings of $2.4 billion, an increase of $1.5 billion, or 182%, over 2002.
.... 2· fu 2004, in a market where originations were declining overall, Countrywide
3 maintained net earnings of $2.1 billion, and increased its market share from 11.4%

- 4
5.
to 12~7%.
18. Countrywide achieved this result in large part by moving away from
- 6 its historical core business ofprime mortgage underwriting to aggressively
7 . matching loan programs being offered by other lenders, even monoline subprime
- 8 lenders. As a result, as reported in Countrywide's periodic filings and reflected in
9 the chart below, in 2004, 2005, and 2006, Countrywide wrote more non­
- 10 conforming, subprime, and home equity loans than in any prior period:

- 11
12 2001 2002 2003 2004 2005 2006
.l'nme
13 Conformint! 50% 59.6% 54.2% 38.2% 32% 31.9%
..,.ime Non­
14 . Conforming

-
16.5% 24.5% 31.4% 38.7% 47.2% 45.2%
.tiome
15 Eauitv 6.8% 4.6% 4.2% 8.5% 9.0% 10.2%
Nonpnme
16 (Sul)prime) 7.8% 3.7% 4.6% 11.0% 8.9% 8.7%
17 FHAlVA 18.9% 7.6% 5.6% 3.6% 2.1% 2.8%
18 Commercial 0.0% 0.0% 0.0% 0.0% 0.8% 1.2%
- 19

- 20 19. In 2004, Countrywide's reported production of conventional

21 . conforming loans dropped to 38.2%, its production of subprime loans had risen to

- 22
23
11%, its production of home equity loans had risen to 8.5%, and its production of
conventional non-conforming loans had risen to 38.7%. By 2006, Countrywide
24 had turned its prior business model on its head: a mere 31.9% of its originations
25' were conforming, 45.2% were non-confonning, 8.7% were subprime, and 10.2%

- 26

27 //I
were home equity.

-
28 /II
-8­
-

- 1
B. Countrywide's Deceptive Description of Its Loans

- 2
3
20. Countrywide's Form lO-Ks deceptively described the types ofloans
upon which the Company's business depended. While COWltrywide provided

- 4 statistics about its originations which reported the percentage ofloans in various
5 categories, such as those noted in the table in paragraph 18, the information was

- 6 misleading because its descriptions of "prime non-confonning" and "nonprime"

7 loans in its periodic filings were insufficient to inform investors what types of

- 8 loans were included in those categories. "Prime" loans were described in

9. Countrywide's 2005, 2006, and 2007 Forms lO-K as follows:

10 Prime Mortgage Loans include conventional mortgage loans,

loans insured by the Federal Housing Administration ("FHA")
11
and loans guaranteed by the Veterans Administration ("VA").
12
A significant portion of the conventiol)alloans we produce
- 13
14 qualify for inclusion in guaranteed mortgage securities backed

- 15
16
by Fannie Mae or Freddie Mac ("confonning loans"). Some of
the conventional loans we produce either have an original loan
amoWlt in excess of the Fannie Mae and Freddie Mac loan limit
17
18 for single-family loans ($417,000 for 2006) or otherwise do not
meet Fannie Mae or Freddie Mac guidelines. Loans that do not
19
meet Fannie Mae or Freddie Mac guidelines are referred to as
- 20
21 "nonconforming loans."

- 22
23
21. Nothing in that description informed investors that Countrywide's

"prime non-confonning" category included loan products with increasing amounts

- 24
25
of credit risk. While guidance issued by the banking regulators referenced a credit
score ("FICO score") at 660 or below as being an indicator of a subprime loan,

- 26 some within the banking industry drew the distinction at a score of 620 or below.
27 . Countrywide, however, did not consider any FICO score to be too low to be

- 28 categoriZed within "prime." Nor did Countrywide's definition of "prime" inform

-9­
-

1 investors that its "prime non-conforming" category included so-called "Alt-A"

- 2
3
loan products with increasing amounts of credit risk, such as (1) reduced or no
documentation loans; (2) stated income loans; and (3) loans with loan to value or
4 combinedloan to value ratios of95% and higher. Finally, it did not disclose that
5 Pay-Option ARM loans, including reduced documentation Pay-Option ARM loans,

- 6 were included in the category of prime loans. Moreover, to Ple extent these
7 . extremely risky loans were below the loan limits established by the government
- 8 sponsored entities that purchased these loans ("GSEs"), they would have been

- 9
10
reported by Countrywide as prime conforming loans. In 2005 and 2006,
Countrywide's Pay-Option ARMs ranged between 17% and 21 % of its total loan
11 originations. It maintained the majority of these loans in the held for investment
12 portfolio at Countrywide Ban1e

- 13
14
22. Significantly, the Countrywide periodic filings do not define
"nonprime" in any way, and Countrywide's periodic filings failed to disclose that

- 15 Imms in the category of subprime were not merely issued to borrowers with
16 blemished credit, but that this category included loans with significant additional
17 . layered risk factors, such as (1) subprime piggyback seconds, also known as 80/20
18 loans; (2)reduced or no documentation loans; (3) stated income loans; (4) loans
- 19 with loan to value or combined loan to value ratios of95% and higher; and (5)

- 20
21
loans made to borrowers with recent bankruptcies and late mortgage payments.
23. By increasing its origination ofnon-conforming and subprime loans

- 22
23
between 2003 and 2006, C.ountrywide was able to originate many more loans in
those years and increase its market share, even as the residential real estate market
24 declined in the United States. AB of December 31, 2003, based on its own internal
25 estimates, COlmtrywide had an 11.4% share of the United States mortgage market.

- 26
27
By September 30,2006, it had a 15.7% share of the market. While Countrywide
boasted to investors that its market share was increasing, company executives did
.- 28 not disclose that its market share increase came at the expense ofprudent

- - 10­
-

underwritinKguidelines. As a result, Countrywide's share price rose from $25.28

2 on December 31, 2003 to $42.45 on December 29,2006, the last trading day of
3 that year.

-
4
5
C. Countrywide's Market Strategy Caused it To Take On
Increasing Credit Risk

-
6 1. Countrywide's Undisclosed Expansion of Underwriting
7 Guidelines and the Matching Strategy
-
8 24. By the end of2006, Countrywide's underwriting guidelines were
9 wider and more aggressive than they had ever been. The company's aggressive
10 guideline expansion was deliberate, and began as early as 2003. Indeed, from
II· January 2003 until well into 2006, Countrywide's credit risk management
12 department ("Risk Management") spent approximately 90% of its time processing

-
13
14
requests for expansions of Countrywide's underwriting guidelines.
25. Countrywide's "matching strategy," also mown as the "supermarket

-
15
16
strategy," was a key driver of the company's aggressive expansion ofunderwriting
guidelines. The strategy committed the company to offering any product and/or
17 underwriting guideline available from at least one "competitor," which included
18 subprime lenders. Thus, if Countrywide did not offer a product offered by a
-
19 competitor, Countrywide's production division invoked the matching strategy to
20 add the product to Countrywide's menu. For example, if Countrywide's minimum
-
21 FICO score for a product was 600, but a competitor's minimum score was 560, the
22 production division invoked the matching strategy to reduce the minimum required
-
23 FICO score at Countrywide to 560. , .

-
24
25
26. The impact of the matching strategy was intensified by Countrywide's
')}o-brokering" policy, which precluded Countrywide's loan officers from referring

-
26 loan applicants to other brokers and/or institutions. Prior to its implementation,
27 loan officers could engage in a practice mown as ''brokering,'' in which the loan
-
28 officer would refer those borrowers deemed too risky for Countrywide to another

-
-11­
-

-
1 lender, which in turn paid a commission to the Countrywide loan officer. The no­
2 brokering policy increased the incentives for Countrywide's retail sales force to be
3 aggressive in finding ways for Countrywide to underwrite a loan, regardless of

-
4· whether the loan satisfied the underwriting guidelines Countrywide repeatedly
5 touted to investors.

-
6
7
27. Mozilo, Sambol, and Sieracki knew that the company was taking on
increased risk of defaults and delinquencies as a result of its widened underwriting

-
8
9
guidelines and matching strategy, yet Countrywide's periodic filings concealed the
unprecedented expansion of underwriting guidelines and the attendant increased
10 credit risk.

-
11
12 28.
2. Exception Loans Magnified Countrywide's Credit Risk
Though Countrywide proclaimed in its Fonns 10-K for 2005,2006,

-
13 and 2007 that it managed credit nsk through its loan underwriting, the company's
14. increasingly wide underwriting guidelines and exceptions process materially

-
15
16
increased Countrywide's credit risk during that time. Countrywide used an
automated underwriting system known as "CLUES" to actually underwrite loans.

-
17
18
The CLUES system applied the principles and variables set forth in the
Countrywide underwriting manuals and its loan program guide. CLUES applied a

-
19
20
device known as the "underwriting scorecard," which assessed borrower credit
quality by analyzing several variables, such as FICO scores, loan to value ratios,
-
21 documentation type (e.g., full, reduced, stated) and debt-to-income ratios. These

-
22
23
variables were weighted differently within the scorecard, depending upon their
perceived strength in predicting credit performance. In underwriting a loan,

-
24
25
Countrywide loan officers entered an applicant's information into CLUES, which
would (1) approve the loan; (2) approve the loan with caveats; or (3) "refer" the

-
26
27
loan to a loan officer for further consideration and/or manual underwriting.
29. The CLUES program typically did not "reject" a loan if a requirement

-
28 of Countrywide's guidelines had not been met or if CLUES calculated that the loan

- 12­
-
-
- presented an excessive layering of risk. Instead, CLUES ''referred'' the loan,
2 indicating that the loan application would have to be reviewed manually prior to
3 approval. In these circumstances, to proceed with the loan, the loan officer would
- 4
5
request an "exception" from the guidelines from more senior underwriters at
Countrywide's structured lending desk ("SLD"). Countrywide's level of

- 6 . exceptions was higher than that of other mortgage lenders. The elevated number
7 of exceptions resulted largely from Countrywide's use of exceptions as part of its
- 8 matching strategy to introduce new guidelines and product changes.

- 9
10
30. Further, the actual underwriting of exceptions was severely
compromised.· According to Countrywide's official underwriting guidelines,

- 11
12
exceptions were only proper where "compensating factors" were identified which
offset the risks caused by the loan being outside of guidelines. In practice,

- 13
14
however, Countrywide used as "compensating factors" variables such as
FICO and loan tova}ue, which had. already been assessed by CLUES in

- 15
16
issuing a "refer" rmding. Countrywide underwriting manuals were amended to
explicitly prohibit this practice in mid-2007, but this serious deficiency was in

- 17 place from early 2006 through early 2007, when a large volume of obviously
18 deficient exception loans were originated by Countrywide.
- 19 D. Countrywide's Business Model Became Unsustainable
20 31. As described above, Countrywide depended on its sales of mortgages
- 21 into the secondary market as an important source of revenue and liquidity. As a

- 22
23
result, Countrywide was not only directly exposed to credit risk through the
mortga~e-re1ated assets on its balance sheet, but also indirectly exposed to the risk

- 24
25
that the increasingly poor quality of its loans would prevent their continued
profitable sale into the secondary mortgage market and impair Countrywide's

- 26
27
liquidity. Rather than disclosing this increasing risk, Mozilo, Sambol, and Sieracki
gave false comfort, again touting Countrywide's loan quality. For example,
28 Countrywide stated in its 2005 Form 10-K: "We.ensure our ongoing access to the

-13 ­
-

-
1 secondary mortgage market by consistently producing quality mortgages. . .. We

-
2
3
make significant investments in personnel and technology to ensure the quality of
our mortgage loan production." A virtually identical representation appears in

- 4
5
Countrywide's 2006 Forni lO-K. Accordingly, Countrywide's failure to disclose
its widening underwriting guidelines and the prevalence of exceptions to those

- 6
7
guidelines in 2005 and 2006 constituted material omissions from Countrywide's
periodic reports.
- 8
9
E. Mozilo, Sambol, and Sieracki Were Aware of the Increased
. Credit Risk Created By Expanded Underwriting Guidelines and
- 10 Exception Loans
11 32. Countrywide's increasingly wide underwriting guidelines materially
12· increased the company's credit risk from 2004 through 2007, but this increased

-
13 risk was not disclosed to investors. In 2007, as housing prices declined,
14 CountryWide began to suffer extensive credit problems as the inherent Credit risks

-
15
16
manifested themselves.
1. The September 2004-Warning

-
17
18
33. The credit losses experienced by Countrywide in 2007 not only were
foreseeable by the proposed-defendants, they were in fact foreseen at least as early
-
19 as September 2004. Risk Management warned Countrywide'S senior officers that

-
20
21
several aggressive features of Countrywide's guidelines (e.g., high loan to value
programs, ARM loans, interest only loans, reduced documentation loans, and loans

-
22
23
with layered risk factors) significantly increased Countrywide's credit risk.
34. Countrywide was taking on more risk as a direct result of the lower
24 credit quality of the loans it was originating. Countrywide's strategy of reducing
25 risk through loan sales was being frustrated as the company produced smaller

-
26
27
percentages ofloans eligible for sale on a nonrecourse basis (e.g., FHA, VA and
conforming loans), and larger percentages of loans (e.g., subprime and

-
28
- 14­
-

-
1 nonconfonning loans) where it retained credit risk in the form ofresidual interests.

- 2 By September 2004, defendants mew the following trends:

3 • 66% ofCOlmtrywide's production was confonning in July 2003,

- 4
5 •
but conforming originations had fallen to 35% by July 2004;

21 % of Countrywide's production was nonconforming in July

- 6
7
2003, but non-conforming originations had risen to 40% by July
2004; and

- 8 • 2% of Countrywide's July 2003 production was subprime, but

subprime originations had risen to 10% by July 2004.
9

10 35. The credit risk described in the September 2004 warning worsened

-
11
12
from September 2004 to August 2007. Risk Management continuously had
discussions with Countrywide's loan production division, which reported to

-
13
14
Sambol, about the credit concerns identified in the September 2004 warning. In
fact, Risk Management conducted studies to identify relationships among certain
-
15 credit variables and their effect upon the probability that a loan would go into
16 serious delinquency or default. One finding of these studies, the results of which
-
17 were shared with Sambol and Sieracki, was that the less documentation associated

-
18 with a loan, the higher the probability of default. Nevertheless, Countrywide
19 continued to expand its underwriting guidelines, and to liberally make exceptions

-
20
21
to those guidelines, through the end of 2006. These facts were never disclosed to
investors.

-
22
23
2. Credit Risk Management Repeatedly Alerted the
Defendants to Increases in Credit Risk
24 36. Both Sambol and Sieracki were members of the Countrywide credit
25 risk committee. The credit risk committee had quarterly meetings. At these
-
26 meetings, the members were provided with detailed presentations highlighting
27 Countrywide's increased credit risk. For example, at an April 6, 2005 meeting of
28 the credit riskcornmittee attended by Sambol, McMurray reported that (1)
- 15-­
-

-
1 Countrywide non-conforming loans originated in May 2002 were twice as likely to

-
2
3
default as loans originated in January 2000; (2) the risk of home equity lines of
credit defaulting had doubled over the past year, mainly due to the prevalence of

-
4
5
reduced documentation in those loans; and (3) Countrywide was now a leader in
the subprime market in four of six categories, whereas in December 2004

-
6 Countrywide had only been a leader in two of six categories.
7 37. Similarly, Sieracki attended a June 28, 2005 meeting at which the
-
8 chiefoperating officer noted that COlmtrywide was taking on "too much" balance
9 sheet risk in home equity lines of credit ("HELOCs") and subprime loans, and had
-
10 taken on "unacceptable risk" from non-owneroccupied loans made at 95%

-
11 combined loan to value ratios, which were an exception to Countrywide's then­
12 . existing underwriting guidelines. Risk Management also reported at that meeting

-
13 . that non-conforming loan programs accounted for 40% of Countrywide's loan
14 originations and that subprime production had tripled, rising from 4% to 14% of

-
15 total production. Finally, at that same meeting, Risk Management reported to the
16 committee on evidence of borrowers misrepresenting their income and occupation
-
17 on reduced documentation loan applications, and the increasing credit risks
18 associated with Pay-Option ARM loans, for example, negative amortization,
-
19 payment shock, and the necessity of raising the initial interest rate to reduce the

-
20. speed ofnegative amortization on the loans.
21 38. Sambol and Sieracki also learned of the risks associated with the

- 22 . company's aggressive guideline expansion in meetings of other company

23 committees. For example, Sieracki was a member of the asset and liability
24 committee, and Sambol attended certain ofits meetings. If a proposed guideline
25 expansion had a modeled expected default rate in excess of 8%, the proposal had to

- 26
27
be submitted to this committee for approval. All proposed expansions to
Countrywide's subprime menu from late 2005 through 2006 presented an expected
- 28 default rate in excess of 8% and required approval of that corrunittee. In June
- 16­
-

1 2005, Sambol and McMurray engaged in a lengthy email exchange regarding the
2 impact of Countrywide's underwriting guideline expansion related to requests for
3 subprime product expansions that had been taken up by the asset and liability

-
4
5
committee in the first and second quarters of2005. In that exchange, McMurray
warned Sambol that "as a consequence of [Countrywide's] strategy to have the

-
6
7
widest product line in the industry, we are clearly out on the 'frontier' in many
areas." McMurray went on to note that the frontier had "high expected default
-
8 rates and losses."
9 39. Additionally, proposals with high expected defaults or that were
10 otherwise controversial were referred to the Countrywide responsible conduct
i1 committee for approval. Sambol was a member of this committee, which had
12 repeatedly approved guideline expansions. For instance, in late 2006

-
13
14
Countrywide's production divisions proposed expanding Countrywide's guidelines
to match certain guidelines offered by Bear Stearns and Lelunan Brothers,

-
15
16
programs that were known within Countrywide as "Extreme Alt-A." Risk
Management was concerned about the risks associated with these guidelines, and

-
17 referred the request to the responsible conduct committee. Sambol, in his capacity
18 as a member of that committee, approved the expansion.
-
19 40. Finally, both Mozilo and Sambol were aware as early as June 2006
20 that a significant percentage ofborrowers who were taking out stated income loans
-
21 were engaged in mortgage fraud. On June 1, 2006, Mozilo advised Sambol in an

-
22 email that he had become aware that the Pay-Option ARM portfolio was largely
23· underwritten on a reduced documentation basis and that there was evidence that

- 24
25
borrowers were lying about their income in the application process. On June 2,
2006, Sambol received an email reporting on the results of a quality control audit

- 26
27
at Countrywide Bank that showed that 500/0 of the stated income loans audited by
the bank showed a variance in income from the borrowers' IRS filings of greater
28
- 17 ­
-
-
- 1 than 10%. Of those, 69% had an income variance of greater than 50%. These

- 2 . material facts were never disclosed to investors.

3 3. Warnings Regarding the Matching Strategy

- 4
5
41. McMurray repeatedly provided explicit and ominous warnings about .
Countrywide's matching strategy. In a June 25,2005 email to Sambol concerning

- 6 guideline expansion and the company's growing credit risks, McMurray addressed
7 the matching strategy and explained that "because the matching process includes
8 comparisons to a variety oflenders, our [guidelines] will be a composite of the
9 outer boundaries across mUltiple lenders[,J" and that because comparisons are only
-
10 made to competitor guidelines where they are more aggressive and not used where
they are less aggressive, Countrywide's "composite guides [sic] are likely
-
11
12 among the most aggressive in the industry." (emphasis added.)

-
13
14
42. On November 2,2006, McMurray sent an email to Countrywide's
chief investment officer ("CIO"), which the CIO forwarded to Sambol, stating that ­

-
15
16
the matching strategy had caused Countrywide to cede its underwriting standards
I
to the most aggressive lenders in the market. In the email, McMurray asked: "Do

-
17 -we want to effectively cede our policy and is this approach "saleable" from a
18 risk perspective to those constituents who may worry about our risk profile?"
-
19 (emphasis added.)
In a November 16, 2006 email to Sambol, McMurray complained
-
20
21
43.
about guidelines and products being introduced in contravention of credit policy.
22 As an example, McMurray cited the fact that Extreme Alt-A loans were being
23 offered by the loan production divisions, even though that program had not been
24 officially approved in the guideline review process. The proposed guidelines
25 would have pennitted 100% financing, layered with additional credit risk factors

-
26
27
such as stated income, lower than average FICO scores, or non-owner occupied
investment properties.

-
28
- 18­
-

-
-

-
1 44. In a February 11, 2007 email to Sambol, McMurray noted that the
2 production divisions continued to advocate for, and operated pursuant to, an
3· approach based upon the matching strategy alone, and repeated his concern that the
4 ·strategy would cause Countrywide's guidelines to be a composite of the riskiest
5 offerings the market. Additionally, McMurray warned that, "I doubt this

- 6 approach would play well with regulators, investors, rating agencies etc. To
7 some, this approach might seem like we've simply ceded our risk standards and
8 balance sheet to whoever has the most liberal guidelines." (emphasis added.)
9 4. Warnings Regarding·Guideline Expansion and Disruptions
- 10 in the Secondary Market
11 . 45. By no later than 2006, Mozilo.and Sambol were on notice that
12 Countrywide's exotic loan products might not continue to be saleable into the

- 13 secondary market, yet this material risk was not disclosed in Countrywide's
. 14 periodic filings.

- 15
16
46. In September 2006 Mozilo Wrote an email to Sambol warning that he
believed that the Pay-Option loan was ''mispriced'' in the secondary market and

- 17
18
that the pricing spread could disappear quickly if there were a negative event in the
market. On February 2,2007, Risk Management warned Sambol that guideline

- 19 expansions could disrupt the secondary market for subprime mortgage backed
20 securities (''MBS''). Later in that quarter, the MBS market for subprime loans
- 21 experienced a disruption that forced Countrywide to write down loans that it had
22 previously intended to sell into that market. Then, in August 2007, the entire
- 23 market for MBS experienced a severe disruption, which effectively crippled the

- 24
25
ability of Countrywide, as well as other mortgage lenders, to sell non-GSE
securitizations into the secondary markets and contributed to Countrywide's

- 26
27
liquidity problems.

- 28
-19 ­
-

-
1 5. Warnings Regarding 1000/0 (a.k.a. 80/20 loans) Financing

-
2
3
47. The seriousness ofRisk Management's warnings on guideline
expansion and the consequences of Countrywide's failure to heed such warnings

-
4
5
are vividly demonstrated by the company's experience with "80/20" subprime
loans. An 80/20 subprime loan is a loan where a borrower with a subprime FICO

-
6
7
score simultaneously takes out two loans to purchase a home: a first lien loan
(typically 80% of the purchase price), and a second lien loan (typically 20% of the
-
8 purchase price). As a result of having 100% financed the purchase, the borrower
9 haS no initial equity in the home. Pursuant to Risk Management's "Policy on High
10 Risk Products," subprime 80/20 loans could not be originated via the exceptions
11 process, and could only be originated if Countrywide could totally extinguish the
- 12 credit risks (e.g., residual interests or corporate guarantees) resulting from such

- 13
14
loans. But the policy was ignored by the production divisions.
48. Mozilo lrnew of the risks CountrYwide incurred by originating

- 15 subprime80/20 loans and repeatedly questioned the wisdom of continuing to offer

16 the product. Mozilo becameconcemed about the loans in the first quarter of 2006,
- 17 whenHSBC, a purchaser of Countrywide's 80120 loans, began to contractually
18 force Countrywide to "buy back" certain of these loans that HSBC contended were
- 19 defective. On March 28, 2006, Mozilo sent an e-mail to Sambol and others,
20 directing them to .implement a series of corrective measures to "avoid the errors of
21 both judgment and protocol that have led to the issues that we face today caused by
22 the buybacks mandated by HSBC." Mozilo further stated that the 100% loan-to­
-
23 value (also known as 80/20) subprime product is "the most dangerous product in

-
24
25
existence and there can be nothing more toxic and therefore requires that no
deviation from guidelines be permitted irrespective of the circumstances."

-
26 49. Then, in an April 13, 2006 email, Mozilo informed Sambol, Sieracki,
27 and others that there were numerous issues that they must address relating to the
28 ·100% subprime second business in light of the losses associated with the HSBC

-
- 20­
-
- 1 buyback. One issue in particular that Mozilo identified was the fact that the loans
2 had been originated "through our channels with disregard for process [and]
3 . compliance with guidelines." Mozilo went on to write that he had "personally

- 4
5
observed a serious lack of compliance within our origination system as it
relates to documentation and generally a deterioration in the quality of loans

- 6 originated versus the pricing of those loan [sic]." Mozi10 noted that, "[iln my
7 conversations with Sambol he calls the 100% sub prime seconds as the 'milk'
- 8 of the business. Frankly, I consider that product line to be the poison of
9 ours." (emphasis added.)
10 50. Furthermore, in an April 17,2006 email to Sambolconcerning

- 11 . Countrywide's subprime 80/20 loans, Mozi10 fumed:

12 In all my years in the business I have never seen a more toxic prduct.

- 13
14
[sic] It's not only subordinated to the first, but the first is subprime. In
addition, the FICas are below 600, below 500 and some below 400[.]

- 15 ..

16
With real estate values coming down ...the product will become
increasingly worse. There has [sic] to be major changes in this

- 17
18
program, including substantial increases in the minimum FICO....
Whether you consider the business milk or not, I am prepared to go
- 19 without milk irrespective of the consequences to our production.
20 51. Echoing Mozilo's criticisms of the 80120 product, in April 2006 Risk
- 21. Management recommended increasing the minimum FICO score on the product by
22 20 points. Sambol, then.still the head of the production divisions, opposed this,
23 reconunendation, and noted that such an increase would make Countrywide
24 uncompetitive with subprime lenders such as New Century, Option One, and
25 Argent.

- 26
27
52. On December 7, 2006, Mozilo circulated a memorandum drafted for
him by McMurray to the board of directors and all Countrywide managing

- 28

- 21 ­
-

- 1 directors, including Sambol and Sieracki. In the memorandum, Mozilo made the

- 2 following observations, among others:

3
• Countrywide had expanded.its subprime
- 4 underwriting guidelines in every conceivable area,
lowering minimum FICas, raising maximum loan
5 size and LTV, and making interest only, stated
- 6 income, and piggyback second loans available to
subpnme borrowers;
7
- 8 • Countrywide expected that subprime loans
originated in 2006 (the "2006 Vrntage") would be
9 the worst performing on record, driven by wider
10 guidelines and the worsening economic
environment, which included rising interestrates and .
- 11
12
declining home v~lues;

• the percentage of 60- and 90~day delinquencies in

- 13
14
the 2006 Vintage (at 8.11 % and 4.03% respectively),
exceeded the percentages from each of the previous
six years, and the company expected these
- 15 percentages to rise; and

-
16
17
.. 62% of Countrywide's· subprime originations in the
second quarter of2006 had a loan to value ratio of
18 100%.
19 53; In April 2006, Mozilo wrote that no premium, no matter how high,

20· could justify underwriting a loan for a borrower whose FICO score was below 600.
21
.Yet CountryWide failed to disclose to investors the serious deficiencies in its
underwriting of these "toxic" loans.

- 22
23 6. Warnings Regarding Exception Loans

24 54. Mozilo, Sambol, and Sieracki were aware of significant lapses in

25 Countrywide's underwriting processes and the resulting risk to Countrywide. On

- 26 May 22, 2005, McMurray warnedSambol of the likelihood of significantly higher

27 default rates in loans made on an exception basis: "[t]he main issue is to make sure
- 28 everyone's aware that we will see higher default rates." McMurray explained that

- 22­
 1 "exceptions are generally done at tenns more aggressive than OUT guidelines:' and
2 continued that "fg]iven the expansion in guidelines and the growing likelihood
3 that the real estate market will cool, this seems like an appropriate juncture to

- 4
5
revisit our approach to exceptions." (emphasis added.) McMurray also warned
that increased defaults would cause repurchase and indenmification requests to rise
6 and the perfonnance of Countrywide-issued MBS to deteriorate.
7 55. The poor quality of the loans originated through the exception process
- 8 became even more obvious in the first quarter of 2007. In fact, in materials
9 distributed at a March 12,2007 meeting of the credit risk committee attended by
10 Sambol and Sieracki, Risk Management reported that nearly 12% of the loans
11 reviewed by Countrywide in an internal quality control process were rated
12 "severely unsatisfactory" or "high risk." The causes for such a rating included
13 findings that such loans had debt-to-income, loan to value, or FICO scores outside
. 14 of Countrywide's already wide underwriting guidelines. By the second quarter of
15 2007, Risk Management began to report a serious deterioration in the performance
16 ofexceptlon loans.
- 17 56. In a December 13,2007 memo that was sent to.Mozi10 in his capacity
18 as Countrywide's chairman of the board, Countrywide's enterprise risk assessment
19 officer noted that:
20 Countrywide had reviewed limited samples of first- and
21 second-trust-deed mortgages originated by Countrywide
22 Bank during the fourth quarter of 2006 and the first
·23 quarter of 2007 in order to get a sense of the quality of
24 file documentation and underwriting practices, and to
25 assess compliance with internal policies and procedures.

- ·26 The review resulted in ... the finding that borrower

27 repayment capacity was Dot adequately assessed by
28 the bank during the underwriting process for home
- 23 ­
-
- 1 equity loans. More specifically, debt-to-income (DTI)
2 ratios did not consider the impact of principal
3 [negative] amortization or an increase in interest.

- 4
5 ; 57.
(emphasis added)
These material deficiencies in Countrywide's underwriting were never

- 6
7
disclosed to investors in Countrywide's Forms 10-Q or lO-K for 2005 through
2007.
- 8F. Pay-Option Arms and the Discrepancy Between the Internal and
9 External Portrayals of Credit Risk
- 10 . 1. The External Story
11 5K . Countrywide began originating Pay-Option ARM loans in 2004; by
- 12 the secQndquarter of2005 21% of Countrywide's loan production was Pay-Option

- 13
.14
ARMS.. Pay-Option ARMs allowed borrowers to choose between four payment
options: (1) a minimum p~yment which was 'insufficient to cover accruing interest;

- 15
16
(2) an interest-only payment; (3) a fully amortizing payment with a 30 year pay­
off; and (4) a fully amortizing payment with a 20 year pay-off. If the minimum

- 17· payment was selected, then the accruing interest would be added to the loan's
18 principal balance, a phenomenon known as negative amortization. COlmtrywide's
- 19 P~y-Option ARM loans typically allowed for negative amortization until the
20 principal balance reached 115% of the original loan balance, at which time the
- 21 payment would reset to the amount necessary to repay principal and interest in the

- 22
23
term remaining on the loan. This resulted in a much higher monthly payment and
"payment shock" to many borrowers. Even if the borrower never reached the

- 24 . 115% threshold, the loan would typically reset after five years to a fully amortizing
25 payment. Because Countrywide began to offer Pay-Option loans in 2004,

- 26
27
Countrywide's first wave ofautomatic resets were scheduled to occur in 2009.
UnIike many other loans that Countrywide originated, most of the Pay-Option

- 28 loans were held for investment by Countrywide Bank.

- 24­

-
1 59. Countrywide publicly heralded Pay-Option loans as a safe product

-
2
3
offering. For instance, in its 2006 Form 10-K, Countrywide proclaimed that it had
"prudently underwritten" its Pay-Option ARMs. On May 31, 2006, MozDo gave a
4 .. speech in which he stated, "Pay-Option loans represent the best whole loan type
5 available for portfolio investment from an overall risk and return perspective," that,

-
6 "[t]he performance profile of this product is well understood because of its twenty
7 year history, which includes stress tests in difficult environments[,]" and that
-
8 Countrywide "actively manages credit risk through prudent program
9 guide1ines...and sound underwriting."
10 2. The Internal View
11 60. Contrary to such public statements extolling the virtues of the Pay-
12 Option ARM product, Mozi10, along with several of Countrywide's senior

-
13
14
executives, had concluded that the product's risks to the company were severe, and
they were scrambling to identify ways to mitigate them. Sambof and Sieracki were

-
15 .aware of these concerns.
16 a. Negative Amortization and Payment Shock
17 61. In June 2005, Risk Management warned senior executives, including
18 Sieracki, that action was needed to address the increasing pace of negative
19 amortization and the potential for payment shock associated with Pay-Option
ARMs. Specifically, in aJune 28, 2005 meeting of the credit risk committee,
-
20
21 which was attended by Sieracki, Risk Management recommended that the rate
22 usedto calculate the minimum payment on Pay-Option ARMs ("start rate") be
23 raised to reduce negative amortization and the severity of payment shock. Risk

-
24
25
Management explained that while the start rate remained constant at 1%, short
term rates (upon which borrowers' fully amortizing payments were based) had

-
26
..27
risen steadily, thereby increasing the pace of negative amortization and the severity
of the resulting payment shock.

-
28
- 25­
-

-
62. At aJune 22, 2006 credit risk committee meeting, attended by Sambol

-
2 .and Sieracki, Risk Management noted that the median time to reset on the pay
3 option loans was getting shorter as negative amortization was accruing at a faster

-
4 than expected pace.
5 b. Mozilo's Pointed Concerns About
-
6 Pay-Option ARMs
7 63. On April 4, 2006, Mozilo received an e-mail regarding Pay-Option
- 8 loans which informed him that "72% of [pay-Option] customers chose Minimum

- 9
10
Payment selection in February 06, up from 60% in August 05." In response to this
information Mozilo sent an email to Sambol that reflected how well he understood

- 11
12
the negative
..'
rai:nifications of the information for Countrywide: "Since over 70%
.

have opted to make the lower payment it appears that it is just a matter of time

- 13
14
that we will be faced with much higher resets and therefore much higher
delinquencies.~'·

- 15
16
64. About six weeks later, on May 18,2006, Mozilo sent another e-mail to
Sambol and Sieracki again sounding the alarm about the Pay-Option portfolio.
- 17
18
stating that "the Bank faces potential unexpected losses because higher [interest]
rates will cause the loans to reset much earlier than anticipated and as a result
- 19 causing mortgagors to default due to the substantial increase in their payments,"
20 Mozilo directed the management team to reduce "balance sheet risk" by
- 21 refinancing Pay-Options into interest-only loans and improving consumer

- 22
23
education about the consequences of resets. Mozilo concluded his e-mail by
stating that ''there is much more that we can do to manage risk much more

- 24 carefully during this period of uncertainty both as to the rate environment and
25 untested behavior ofpayoptions." The very next day, May 19,2006, Mozilo wrote

- 26 another email to Sambol and Sieracki, noting that Pay-Options loans presented a
27 long term problem "unless [interest] rates are reduced dramatically from this level
- 28 and there are no indications, absent another terrorist attack, that this will happen."

- - 26­
-

-
1 Co" Mozilo's Concerns Mount

-
2 65. Mozilo received more dire news regarding the Pay-Option loan
3 portfolio in June 2006. On June I, 2006, one day after he gave a speech publicly

-
4
5
praising Pay-Option ARMs, Mozilo sent an email to Sambol and other executives,
in which he expressed concern that the majority of the Pay-Option ARM loans
-
6 were originated based upon stated income, and that there was evidence of
7. borrowers misrepresenting their income. Mozilo viewed stated income as a factor
-
8 that increased credit risk and the risk of default. In his email, Mozilo reiterated his

- 9
10
concern that in an environment of rising interest rates, resets were going to occur
much sooner than scheduled, and because at least 20% of the Pay-Option

- 11
12
borrowers had FICO scores less than 700, borrowers "are going to experience a
payment shock which is going to be difficult if not impossible for them to

- 13 manage." Mozilo concluded that the company needed to act quickly to address
14" " these issues because "[w]e know or can reliably predict what's going to happen in

- 15
16
the next couple of years." Mozilo directed Countrywide Bank to (1) stop
accumulating loans with FICO scores below 680 unless the loan-to-value ratio was
- 17 75% or lower, (2) assess the risks that the Bank faced on loans with FICO scores
18 below 700 and determine if they could be sold out of the Bank and replaced with
- 19 higher quality loans, and (3) take a careful look at the reserves and ''begin to
20 assume the worst."
21 66. On July 10, 2006, Mozilo received an internal monthly report, called a

-
22
23
"flash report," that tracked the delinquencies in the Pay-Option portfolio, as well as
the percentage of borrowers electing to make the minimum payment and the

-
24
25
amount of accumulated negative amortization on each loan. Mozilo learned that
from September 2005 through June 2006, the percentage of Pay-Option borrowers

-
26 choosing to make the minimum payment had nearly doubled, from 37% to 71 %.
27 Mozilo believed that these statistics were significant enough that he requested that
-
28 the company include a letter in bold type with every new Pay-Option loan to

-
- 27­
-

-
1 infonn borrowers of the dangers ofnegative amortization and to encourage full

- 2
3
payment.
67. About a month later, on August 16,2006, Mozilo received an e-mail

- 4
5
from a fellow memb~r of Countrywide's board of directors, asking whether the
company anticipated any significant problems with the Pay-Option portfolio.
- 6 Mozilo responded by reiterating the ongoing concerns he had shared with senior
7 management earlier in 2006. By this point in time, over 75% of the Pay-Options
- 8 borrowers were opting for the minimum payment, which, along with rising interest
9 rates, continued to accelerate negative amortization. Mozilo explained that, as a
- 10 result, the loans would reset much faster than the borrowers expected with

- 11
12
acCompanying payment shock. The only solution, Mozilo wrote, was to refinance
the loans before reset, but this would be difficult in light of decreasing home values

- 13 and rising interest rates. Mozilo wrote that only "unlikely" events, such as a
14 dramatic rise in home values or a dramatic drop in interest rates, would alleviate

- 15
16
future payment shock.
d. Internally, Mozilo Urges Selling the Pay-Option
- 17 Portfolio
18 68. Mozilo met with Sambol the morning of September 25,2006 to
- 19 discuss the Pay-Option ARM loan portfolio. The next day Mozilo sent an e-mail ~..

- 20
21
to Samboland Sieracki expressing even greater concern about the portfolio. In
that e-mail, Mozilo wrote:

- 22
23 -
[w]e have no way, with any reasonable certainty,
to assess the real risk of holding these loans on

- 24
25
our balance sheet. The only history we can look to
is that of World Savings however their portfolio was

- 26
27
fundamentally different than ours in that their focus
was equity and our focus is fico. In my judgement,
28 as a long time lender, I would always trade off fico

- - 28­
-

1 for equity. The bottom line is that we are flying

2 blind on how these loans will perform in a stressed
3 environment of' higher unemployment, reduced
4 values and slowing home sales. (emphasis added)
5 69. In his September 26, 2006 email Mozilo further stated that "pay
-
6 options are currently mispriced in the secondary market, and that spread
7 could disappear quickly if there is an foreseen [sic] headline event such as
8 another lender getting into deep trouble with this product or because of negative
9 investor occurance [sic]." (emphasis added.) He urged that the "timing [wa]s
10 right" to sell Countrywide Bank's portfolio ofloans. To mitigate these anticipated

-
11 losses, Mozilo proposed that the Bank "sell all newly originated pay options and
12 begin rolling off the bank: balance sheet, in an orderly manner, pay options

-
13
14
currently in their port[folio]."
70. McMurray respOlided to Mozilo's September 26, 2006 email, agreeing
15 that Countrywide "should be shedding rather than adding Pay Option risk to the
16 portfolio." In the fall of 2006, Countrywide's CIa went further, and recommended
-
17 to Mozilo, Sambol, Sieracki, and others that all Pay-Option ARMs be sold from
18 Countrywide Bank because Countrywide was not receiving sufficient
-
19 compensation on these loans to offset the risk of retaining them on its balance

-
20
21
sheet.

71. Mozilo never became comfortable with the risk presented by the Pay­

-
22 . Option loan. Indeed, on January 29,2007, Mozilo wrote an email in which he
23 instructed the president of Countrywide Bank to "to explore with KPMG the
24 potential of selling out (one time transaction because of the tarred reputation of
25 Payoptions) the bulk to the Payoptions on the Bank's balance sheet and replace
-
26 them with HELGCS." Then, on November 3, 2007, Mozilo instructed the
27 presidentof the Bank and Sambol that he did not "want any more Pay Options
-
28 originated for the Bank. I also question whether we should touch this product
- 29­
-

1 going forward because of our inability to properly underwrite these combined

-
2
3
with the fact that these loans are inherently unsound unless they are full doc, no
more than 75% LTV and no piggys" (emphasis added). Finally, on November 4,

-
4
5
2007, Mozilo advised the president of the Bank and Sambol that "[pJay options
have hurt the company and the Bank badly.... World Savings culture pennits
6 them to make these loans in a sound manner aI)d our culture does not .... fico

-
7
8
scores are no indication of how these loans will perform."
72. Despite the repeated warnings ofMozilo, McMurray, and the CIO, the
9 Pay-Option ARMs were never sold, and the. clearly identified risks to Countrywide
-
10 were not disclosed to investors. Mozilo recognized as early as August 2006 that

-
11
12
Pay-Option ARM loans were one of the "only products left with margins [Profit]."
G. Mozilo, Sambol, and Sieracki Were Responsible for

-
13 Countrywide's Periodic Filings

14 73. Mozilo, Sambol, and Sieracki each bore responsibility for

-
15
16
Countrywide's periodic filings. In April 2004, Countrywide promulgated a set of
written "Disclosure Controls and Procedures ("Disclosure Guidelines")" which.
-
17 . established the procedures governing the preparation of the company's periodic

-
18
19
reports. The Disclosure Guidelines were revised in December 2005 and again in
September 2006. The Disclosure Guidelines established a disclosure committee at·
20 Countrywide, which Sieracki joined at least as early as December 2005. The
21 Disclosure Guidelines required Countrywide "to disclose on a timely basis any

-
22
23
information that would be expected to affect the investment decision of a
reasonable investor or to alter the market price of the Company's securities."

- 24
25
Countrywide's financial reporting staffwas required to:
seek input from and discuss with the Divisional Officers information
- 26 pertaining to the past and current performance and prospects for their
27 business unit, known trends and uncertainties related to the business
- 28

- - 30­
-
-

-
1 unit, [and] significant risks and contingencies that may affect the

- 2 business unit. ..
3 The Disclosure Guidelines also required that Countrywide's accounting division,

- 4 ." among others, assist the officers involved in the preparation of the company's
5 periodic reports in gaining a reasonable understanding of the applicable rules and
... 6 . regulations, including the disclosure requirements set forth in Regulation S-K and
7 the relevant SEC staff guidance and interpretive materials.
- 8 74. The preparation of the periodic reports at Countrywide began
" .
with a
9 review of the pertinent report from the prior period. The senior vice president for
10 financial reporting circulated to the head of each Countrywide division (1) a

- 11
12
memorandum setting forth Countrywide's disclosure obligations and (2) a template
("MD&A Questionnaire") that contained questions concerning the applicable

- 13" officer's division and that portion of the prior period's filing that concerned the
14 officer's division.
.... 15 . 75. Starting in the first quarter of 2006, the MD&A Questionnaire for
16 credit risk management was sent to McMurray and solicited information pertaining

- 17 to anurnber of topics related to credit risk, including (1) changes in the

- 18 management of credit risks, (2)"environmental risks and uncertainties, (3)

19· deterioration in loan quality and (4) changes in underwriting guidelines.
76.
... . 20 After circulatirig the draft MD&A Questionnaires to the divisions, the
21 financial reporting group compiled them and generated the first draft of the

- 22 periodic report, which was reviewed and edited by the chief accounting officer and
·23 "the deputy CFO. The revised draft then went to the legal department and the

- "24 senior managing directors responsible for signing sub-certifications, as well as

25 ""Sieracki, Sambol, and Mozilo.

- ·26
27
77. From the certifiers and the senior officers, the draft went to the board
of directors. When all of the certifications had been compiled, Sieracki and Mozilo
- 28 were notified and they signed Sarbanes-Oxley certifications. Sieracki also signed
- 31 ­
-

-
I all of the Fonns lO-Q and 10-K starting in the first quarter of2005 and throughout

-
2
3
2007. Sambol signed the Fonns lO-Q for the third quarter of2006 and all of the
quarters in 2007, as well as the Fonn lO-K for the year ended 2007. Mozilo signed

-
4
5
the Forms JO-K for the years ended 2005, 2006, and 2007.
H. Sambol and Sieracki Refused Suggestions to Disclose
6 Countrywide's Increased Credit Risk
7 78. Sambol and Sieracki actively participated in decisions to exclude
-
8 disclosures regarding COlmtrywide's widened llilderwriting guidelines in the
9 periodic filings. Throughout 2006, McMurray llilsuccessfully lobbied to the
10 financial reporting department that Countrywide disclose more infonnation about

-
11
12
its increasing credit risk, but these disclosures were not made.
79. In January 2007, McMurray sent an email to Sieracki, which he

-
13
14
subsequently incorporated by reference in his MD&A questionnaire, explaimng
that Countrywide's delinquencies would increase in the future due to a weakening
15 real estate market and what McMurray characterized as credit guidelines that were
16 "wider than they have ever been." On January 29,2007 McMurray provided
-
17 Sambol and others with an outline of where credit items impacted Countrywide's

-
18 balance sheet. McMurray then forwarded the email to the financial reporting staff,
19 and specifically requested that a version of the outline be included in the 2006

-
20
21
Form lO-K. The information was not included in the 2006 Form 10-K.
80. In August 2007, McMurray exchanged a series of emails with the

-
22· managing director of financial reporting suggesting revisions to the FOnTI 10-Q for
23 the second quarter of 2007. McMurray again specifically asked financial reporting

-
24
25
to include information regarding widened underwriting guidelines in the
prospective trends section of the Fonn 10-Q for the second quarter of 2007. ill
26 response, the managing director of financial reporting wrote back to McMurray,

-
27
28
stating that he did not make McMurray's changes because he "expect[ed] those

-
- 32­
-
1 changes to be trumped by certain.reviewers." ·One of those reviewers was
2· Sambol.
3 81. When McMurray's request that Countrywide disclose its widened
_.
4 underwriting guidelines was not included in the draft filing, he sent a "qualified"
5 certification to the company's Sarbanes-Oxley officer, along with an email
-
6 articulating his concerns. That email was forwarded to the deputy CFO, who then
7 spoke with McMurray about his concerns. She took his suggestions to Sieracki
-
8 and Sambol, who directed her not to include them in the Form 10-Q.

-
9
10
82. Despite McMurray's repeated requests, Countrywide never made any
disclosures in its Forms 10-Q or lO-K for 2005, 2006, or 2007 about the

-
11 unprecedented expansion of its underwriting guidelines.
12 I. Mozilo, Sambo., and Sieracki Made Mfirmative

-
13
14 83.
Misrepresentations to Investors

As set forth in detail above, Mozilo, Sambol, and Sieracki were all
15 aware that Countrywide had increasingly widened its underwriting guidelines year
16 after year from 2004 through 2006, and that Countrywide Bank's held for
17· investment portfolio included loans that were underwritten based on reduced

-
18 documentation, with loan to value ratios above 95%, and with subprime FICO
19· scores. Despite that Imowledge, Mozilo, Sambol, and Sieracki failed to include
20 theSe material facts in Countrywide's Forms lO-K and lO-Q for 2005,2006, and
21 2007. Indeed, Mozilo, Sieracki, and Sambol each made public statements from

..
.22 2005 through 2007 that were intended to mislead investors about the increasingly
23 aggressive underwriting at Countrywide and the financial consequences of those

-
24 widened underwriting guidelines.

25 1. Misrepresentations in Countrywide's Periodic Reports

-
26
27
84. From 2005 through 2007, all of the proposed defendants participated
in preparing Countrywide's periodic reports. These documents contained
-
28 misrepresentations as follows:

-
- 33­
- 1 85. First, CountryWide's Fonns lO-K for 2005, 2006, and 2007 stated that

- 2 Countrywide "manage[d] credit risk through credit policy, underwriting, quality

3 control and surveillance activities" and touted the Company's "proprietary

- 4
5
underwriting systems ... that improve the consist~ncy of underwriting standards,
assess collateral adequacy and help to prevent fraud." These statements were false,

- 6
7
because defendants knew that a significant portion of Countrywide's loans were
being made as exceptions to Countrywide's already extremely broad underwriting
- 8 guidelines.
9 86. Second, Countrywide stated in its 2005 Fonn 10-K: "We ensure our
10 ongoing access to the secondary mortgage market by consistently producing

- 11
12
quality mortgages. . .. We make significant investments in persOImel and
technology to ensure the quality of our mortgage loan production." A virtually

- 13 identical representation appears in Countrywide's 2006 Form lO-K. These

14 statements were false, because, as set forth in detail above, Mozilo, Sarnbol, and

- 15
16
Sieracki were aware that Countrywide was originating increasing percentages of
poor quality loans that did not comply with COWlttywide's Wldenyriting
17 guidelines.

- 18

20
87. Third, the descriptions of "prime non-conforming" and "subprime"
19 . loans in Countrywide's Forms lO-K were misleading because they failed to
disclose what typesofloans were included in those categories. The definition of
21 "prime" loans in Countrywide's 2005,2006, and 2007 Fonns 10-K was:

- 22
23
Prime Mortgage Loans include conventional mortgage loans,
loans insured by the Federal Housing Administration ("FHA")

- 24
25
and loans guaranteed by the Veterans Administration ("VA").
A significant portion of the conventional loans we produce

- 26
. 27
qualify for inclusion in guaranteed mortgage securities backed
by Fannie Mae or Freddie Mac ("conforming loans"). Some of

- 28 the conventional loans we produce either have an original loan

- 34­
-

-
1 amount in excess of the Fannie Mae and Freddie Mac loan limit

-
2

3
for single-family loans ($417,000 for 2006) or otherwise do not
meet Fannie Mae or Freddie Mac guidelines. Loans that do not

-
4
5
meet Fannie Mae or Freddie Mac guidelines are referred to as
~'nonconforming loans.
...
6 88. Nothing in that definition infonned investors that Countrywide
7 included in its prime category loans with FICO scores below 620. Nor did the
-
8 definition infonn investors that the "prime non-conforming" category included

-
9
10
loan products with increasing amounts of credit risk, such as (1) reduced and/or no
documentation loans; (2) stated income loans; or (3) loans with loan to value or

- 11
12
combined loan to value ratios of95% and higher. Finally, it did not disclose that
Countrywide's riskiest loan product, the Pay-Option ARM, was classified as a

- 13
14
"prime loan," and to the extent that the loan amount was below the loan limits .
established by the GSEs, would have been reported in Countrywide's Forms lO-K

- 15 as a prime conforming loan. Significantly, in 2005 and 2006, Countrywide's Pay­

- 16. Option ARMs ranged between 17% and 21 % of its total loan originations, the
17 majority of which were held for investment at Countrywide Bank.

- 18
19
·89. Fourth, the Countrywide periodic filings noted that Countrywide
originated "non-prime" loans, but failed to disclose that these loans were not

..
20
.
merely issued to borrowers with blemished credit, but also included significant
. {

21. additional risk factors, such as (1) subprime piggyback seconds, also known as

- 22
23
80/20 loans; (2) reduced documentation loans; (3) stated income loans; (4) loans
with loan to value or combined loan to value ratios of95% and higher; or (5) loans
24 made to borrowers with recent bankruptcies and late mortgage payments.

- 25
26
90. Finally, Countrywide's 2006 Fonn lO-K contained the
misrepresentation that "[w]e believe we have prudently underwritten" Pay-Option

- 27
28

ARM loans -- despite Mozilo's resounding internal alanns regarding these loans

- 35­
 -

- 1 and his and Sambol's knowledge that a significant percentage of borrowers were

- 2 misstating their incomes on stated income loans.

3 2. Mozilo and Sambol Made Additional Mfinnative

- 4 Misstatements to Investors

- 5.
.6
91. Mozilo and Sambol made affirmative misleading public statements in
addition to those in the periodic filings that were designed to falsely reassure

-
7. investors about the nature and quality of Countrywide's underwriting.
8 92. Mozilo repeatedly emphasized Countrywide's underwriting quality in

-
9 public statements from 2005 through 2007. For example, in an April 26, 2005
10 .earnings call, Mozilo falsely stated that Countrywide's Pay-Option portfolio at the

-
11
12
bank was "all high FICO." In that same call, in response to a question about
whether the company had changed its underwriting practices, Mozilo stated, "We

-
13
14
don't see any change in our protocol relative to the quality ofloans that we're
originating."

-
15 . 93. In the July 26, 2005 earnings call, Mozilo claimed that he was "not

..
16
17
aware of any change of substance in [Countrywide's] underwriting policies" and
that Countrywide had not "taken any steps to reduce the quality of its underwriting
18 regimen." In that same call, Mozilo touted the high quality of Countrywide's Pay­
-
19 Option ARM loans by stating that "[t]his product has a FICO score exceeding 700.
... the people that Countrywide is accepting under this program ... are of much
...
20
21 higher quality... that [sic] you may be seeing ... for some other lender." On
22 January 31 ~ 2006, Mozi10 stated in an earnings call "It is important to note that
23 [Countrywide's] loan quality remains extremely high."

-
24
25
94. On April 27, 2006, Mozilo stated in an earnings call that
Countrywide's "pay option loan quality remains extremely high" and that

-
26
27
Countrywide's "origination activities [we]re such that, the consumer is
underwritten at the fully adjusted rate of the mortgage and is capable ofmaking a
-
28 higher payment, should that be required, when they reach their reset period."

-
- 36­
-

-
lor years" so the company must act quickly to address these issues. In addition,

- 2
3
Mozilo failed to disclose that by the time he made the statement about the 20-year
history of pay-options, the history that he was referring to, that of World Savings,

- 4
5
no longer provided him any comfort about the future performance of the portfolio.
97. At a Fixed Income Investor Forum on September 13, 2006, Mozilo
- 6 upheld Countrywide as a "role model to others in terms of responsible lending."
7 He went on to remark that "[t]o help protect our bond holder customers, we engage
8 in prudent underwriting guidelines" with respect to Pay-Option loans. These

- 9 statements were false when made because:

10 • . On July 10, 2006, after reviewing data on an internal flash report,

- 11
12
Mozilo learned that, from September 2005 through June 2006, the
percentage of Pay-Option borrowers choosing to make the minimum
. payment had nearly doubled, from 37% to 71 %. This was the key

- 13
14
metric by which Mozilo measured the performance of the Pay-Option
portfolio;

- 15
16
• On August 16, 2006 Mozilo received an e-mail asking whether the
company anticipated any significant problems with the Pay-Option
portfolio. Mozilo responded that rising interest rates would cause the

- 17
lo'ans to reset much faster than the borrowers expected with
accompanying payment shock. The only solution, Mozilo wrote, was
to .refinance the loans before reset, but this would be difficult, in light
- 18
19 .
of decreasing home values and rising interest rates. Only unlikely
. events~ such as a dramatic rise in home values or a dramatic drop in

- 20
21 •
interest rates, would alleviate future payment shock; and

On September 26, 2006 Mozilo advised Samboland Sieracki in an

- 22
23
email that "[w]e have no way, with any reasonable certainty, to assess
the real risk of holding [pay-Option] loans on our balance sheet. The
only history we can look to is that of World Savings however their

- 24 portfolio was fundamentally different than ours in that their focus was
equity and our focus is fico. In my judgement, [sic] as a long time

-
25 lender, I would always trade off fico· for equity. The bottom line is
26 that we are flying blind on how these loans will perform in a stressed
environment ofhigher unemployment, reduced values and slowing
27
- 28
home sales." (emphasis added)

- - 38­
-

-
1 back in a February 2,2007 email, which was forwarded to Sambol, and noted that,

- 2 "[t]he obvious big topic of concern was 2006 vintage performance, both prime and
3 nonprime. All recognize that 80/20's (and the layered risk on top of them) are

- 4
5
defmitely the main culprit and are concerned that the rating agencies sized it
wrong. All want to know when we are pulling back guidelines...and why we
- 6 haven't already." (emphasis added.) They went on to note that, "[i]nvestors

- 7
8
believed that 100% financing and layered risk is the driver." (emphasis
added.)

- 9
10
102. One of the Countrywide employees attending the conference observed
that higher than expected losses on 80120 loans caused investors to fear

- 11 increasingly high losses and the possibility that their investments, which, in many
12 cases, had received AAA ratings, would be downgraded. The secondary market

- 13
14
for 80/20 loans essentially evaporated after the conference. In 2007, as a result of
the increasingly risky loans that it had been underwriting, Countrywide began to

- 15 report extensive credit problems. In May 2007, Countrywide disclosed in its Form

- 16
17
10-Q for the ftrst quarter of2007 that its consolidated net earnings for the quarter
were $434 million, a 37% decrease from net earnings in the first quarter of2006.

- 18
19
Countrywide indicated that its first quarter results had been negatively impacted by
higher delinquencies related to its subprime lending, which had caused the company

- 20
21
to (1) take a write down of $217.8 million due to its inability to sell certain ofits
subprime loans into the secondary market; (2) reduce the estimated value ofits
22 retained servicing rights by $429.6 million; and (3) increase its allowance for loan
23 losses on loans held for investment by $95.9 million.

- 24
25
103. Then, on August 9, 2007, Countrywide disclosed in its Fonn 10-Q for
the second quarter of2007 that its consolidated net earnings for the quarter were
,

- 26 $485 million, a 33% net decrease from the second quarter of 2006. Countrywide

- 27 attributed the decline to credit-related costs, specifically, a $417.2 million

28 impainnent loss on its retained interests, including $388.1 million related to home

- - 40­
-

-
1 equity loans, and a $231 million increase in its allowance for loan losses. On July

-
2
3
24,2007, in the earnings release teleconference, Countrywide disclosed for the first·
time that its definition of ''prime'' loans included loans made to borrowers with
-
4 FICO scores as low as 500, and that 80% ofits portfolio ofPay-Option loans held
5 for investment were underwritten based upon reduced documentation. After the
-
6 disclosures regarding its credit risk on July 24,2007, Countrywide's share price

-
7 dropped (rom the previous day's close of $34.06 to $30.50 on July 24, an 11 %
8. decline.
9 104. ConcUrrent with its rising credit losses, Countrywide experienced a
10 liquidity crisis in August 2007. Revenues from Countrywide's capital markets

-
11
12
loan sales arid securitizations had dropped froin $553.5 million in pre-tax earnings
in 2006 to $14.9 million in 2007, and Countrywide found itself unable to access

-
13
14
the short term credit markets by issuing commercial paper. As a result, on August
16, 2007, Countrywide announced that it had drawn down its entire $11.5 billi~n

-
15
16
credit facility to supplement its cash position. Following that announcement, the
ratings agencies downgraded Countrywide's securities, and Countrywide's stock
-
17 declined from $21.29 per share to $18.95, another approximately 11 % decline.
18 105. On August 23, 2007, Countrywide announced that Bank of America
19 had invested $2 billion in Countrywide in exchange for non-voting preferred

-
20
21
securities. .
106. On October 26,2007, Countrywide reported a quarterly loss of$1.2
22 billion. The company's Form 10-Q, filed on November 9, 2007, disclosed that
23 Coootrywide had taken a $1 billion impairment loss on its loans held for sale and

-
24
25
mortgage backed securities, and had taken $1.9 billion in credit charges related to its
allowance for loan losses and its provision for representations and warranties on
-
26 loans it had securitized and sold. In the October earnings call, Mozilo nevertheless

-
27
28
assured investors that the company would return to profitability in the fourth quarter
of2007 - a representation that caused Countrywide's share price to rise from its

- - 41 ­
-

I· previous day's close of$13.07 to $17.30 after the call, despite its poor perfonnance

-
2
3
in that quarter.
107. Thereafter, Countrywide's share price continued to trend downward,

-
4
5
driven in part by bankruptcy rumors, until it closed at $8.94 on December 31, 2007.
Then, on January 8, 2008,.Countrywide's shares dropped 28%, from $7.64 to $5.47,
-
.6 again on rumors that the company intended to file for banlauptcy. On January 11,
7. 2008, prior to reporting its year~end 2007 results, Countrywide announced that it
-
8 was being acquired by Bank of America in an all stock transaction estimated to

-
9
10
have an approximate value of $4 billion.
108. On March 29,2008, in its Form 19-K for the year ended December 31,

-
11 2007, Countrywide disclosedthat the contraction of the secondary market for its
12 . loans had increased its financing needs because it was required to hold loans for

-
13 longer periods pending sale and certain loans had become unmarketable and had to

14 be held for investment. In response to these funding needs, Countrywide disclosed

15 that it had: (1) speeded integration of mortgage banking activities into
16 Countrywide Bank to reduce its dependency on the secondary markets; (2) taken a
-
17 $2 billion infusion from Bank of America in exchange for shares ofpreferred
18 stock; (3) drawn down an $11.5 billion credit line to maintain liquidity; and (4)
19 revised its product offerings and underwriting guidelines, such that the majority of

-
20
21
its loan production was again eligible for sale to the government sponsored entities.
K. Stock SaleS ofM()zilo and Sambol
22 109. Both Mozilo and Sambol realized profits on sales of Countrywide
23 stock in 2005, 2006, and 2007, through stock sales pursuant to various IOb5-l

-
24
25
plans. From May 9, 2005, when the Form 10-Q for the first quarter of 2005 was
filed, through the end of 2007, Mozilo exercised stock options and sold the
-
26 underlying shares for total proceeds of at least $260 million, and Sambol exercised

-
27 stock options and sold the underlying shares for total proceeds of at least $40
28. million.

- - 42­
-
-
- 1 L. Mozilo, Sambo), and Sieracki Participated in Several Offerings of

- 2
3
Countrywide Securities While the Misleading Periodic Reports
Were Outstanding

-
4
5
110. On February 9,2006, Countrywide filed a registration statement on
Fonn S-3ASR that registered a then indetenninate amount of common stock,
-
6 preferred stock, stock purchase contracts, stock purchase units, and debt securities
7 ofCountrywide. Thereafter, Countrywide filed 180 prospectus supplements
8 identifying the securities it was offering for sale,. including a Post-Effective

-
9
10
Amendment to that Fonn S-3ASR dated October30, 2006. On November 16,
2007, Countrywide filed a registration statement on Form S-3ASR that registered

-
11 $2 billion worth of Series A Floating Rate Convertible Senior Debentures and $2
12 billion worth of Series B Floating Rate Convertible Senior Debentures. Sieracki,

-
13· Sambol and Mozilo signed all of these offerings, each of which incorporated one
14 ofthe false Fonn 10-Ks by reference.
15 M. Insider Trading By Mozilo
16 111. Mozilo also engaged in insider trading in Countrywide securities.
17 Mozilo established four sales plans pursuant to Rule 10b5-1 of the Exchange Act

-
18 in October, November, and December 2006 while in possession ofmaterial, non­
19 public infonnation concerning the operations and financial condition of

-
20
21
Countrywide.
C. Countrywide's Insider Trading Policy

-
22
23
112. During the relevant period, Countrywide had an insider trading policy
in effect, dated as of June 24, 2005, which prohibited trading in Countrywide

-
24
25
securities on the basis of material non-public information. The policy included a
section entitled "Material Information" that stated:

-
26
27
3.2 Material Information
U.S. federal securities laws prohibit

-
28
transactions while aware of material
nonpublic information. "MatenaI"
information means infonnation relating to the

-
- 43­
-

company with publicly traded securities,

1 whicll, ifpublicly disseminated, would likely
affect the market price of any of its securities,
-
2 or which would likely be considered
important by a reasonable investor in
3 dete~ning whether to buy, sell, or hold such

-
4
secunties.

5 In addition, the policy included a section regarding 10b5-l sales plans that stated:
-
6 4.3 10b5-l Trading Arrangements
7 A. Section 10b5-l of the Exchange Act creates
an excq>tion to the prohibition against trading
8 while in the posseSSIOn of matenal nonpublic
inform.ation. In orqer to t~e advantage of the
-
9
10
exceptIOn set forth m SecTIon 10b5-l·ofthe
Excliange Act, Directors and Executives
Officers must enter into a 10b5-l Trading

Plan; provided that such Trading Plan:

11
1. specifies the amount of shares to be
12 pur,chased or sold and the price at
which and the date on whIch the shares
13 are to be purchased or sold; or
14 11. includes a written fonnula or

-
15
16
algorithm, or computer pro@am, for
detennining the amount of shares to be
pur,chased or sold and theprice at

-
17
111.
which and the date on which the shareS
are to be purchased or sold; or
does not pennit the individual to

-
18
19
exercise any subsequent influence over
how when or whether to effect
purchases or sales; provided, in
addition, that any other person who,

-
20
21
pursuant to the contract, instruction, or
plan, did exercise such mfluence must
not be aware of the material nonpublic

-
22­
23
IV.
infonnation when doing so; and
was aclmowledged by Coun~de in
writing and pre-cleared by the Office of

-
24
25:
the CliiefLegal Officer.
113. Mozilo lmew about and understood the Countrywide insider trading

-
26
policy. In addition, prior to the execution of each 10b5-1 sales plan,
. Countrywide's legal department was requiTed to review and approve the sales plan

27
28

-
-44 ­
-

-
1 and Mozilo was required to orally represent to Countrywide's general counsel that

-
2 he was not in possession of material non-public information.
3 2. Mozilo Established His 200610b5-1 Sales Plans While
-
4 In Possession of Material, Nonpublic Information
5 114. As set forth in section E. above, in 2006, Mozilo possessed material

-
6 non-public information regarding the characteristics and performance of Pay­

-
7 . Option ARM loans as well as increasing credit risks associated with this product.
8 None of this information was disclosed to the public prior to the establishment of

-
9
10
Mozilo's sales plans in October, November, and December 2006.
·115. As set forth in section F. above, in 2006, Mozilo learned ofred flags

-
11
12
concerning Countrywide's expanded underwriting guidelines and concluded that
certain ofCountrywide's mortgage loans would have a future detrimental financial

-
13 impact on the company. In response to this information, beginning in early 2006,
14 Mazilo raised his concerns with other members of senior management and

-
15
16
instructed them to take action to mitigate risks associated with lower quality loans.
116. While in possession of this material, non-public information, Mozilo
-
17 established four different Rille 10b5-1 plans.

-
18
19
117. On October 27,2006, Mozilo established a sales plan that directed his
broker to exercise 3,989,588 stock options and sell the underlying shares on

-
20
21
specific days set forth in the plan beginning on November 1, 2006 and ending no
later than October 5, 2007 (the "October 2006 Plan").

-
22
23
118. Mozil0 gave final approval to create the October 2006 Plan during a
meeting with his financial advisor on September 25,2006, one day before sending

-
24
25
an e-mail to Sambol and Sieracki, as described in paragraphs 68 and 69 above, that
stated among other things, that "we are flying blind on how these loans will
-
26 perform in a stressed environment of higher unemployment, reduced values
27 and slowing home sales." (emphasis added).
28

-
- 45­
 ,...

1
119. Also on October 27,2006, Mozilo established a sales plan in the name

-
2
of the Mozilo Family Foundation, a charitable organization that he chaired, that
3
directed the broker to sell 91,999 shares of Countrywide stock held by the

-
4
Foundation: 23,000 shares to be sold on November 1,6, and 16,2006 and 22,999
5
shares to be sold on November 21, 2006 (the "Foundation Plan").
-
6
120. On November 13,2006, Mozilo established a sales plan for the Mozilo

-
7
Living Trust, a revocable trust created for the benefit of his family, that directed
8
the broker to sell100,000 shares of Countrywide stock in lots of25,000 shares on

-
9
November 16,21,29, and December 4,2006 (the "Trust Plan").
10
121. On December 12,2006, Mozilo established a sales plan that directed

-
11.
his broker to exercise 1,389,580·stock options and sell the underlying shares on
12·
specific days set forth in the plan begiIming on January 5,2007 and ending no later

-
13· than December 14,2007 (the "December 2006 Plan").
14 122. Mozilo executed the December 2006 Sales Plan five days after he

-
.15
16
c~culated a memorandum, described in paragraph 52 above, to all managing

directors and the board of directors that analyzed subprime mortgages.

-
17 123. On February 2,2007, Mozilo amended the December 2006 Plan

-
18 . ("February Amendment") by directing the exercise of an additional 2,467,777
19 stockoptions and selling the underlying shares on the schedule already set forth in

-
20
21
the December 2006 Plan.
124. From Novem:ber 2006 through October 2007, Mozilo exercised over
22 five million stock options and sold the underlying shares pursuant to the four sales
23 plans, realizing gains of over $139 million.

-
24 /1/
25 11/
-
26 III
27 1//
,...
28 /1/

-
- 46- .
-

-
1 FIRST CLAIM FOR RELIEF

- 2 FRAUD IN THE OFFER OR SALE OF SECURITIES

3 Violations of Section 17(a) of the Securities Act

- 4 (Against All Defendants)

5 125; The Commission realleges and incorporates by reference ~~ 1 through

- 6 124 above.
7 126: Defendants, and each of them, by engaging in the conduct described
- 8 above, directly or indirectly, in the offer or sale of securities by the use of means or

- 9 instruments of transportation or communication in interstate commerce or by the

lOuse of the mails:

- 11
12
a. with scienter, employed devices, schemes, or artifices to
defraud;

- 13 b. obtained money or property by means of untrue statements of a

14 material fact or by omitting to state a material fact necessary iI).

- 15
16
order to make the statements made, in light of the
circumstances under which they were made, not misleading; or
- 17 c. engaged in transactions, practices, or courses of business which
18 operated or would operate as a fraud or deceit upon the
- 19 purchaser.

- 20
21
127. By engaging in the conduct described above, Defendants violated, and
unless restrained and enjoined will continue to violate, Section 17(a) of the

- 22
23
Securities Act, 15 U.S:C. § 77q(a).
III

- 24 III
25 III
26 III
27 III
- 28 III
- 47­
-

-
- 1 SECOND CLAIM FOR RELIEF

- 2
3
FRAlID IN CONNECTION WITH THE PURCHASE

OR SALE OF SECURITIES

- 4
5
Violations and Aiding'and Abetting Violations of Section lO(b) of the
Exchange Act and Rule IOb-S thereunder
- 6 (Against All Defendants)
7 128. The Commission realleges and incorporates by reference ~~ 1 through
- 8 124 above.

- 9 ,129. Defendants, and each of them, by engaging in the conduct described

, 10 above, directly or indirectly, in connection with the purchase or sale of a security,

- 11 by the use of means or instrumentalities of interstate commerce, of the mails, or of

12 the facilities of a national securities exchange, with scienter:

- 1J
14,
a.
b.
employed devices, schemes, or artifices to defraud;
made untrue statements of a material fact or omitted to state a

- 15
16
material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made,
- 17 not misleading; or
18 ' c. engaged in acts, practices, or courses of business which
- 19 ' operated or would operate as a fraud or deceit upon other

- 20 ,
21
persons.
130. By engaging in the conduct described above, Defendants violated, and

- 22 lIDless restrained and enjoined will continue to violate, Section lO(b) of the
,23 Exchange Act, 15 U.S.C. § 78j(b), and Rule IOb-5 thereunder, 17 C.F.R. §

- 24
25" III

240.10b-5.

- ,26 III

27 III
- 28' III

- - 48­
-

I THIRD CLAIM FOR RELIEF

- 2
3
VIOLAnONS OF COMMISSION PERIODIC REPORTING

REQUIREMENTS

- 4
5
Aiding and Abetting Violations of Section 13(a) of the Exchange Act, and

Rules 12b-20, 13a-l, and 13a-13 thereunder

- 6 (Against All Defendants)

7 131. The Commission realleges and incorporates by reference ~~ I through

- 8 124 above.

- 9
10
132. Countrywide violated Section 13(a) of the Exchange Act and Rules

12b-20, 13a-I' and 13a-13 thereunder, by filing with the Commission annual

- II
12
reports on Fonn 10-K for fiscal years 2005, 2006, and 2007 and quarterly reports
on Fonn 10-Q for each quarter in 2005,2006, and 2007 that were materially false

- 13 and failed to include material infonnation necessary to make the required

14· statements, in light of the circumstances under which they were made, not

- 15
16
misleading.
. 133. Mozilo, Sambol, and Sieracki knowingly provided substantial .
- 17 assistance to Countrywide in its violation of Section 13(a) of the Exchange Act and
18 Rules 12b-20, 13a-I' and 13a-13 thereunder in connection with Countrywide's
- 19 annual reports for fiscal years 2005, 2006, and 2007 and its quarterly reports for

- 20
21
each quarter in 2005, 2006, and 2007.
134. By engaging in the conduct described above and pursuant to Section

- 22
23
20(e) of the Exchange Act, 15 U.S.C. § 78t(e), Mozilo, Sambol, and Sieracki aided
and abetted Countrywide's violations, and unless restrained and enjoined will

- 24
25
continue to aid and abet violations, of Section 13(a) of the Exchange Act, and
Rules 12b-20, 13a-l, and 13a-13 thereunder.

- 26 III
27 III
- 28. III

- -49 ­
-

-
- 1 FOURTH CLAIM FOR RELIEF

- 2
3
CERTIFICATION VIOLATIONS

Violations of Rule 13a-14 of the Exchange Act

- 4 (Against Defendants Mozilo and Sieracki)

135. The Commission realleges and incorporates by reference" 1 through

-
5
6 124 above.
7 136. Mozilo and Sieracki violated Rule 13a-14 by signing the certifications
- 8 included with Countrywide fiscal year 2005,2006, and 2007 Forms IO-K,

- 9
10
certifying, among other things, that the fonns fully complied with the requirements
of the Exchange Act and fairly presented, in all material respects, the financial

- 11
12
condition and results of operations of the company, when, in fact, the reports
contained untrue statements of material fact and omitted material infonnation

- 13
14
necessary to make the reports not misleading.
137. By engaging in the conduct described above, defendants Mozilo and

- 15
16
Sieracki violated Exchange Act Rule 13a-14, 17 C.F.R. § 240.13a-14. Unless
restrained and enjoined, defendants Mozilo and Sieracki will continue to violate
- 17 Rule 13a-14, 17 C.F.R. § 240. 13a-14.
18 PRAYER FOR RELIEF
- 19 WHEREFORE, the Commission respectfully requests that the Court:

- W
21
L
Issue findings of fact and conclusions of law that the defendants committed

- 22
23
the alleged violations.

II.

- 24
Issue judgments,in a fonn consistent with Fed. R. Civ. P. 65(d),
25 permanently enjoining Defendant Mozilo and his agents, servants, employees,

- 26
27
attorneys, and those persons in active concert or participation with any of them,
who receive actual notice of the order by personal service or otherwise, from
- 28 violating Section 17(a) of the Securities Act, Section 1O(b) of the Exchange Act,

- - 50­
-

1 and Rules lOb-5 and 13a-14 thereunder, and from aiding and abetting violations of

-
2
3
Section 13(a) of the Exchange Act, and Rules 12b-20, 13a-l, and 13a-13
thereunder.

-
4 III.
5 Issue judgments, in a fonn consistent with Fed. R. Civ. P. 65(d),
-
6 permanently enjoining Defendant Sambol and his agents, servants, employees,
7 attorneys, and those persons in active concert or participation with any of them,
-
8· who receive actual notice of the order by personal service or otherwise, from
9 violating Section 17(a) of the Securities Act, and Section 1O(b) of the Exchange
10 Act, and Rille 10b-5 thereunder, and from aiding and abetting violations of Section

- 11
12
13(a) ofthe ExchangeAct, and Rules 12b-20, 13a-l, and 13a-13 thereunder.
IV.

- 13 Issue judgments, in a form consistent with Fed. R. Civ. P. 65(d),

14 permanently enjoiiring Defendant Sieracki and his agents, servants, employees,

- 15
16
attorneys, and those persons in active concert or participation with any of them,
who receive actual"notice of the order by personal service or otherwise, from
- 17 violating Section 17(a) of the Securities Act, Section 1O(b) of the Exchange Act,
18 and Rules lOb-5 and 13a-14 thereunder, and from aiding and abetting violations of
-
19 Section 13(a) of the Exchange Act, and Rules 12b-20, 13a-l, and 13a-13

-
20
21
thereunder.
V.

-
22
23
Enter an order, pursuant to Section 21(d)(2) of the Exchange Act, 15 U.S.C.
§ 78u(d)(2), prohibiting defendants Mozilo, Sambol, and Sieracki from acting as
24 officers or directors of any issuer that has a class of securities registered pursuant
25 to Section 12 of the Exchange Act, 15 U.S.C. § 781, or that is required to file
-
26 reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. § 780(d).

-
27
28
III
1//

-
- 51 ­
-
....

- I ~.

- 2
3
Order defendants Mozilo and Sambol to disgorge all ill-gotten gains from
their illegal conduct, together with prejudgment interest thereon.

- 4
5
VII.
Order defendants Mozilo, Sambol, and Sieracki to pay civil penalties under

- 6
7
Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3).
VIll.
- 8
9
Order defendant Mozilo to pay a civil penalty under Section 21A(a) of the
Exchange Act, 15 U.S.C. § 78u-l(a).
- 10 IX.

II Retain jurisdiction of this action in accordance with the principles of equity

- 12 and the Federal Rules of Civil Procedure in order to implement and carry out the

- 13
14
tenns of all orders and decrees that may be entered, or to entertain any suitable
application or motion for additional relief within the jurisdiction of this Court.

- 15
16
x.
Grant such other and further relief as this Court may detennine to be just and

- 17
18
necessary.

- 19 DATED: June 4, 2009 ~~.)~

M:Mc~,III

- 20
21
22
SPENCER E. BENDELL
LYNNM. DEAN
SAM PUATHASNANON
PARIS WYNN
Attorneys for Plaintiff
23 Securities and Exchange Commission

- 24
25

- 26

27­
- 28

- - 52­
-

- 1 DEMAND·FOR JURy TRIAL

- 2
3

Plaintiff hereby demands trial by jury.

- 4 DATED: June 4, 2009

~'m.~

. McCOY, III
5 SPE CER E. BENDELL

- 6
7
LYNN M. DEAN
SAM PUATHASNANON
PARIS WYNN
Attorneys for Plaintiff
- 8 Securities and Exchange Commission

9
- 10
11
- 12

- 13
14

- 15

16

- 17
18
- 19

- 20
21

- 22
23 .

- 24
25

- 26

27
- 28
- 53­
 Press Release: SEC Charges State Street for Misleading Investors About Subprime Mortg... Page 1 of 3

- Home I Previous Page

- U.S. Securities and Exchange Commisslo

- SEC Charges State Street for Misleading Investors About

Subprime Mortgage Investments

Boston-Based Firm to Settle Charges by Repaying Fund Investors

More Than $300 Million

- FOR IMMEDIATE RELEASE

2010-21

- Washington, D.C., Feb. 4, 2010 - The Securities and Exchange

Commission today charged Boston-based State Street Bank and Trust
Company with misleading its investors about their exposure to subprime
investments while selectively disclosing more complete information to
specific investors.

- Additional Materials
:. SEC Order Against State Street Bank and Trust Company
-
-
State Street has agreed to settle the SEC's charges by paying more than
$300 million that will be distributed to investors who lost money during the
subprime market meltdown in 2007. This payment is in addition to nearly
$350 million that State Street previously agreed to pay to investors in State

- Street funds to settle private claims.

"State Street led investors to believe that their investments were more

- diversified than a typical money market portfolio, when instead they were
invested almost entirely in subprime investments that ultimately caused
hundreds of millions of dollars in losses," said Robert Khuzami, Director of
the SEC's Division of Enforcement. "Investigating potential securities law
violations arising out of the credit crisis remains a high priority for the SEC
Enforcement Division."

- The enforcement action is the result of joint efforts by the SEC with the
Massachusetts Securities Division and the Massachusetts Attorney General's
office, which both announced related charges against State Street today.

- David P. Bergers, Director of the SEC's Boston Regional Office, said, "State
Street informed certain investors and left others in the dark about their

- subprime mortgage exposure. This global settlement will ensure that

harmed investors are compensated."

According to the SEC's complaint filed in federal court in Boston and a

- related administrative order issued by the Commission, State Street
established its Limited Duration Bond Fund in 2002 and marketed it as an

- http://www.sec.gov/news/oress/2010/2010-21.htm Ll/"nOl0
-
Press Release: SEC Charges State Street for Misleading Investors About Subprime Mortg... Page 2 of3

-
"enhanced cash" investment strategy that was an alternative to a money
market fund for certain types of investors.

- By 2007, however, the fund was almost entirely invested in subprime

residential mortgage-backed securities and derivatives that magnified its

- exposure to subprime securities. But State Street continued to describe the

fund to prospective and current investors as having better sector
diversification than a typical money market fund, and failed to disclose the
extent of the fund's concentration in subprime investments.

- According to the SEC's complaint and order, State Street sent investors a
series of misleading communications beginning in July 2007 concerning the

- effect of the turmoil in the subprime market on the Limited Duration Bond
Fund and other State Street funds that invested in it. At the same time,
however, State Street provided particular investors with more complete
information about the fund's subprime concentration and other problems
- with the fund. These other investors included clients of State Street's
internal advisory groups, which provided advisory services to some
investors in this fund and related funds.

- The SEC alleges that, based on this more complete information, State
Street's internal advisory groups subsequently decided to recommend that

- all of their clients including the pension plan of State Street's publicly­
traded parent company (State Street Corporation) redeem their
investments from the fund and the related funds. The SEC alleges that
State Street sold the fund's most liquid holdings and used the cash it
- received from these sales to meet the redemption demands of better
informed investors, leav'ing the fund and its remaining investors with
largely illiqUid holdings.

- Under the terms of the settlement, State Street agreed to pay a $50 million
penalty, more than $8.3 million in disgorgement and prejudgment interest,

- and more than $255 million in additional payments to compensate

investors. Combined with nearly $350 million that State Street has already
paid or agreed to pay some investors through settlements of private
lawsuits, the total compensation to harmed State Street investors is
- approximately $663 million.

State Street also was ordered to cease and desist from -any further

- violations of certain securities laws. The SEC's enforcement action took into
account the company's remediation and its cooperation, including:

- •
.•
•
Replacement of key senior personnel and portfolio managers.
Conducting a review of its procedures and revised its risk controls.
Entering into private settlements with harmed investors.
• Recent agreement - pursuant to a limited privilege waiver - to
provide information it was not otherwise obligated to provide to
enable the SEC to assess the potential liability of individuals with
respect to certain investor communications.

- The SEC's investigation is ongoing. The Commission appreciates the

assistance of the offices of Secretary of the Commonwealth of
Massachusetts William F. Galvin and Massachusetts Attorney General
Martha Coakley.

-
htto://www.sec.Qov/news/oress/201 0/201 0-21.htm 4/5/2010
 Press Release: SEC Charges State Street for Misleading Investors About Subprime Mortg... Page 3 on

-
# # #

For more information about this enforcement action, contact:

David P. Bergers
Regional Director, SEC's Boston Regional Office

- (617) 573-8927

- http://www.sec.gov/news/press/2010/2010-21.htm

- Home I Previous Page Modified: 02/04/2010

-
-
-
-
-

-
-

-
httn://www.sec.Qov/news/oress/2010/2010-21.htm 4/5/2010
-

UNITED STATES OF AMERICA

Before the
SECURITIES AND EXCHANGE COMMISSION

- SECURITIES ACT OF 1933

Release No. 9107 / February 4, 2010

ADMINISTRATIVE PROCEEDING
File No. 3-13776

- In the Matter of ORDER INSTITUTING CEASE-AND­

- STATE STREET BANK AND TRUST
DESIST PROCEEDINGS PURSUANT TO
SECTION 8A OF THE SECURITIES ACT
COMPANY, OF 1933, MAKING FINDINGS, AND
- Respondent.
IMPOSING A CEASE-AND-DESIST
ORDER

- I.

- The United States Securities and Exchange Commission (the "Commission") deems it
appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to
Section 8A of the Securities Act of 1933 ("Securities Act") against State Street Bank and

- Trust Company ("State Street" or "Respondent").

II.

- In anticipation of the institution of these proceedings, the Respondent has submitted an

Offer of Settlement (the "Offer") which the Commission has detennined to accept. Solely
for the purpose of these proceedings and any other proceedings brought by or on behalf of

- the Commission or in which the Commission is a party, and without admitting or denying
the findings herein, except as to the Commission's jurisdiction over Respondent and the
subject matter ofthese proceedings, which are admitted, Respondent consents to the entry of
this Order Instituting Cease-and-Desist Proceedings Pursuant to Section SA ofthe Securities
Act of 1933, Making Findings, and Imposing a Cease-and-Desist Order ("Order"), as set
forth below.

III.

On the basis of this Order and Respondent's Offer, the Commission finds' that:

-
J The findings herein are made pursuant to the Respondent's Offer and are not binding on any
other person or entity in this or any other proceeding.

-
-
- 1.
Summary

During the subprime mortgage crisis in 2007, State Street engaged in a course

- of business that misled investors about the extent of subprime mortgage-backed securities
held in certain unregistered funds under its management. As a result of State Street's conduct,
investors in State Street's funds lost hundreds of millions of dollars during the subprime

- market meltdown in mid-2007.

2. State Street offered investments in certain collective trust funds to institutional

investors, including pension funds, employee retirement plans, and charities. These funds
- included two substantially identical funds - referred to together as the Limited Duration Bond
Fund (the "Fund") - made available to different categories of investors. Other actively­

- managed bond funds and a commodity futures index fund managed by State Street ("the .
related funds") also invested in the Fund. State Street established the Fund in 2002 and
marketed the Fund by saying it utilized an "enhanced cash" investment strategy that was an
alternative to a money market fund for certain types of investors. By 2007, however, the Fund

- was almost entirely invested in or exposed to subprime residential mortgage-backed securities

("subprime investments"). Nonetheless, State Street continued to describe the Fund to
prospective and current investors as having better sector diversification than a typical money

- market fund, while failing to disclose the extent of its exposure to subprime investments.

3. When the subprime market collapsed in mid-2007, many investors in the Fund

- and the related funds were unaware that the Fund had such significant exposure to subprime
investments. In fact, the Fund's offering materials, such as quarterly fact sheets,
presentations to current and prospective investors, and responses to investors' requests for
proposal, contained misleading statements and/or omitted material information about the
- Fund's exposure to subprime investments and use ofleverage. As a result, many investors
either had no idea that the Fund held subprime investments and used leverage, or believed that

-
the Fund had very modest exposure to subprime investments and used little or no leverage.

4. Beginning on July 26, State Street sent a series of shareholder communications

concerning the effect ofthe turmoil in the subprime market on the Fund and the related funds

- that misled investors and continued State Street's failure to disclose the Fund's concentration
in subprime investments. At the same time, State Street provided certain investors with
accurate and more complete information about the Fund's subprime concentration. These

- other investors included clients of State Street's internal advisory groups, which provided
advisory services to some of the investors in the Fund and the related funds. During 2007,
State Street's advisory groups became aware, based on internal discussions and internally

... available information, that the Fund was concentrated in subprime investments. Prior to July
26,2007, at least one internal advisory group also learned that State Street was going to sell a
significant amount of the Fund's distressed assets to meet significant anticipated redemptions.
State Street's internal advisory groups subsequently decided to redeem or recommend
- redemption from the Fund and the related funds for their clients. State Street Corporation's
pension plan was one of those clients. State Street sold the Fund's most liquid holdings and

- used the cash it received from these sales to meet the redemption demands of these better
informed investors, leaving the Fund with largely illiquid holdings.

- 2

- Respondent

5. State Street, a subsidiary of publicly-traded State Street Corporation, is a

- Massachusetts trust company and a bank that is a member of the Federal Reserve System.

The principal place of business of State Street and State Street Corporation is Boston,

Massachusetts. Because State Street is a bank, it relies on the exclusion from the definition of

- investment adviser contained in Section 202(a)( II) of the Investment Advisers Act of 1940.

The unregistered collective trust funds State Street advises, such as the Fund and the related
funds, similarly rely on the exclusion from the definition of investment company under

- Section 3(c)(Il) of the Investment Company Act of 1940.

Background

­ '" Background - The Limited Duration Bond Fund ("the Fund")

6. State Street established the Fund in February 2002 as an actively-managed

- fund targeting a return of one-half to three-quarters of one percent per year over the London
Inter-Bank Offer Rate (LIBOR), the interest rate that banks charge each other for short-term
loans. Like a mutual fund, the Fund offered daily redemptions, and investors purchased or

- sold units ofthe Fund based on the Fund's daily net asset value. As a bank-managed
collective trust fund, State Street only offered the Fund and the related funds to certain
investors. According to the Fund's offering materials, the Fund's minimum credit quality was

- BBB, but its average credit quality was always AA or AA+. In mid-June 2007, the Fund had
assets of approximately $3 billion.

- 7. Over the years, the Fund consistently achieved its target performance by
heavily concentrating in bonds backed by first lien mortgages to subprime borrowers. The
Fund's consistent outperformance of its benchmark and low volatility resulted in State

.. Street's decision to permit its portfolio managers of the related funds to invest up to 25% of
those funds' assets in the Fund so those funds could beat their benchmarks. As it became
harder to achieve benchmark performance by investing in other segments of the bond market,

-
State Street decided to concentrate an even greater percentage ofthe Fund in subprime
investments.

8. In 2006 and early 2007, State Street magnified the Fund's exposure to

- subprime investments by increasing the Fund's use of reverse repurchase agreements, credit
default swaps, and total return swaps tied to the outperformance of subprime investments. All
of these investments had the effect ofleveraging the Fund, and, ultimately, exposed the Fund

- to more risk and volatility.

Misrepresentations Regarding Subprime Investments. Use of Derivatives. and Leverage

- 9. In its offering documents and other communications with investors and

prospective investors, State Street stated that the Fund was sector-diversified and was an
enhanced cash portfolio (or slightly more aggressive than a money market fund). In fact, the

- Fund was concentrated in subprime bond investments and derivatives tied to subprime
investments. From inception to June 30, 2007, the Fund's quarterly fact sheet for prospective
and current investors stated:

- 3

- The Limited Duration Bond Strategy utilizes an expanded universe of securities

that goes beyond typical money markets including: Treasuries, agencies,
collateralized mortgage obligations, adjustable rate mortgages, fixed rate

- mortgages, corporate bonds, asset backed securities, futures, options, and

swaps .... When compared to a typical 2 A-7 regulated money market portfolio,

-
the Strategy has better sector diversification, higher average credit quality, and
higher expected returns. The tradeoff is this fund purchases issues that are less
liquid than money market instruments and these instruments will have more price
volatility. This Strategy should not be used for daily liquidity. Returns to the

- Strategy are more volatile over short horizons than traditional cash alternatives
and may not benefit the short-term investor.

- In 2006 and 2007, this language misled investors into believing that the Fund had better
sector diversification and higher average credit quality than a typical money market
portfolio, when in reality by that time the Fund held primarily subprime investments and

- had a lower average credit quality.

10. In its offering materials, State Street also misrepresented the Fund's
exposure to subprime investments. Through July 2007, the fact sheets, investor

- presentations, and account statements for the Fund and the related funds presented market
value sector exposures for "ABS" (asset backed securities), "MBS" (mortgage-backed
securities), etc. For example, the standard Fund presentation and Fund fact sheet that

- State Street used during the second quarter of2007 reflected the following exposures in
the Fund:

- Breakdown by Market Value

ByS~Dr
(%1

,,. ~ ""
-
- '~ ~I....--....es
_ _--:-o_,()_ _"",,

01"",
o_o_ _--.

- Although some other industry participants also included subprime investments within the "ABS"
category, State Street did not define these sector categories in its investor materials. As a result,
many investors and State Street client service personnel believed that the Fund and the related
funds had very little or no exposure to subprime investments when the subprime turmoil

- commenced in 2007 because State Street's materials showed little or no "MBS" in the funds.
Moreover, State Street also failed to explain that virtually all the Fund's ABS exposure was

-
subprime investments.

11. Investors' misunderstanding concerning the extent of the Fund's subprime

investments was further exacerbated by the fact that many of State Street's client service

- personnel who answered client questions during the period of market turmoil related to subprime
investments, like State Street's clients, did not understand that State Street's undisclosed
definition of"ABS" included subprime securities and its definition of"MBS" did not. In fact,

-
4

-
-
- most of the Fund's investors and State Street's own client service personnel were unaware that
the Fund's ABS investments were almost wholly comprised of subprime MBS.

- 12. State Street's investor marketing materials and presentations in 2006 and 2007
also misrepresented the extent of the Fund's exposure to sUbprime investment risk, including the
Fund's exposure to leveraged subprime investments. During this period, the Fund was

-- leveraged through reverse repurchase agreements on its subprime bonds and through derivative
contracts whose value rose and feB based on changes in the value of other sUbprime investments.
The notional value of a derivative contract is the total value of the derivative contract's assets,

-
and a small amount invested in a derivative contract often controls a much larger notional value.

Therefore, where a portfolio of assets includes derivative investments, information about a

portfolio's notional value relative to its market value may be necessary to determine a portfolio's

- exposure to leverage.

13. Up until 2005, State Street's investor marketing materials and presentations

-
reflected the impact of derivative positions on the Fund's sector exposures by reporting total
exposure to various asset sectors in excess of 100% of the net assets of the Fund. In 2005,
however, State Street changed these materials to describe the Fund's sector exposures by using a
presentation based on only the market value of exposures. This form of reporting displayed

- exposures totaling 100% (see chart in paragraph 10) without also disclosing that, on a notional
basis, the Fund's exposure to subprime investments often exceeded 100% because of the Fund's
investment in various subprime derivatives. As a result of State Street's change in disclosure,

- State Street failed to inform investors in many of its descriptions of the Fund's sector exposures
that the Fund's investment performance was tied to subprime and that its use of leverage
magnified its exposure to subprime.

- 14. In addition to representations of sector diversification in fact sheets, investor

presentations, and other State Street offering documents, the investors in the Fund and the related

- funds had investment management agreements with State Street concerning the investment of
their assets in State Street's funds. Some of those agreements included guidelines limiting the
use of leverage and requiring diversification. State Street's agreement to comply with those
guidelines misled investors concerning the diversification of the Fund and its use of leverage.

- 15. State Street's template response to investors' requests for proposal ("RFP") for
the Fund to the question "Describe your use of derivatives," stated:

- Approximately 20-30% of the portfolio is comprised of derivative securities.

These securities are used because they provide the portfolio with low risk and

- excellent yields. These securities also dampen the price volatility of the fund.
These issues are structurally transparent. We do not maintain a leveraged
exposure. Our competitive advantage at State Street is the use of our large
passive funds and the returns they generate to enter into total return swaps, which
- provide a nice yield to our Limited Duration Bond Strategy with minimal risks.
Derivative securities used include financial futures contracts, options and swaps.

- 16. This statement misled purchasers of the Fund because: I) the Fund's derivatives
typically exceeded 20-30% of the Fund's portfolio; 2) the Fund maintained a leveraged
exposure; and 3) the Fund's derivative investments exposed the Fund to greater risk and

- 5

.­

increased its price volatility. Nonetheless, State Street utilized this answer in a communication
with at least two prospective investors of the Fund, one of whom invested in the Fund,
representing that the Fund does "not maintain a leveraged exposure," and that there was "no

-
leverage at the product level."

17. In a standard investor presentation concerning the Fund, State Street represented
that one ofthe Fund's objectives was "[m]odest use ofleverage to manage risk and enhance
returns." However, in 2007, the Fund's use of leverage often resulted in exposure to the
subprime market in excess of 150% ofthe Fund's market value. This leverage exposed the Fund

- to significant risks and, by July 2007, the Fund's leveraged investments far exceeded the Fund's
risk budget based on the expected volatility of the Fund and its benchmark. As a result of State
Street's representations regarding leverage, many of the Fund's investors and State Street's client
service personnel did not know the Fund had leveraged positions that magnified the Fund's
exposure to subprime investments until long after the Fund began a precipitous decline in mid­
2007.

18. After a brief period of subprime market turmoil in February 2007, State Street
circulated an internal alert to its client service personnel. State Street adapted the internal alert

-
into a nearly identical letter it sent to some investors in the Fund and the related funds in early
March 2007. The internal alert and letter stated that the Fund's recent underperformance was
caused by the Fund's small position in a certain subprime derivative investment. The February
internal alert and investor letter focused on the Fund's "modest" exposure to a small position in

- this BBB rated subprime derivative investment: "One ofthe alpha drivers in State Street's active
strategies has been taking modest exposure in the investment grade triple Basset-backed
securities market, specifically the sub-prime home equity market." State Street reiterated this

- statement in an update sent to certain investors in April. As a result of State Street's internal and
external communications in the February to April 2007 timeframe, many of State Street's client
service personnel and investors in the funds believed that the Fund had a very small exposure to

- subprime investments.

State Street's Internal Advisory Groups Caused Their Investors to Redeem the Fund

- 19. Beginning in mid-June 2007, as the market for the Fund's subprime investments
was in crisis, the Fund began a precipitous decline in value. In late July 2007, State Street's
internal advisory groups recommended to their clients that they withdraw from those funds while

- State Street continued encouraging others to stay invested and to continue to invest.

20. In late July 2007, three of State Street's internal advisory groups that oversaw

- client investments in actively-managed bond funds decided that their clients should redeem their
investments in the Fund and the related funds. Those groups were aware of the Fund's exposure
to subprime investments and other problems with the Fund that had not been disclosed to other

- investors because: 1) employees of two of the advisory groups were voting members on State
Street's confidential Investment Committee that discussed at length actions to be taken in the
Fund in response to the market crisis and anticipated redemptions; 2) the advisory groups had

-
regular access to the Fixed Income trading desk and portfolio managers; and 3) the advisory
groups received versions of the internal use only subprime alerts, including State Street's early
July 2007 internal subprime alert described in paragraph 28 below, which caused these groups to
seek out and receive more information about the Fund's subprime holdings. The clients in these

- 6

- groups were invested in the Fund and 14 of the related funds. As of July 25, 2007, the clients of
these internal advisory groups held approximately 20 percent of the shares in these funds. By
early August 2007, because of State Street's actions, virtually all of the advisory groups' clients

-
had redeemed out of the Fund and the related funds.

21. On the morning of July 25, 2007, an advisory group manager attended State

- Street's Investment Committee meeting where the main topic was a "strictly confidential"
discussion about subprime problems in the actively-managed bond funds. The Investment
Committee, which had fiduciary oversight responsibility for all of State Street's funds, discussed

- major liquidity concerns with the Fund and the need to meet anticipated investor redemptions by
selling a significant percentage of the Fund's subprime investments. At the conclusion of the
discussion, the Investment Committee voted unanimously to direct the Fund's portfolio

- managers to sell assets to increase liquidity in the Fund in anticipation of investor redemptions of
25-50% at month end.

22. Between July 26 and August I, as a result of the directions from the July 25

- Investment Committee meeting, State Street raised almost $700 million in cash to meet
anticipated investor redemption demands. Approximately 75 percent ofthis cash came from the
sale of almost all of the Fund's highest rated AAA bonds, even though the Fund's AAA bonds

- were only 20 percent of the Fund's net asset value at the time of the July 25 Investment
Committee meeting. During this same period, the Fund experienced significant redemptions,
including redemptions from clients of State Street's internal advisory groups. Therefore, after

- State Street met the redemption demands of the Fund's more informed clients, average credit
quality of the Fund's bonds decreased.

23. State Street imposed no information barriers on the internal advisory groups and
- had no policies prohibiting their attendance at the Investment Committee meeting. State Street
also had no policies prohibiting the internal advisory groups from making investment decisions
about the Fund and the related funds after learning material information about the Fund and the

- related funds at an Investment Committee meeting.

24. Certain employees of one advisory group also learned through internal State

- Street meetings that: 1) Fixed Income managers believed the primary cause of the Fund's July
underperformance was Lehman Brothers' repricing of its subprime indices, and that further
declines in these indices were likely (which would exacerbate the Fund's underperformance

- issues); 2) the Fund was selling assets to raise cash in anticipation of investor redemptions; and
3) the Fixed Income managers expected a potential maximum loss in the Fund of another 3% or
4% of the Fund's value. With that knowledge, the advisory group decided to recommend

- redemption from the Fund and shortly thereafter recommended redemption from the related
funds.

-
25. On July 25, 2007, a second advisory group decided to redeem or recommend to its
clients that they redeem all oftheir holdings in the Fund and the related funds. In March 2007,
those managers had learned that subprime investments were a core part ofthe Fund strategy, the
Fund held at least 75% of its assets in subprime investments, and the Fund had exposure to
sUbprime investments besides the small subprime derivative position described in State Street's
internal February alert. A manager of that advisory group also attended State Street's Investment
Committee meetings throughout 2007 and learned that the Fund and the related funds were

- 7

, -

, -
investing more in higher rated subprime tranches.

26. After that group's decision on July 25, a group member drafted a summary that
, -. attributed its decision to recommend redemption to the recent stress on the subprime market and
the potential for continued stress on that market. All of the clients who received the
recommendation followed it.

· ­ 27. On July 27, a third State Street advisory group decided to redeem or recommend
to its clients that they redeem all oftheir holdings in State Street's actively-managed bond funds.
That group's decision was prompted by hearing that State Street's largest advisory group had
·­ decided to get clients out ofthe Fund.

Mid-2007 Communications About The Fund

. ­ 28. In early July 2007, State Street circulated an internal "client at risk" alert to its
internal advisory groups and its other client service personnel that stated that the "the cause" of
· ... "substantial underperformance in the month ofJune... was our exposure to the subprime
mortgage market, specifically our exposure to the triple B ABX and, in certain funds such as the
Limited Duration [ERISA] Fund, exposure to the high quality CDO market."

.. ­ 29. In mid-July 2007, as the subprime market situation continued to worsen, State
Street's Fixed Income group developed answers to Frequently Asked Questions (FAQs)
concerning the subprime situation. On July 26, State Street distributed the first set ofFAQs to
..... State Street's client service personnel and its internal advisory groups. Senior managers
instructed that the FAQs were "to assist you with client/consultant questions" but were "for

.. ­ internal use only" and should only be used for oral discussions with investors. The FAQs
enabled State Street's client service personnel to disclose information to certain investors who
requested it, including that the Fund was concentrated in subprime investments and that State
Street's largest internal advisory group had decided to redeem its clients out of the Fund and the
... ­ related funds. Many investors who received information from the FAQs redeemed their
investments shortly after receiving the information. In late July and early August, in response to
requests from certain investors or their outside consultants, State Street also provided the Fund's
.. ­ holdings and disclosed the fact that State Street had decided to reprice some of the Fund's
securities to reflect market prices that were lower than the vendor prices State Street had been
using to arrive at the Fund's net asset value. All but one of these investors immediately sold

.­ their investments before the Fund experienced its most significant losses in August.

30. In late July and early August 2007, as State Street was preparing to redeem
investments by investors in the Fund and the related funds (including the clients of State Street's
-- internal advisory groups) to whom State Street had provided information about the Fund's
subprime concentration and other risks, State Street also was sending letters to all investors in the
Fund and the related funds that continued to keep many investors in the dark. Investors who
-- only received State Street's offering materials plus its late July and early August letters
continued to be misinformed about the risks of the Fund and the related funds and the actions
State Street was taking in response to the market crisis. As a result, most of these investors
.. ­ experienced significant investment losses as they continued to hold or purchase shares of the
Fund and the related funds after State Street had made disclosures to other investors that caused
these more informed investors in the Fund and the related funds to redeem their investments.

-- 8

--
.­
--
A. On July 26,2007, State Street sent a letter to all investors in the Fund and
related funds concerning the impact of tunnoil in the subprime market on those funds.
The letter was originally based on the internal "client at risk" alert from early July, but
the five-paragraph letter that investors finally received did not include any of the
infonnation from that alert regarding the extent of exposure to subprime investments in
the Fund. Nor did the letter include the infonnation State Street disclosed to its internal
advisory groups and certain other investors described above in paragraphs 19 to 29. The
letter disclosed little more than the fact that recent events in the subprime market "are
impacting perfonnance in some of our active fixed income portfolios in which you are
invested directly or indirectly."

B. As for State Street's view of the subprime situation and what it would do
_... in response to the situation, the July 26 letter stated:

We believe that what has occurred in June, and thus far in July, has been more
driven by liquidity and leverage issues than long tenn fundamentals ... We have
been seeking to reduce risk in those portfolios where we believe it is appropriate
by taking advantage of liquidity in the market when it exists, and will continue to
do so, while seeking to avoid putting undue pressure on asset valuations.
_... However, in conveying that it was seeking to reduce risk, State Street omitted that the
steps it was taking to take advantage of liquidity would result in the Fund holding bonds
oflower average credit quality and greater illiquidity. As described above, after the July
-.'" 25 Investment Committee meeting, State Street sold almost all of the Fund's highest rated
bonds to meet investor redemptions. To meet the early redemption demands of the more
infonned investors, including State Street's internal advisory group clients, State Street
depleted the cash it raised from the sale of the Fund's highest rated assets at a much faster
rate than it sold the Fund's lower rated bonds, resulting in a Fund that held bonds of
lower average credit quality and greater illiquidity for investors who remained in the
Fund after the anticipated redemptions. Therefore, after receiving State Street's subprime
update on July 26, investors relying on State Street's written materials still had no idea
they were in a subprime concentrated fund, or that the Fund would soon be concentrated
in lower-rated subprime bonds.

C. On August 2,2007, State Street asked its client service personnel to send
another letter to all affected investors concerning the subprime situation and preliminary
July perfonnance returns. The letter did not disclose the infonnation described in
paragraphs 19 to 29 above that State Street had provided to its internal advisory groups
and certain other investors who requested the infonnation. In the August 2 letter, State
Street again stated it had taken actions to reduce risk, including the sale of certain
subprime bonds, while maintaining the Fund's average credit quality. However, State
Street had sold almost all of the Fund's highest rated subprime bonds, and, upon meeting
anticipated investor redemptions in late July and early August, the Fund's bonds were
increasingly lower credit quality. Those investors who remained in the dark concerning
the Fund's risks invested in or continued to hold their investment as the Fund became
concentrated in lower-rated subprime bonds.

31. On August 14, 2007, State Street sent a third letter concerning the subprime

9
-

-
situation to all affected investors except the clients of State Street's advisory groups. However,
once again, the letter did not include the information State Street disclosed to its internal

- advisory groups and certain other investors described in paragraphs 19 to 29 above. The August
14 letter stated: "While we will continue to liquidate assets for our clients when they demand it,
we believe that many judicious investors will hold the positions in anticipation of greater
liquidity in the months to come," despite the fact that State Street knew that many of the Fund's

- investors, including its internal advisory groups and State Street Corporation's pension plan, had
redeemed their entire investment in the Fund. In addition, the letter failed to disclose that State
Street had already sold the Fund's most liquid investments and used the cash from those sales to

- meet investor redemptions.

32. On October 5, 2007, State Street sent another letter to all of its clients concerning

- a recent lawsuit filed by an investor for losses in funds invested in the Fund. This letter

represented:

- Unfortunately, due to certain client redemptions, we were obligated to sell

otherwise unimpaired assets into a market which was largely illiquid creating
realized losses. These redemptions were a contributing factor in the negative

- returns. They were not the result of any failure on the part of SSgA's investment
management. ..

- However, these redemptions, which included State Street Corporation's pension plan's
redemption, in part resulted from State Street's own actions that Jed to decisions by State Street's
internal advisory groups to redeem or recommend redemption ofthe Fund and the related funds.

- Violations

-
33. As a result ofthe conduct described above, State Street violated Section
17(a)(2) and Section 17(a)(3) of the Securities Act in that, in the offer and sale of securities
and by the use of the means and instruments of transportation or communication in interstate
commerce or by use of the mails, it directly or indirectly has obtained money or property by

- making untrue statements of material fact and/or by omitting to state material facts necessary
in order to make the statements made, in light of the circumstances under which they were
made, not misleading. In addition, in violation of Section 17(a)(3) of the Securities Act, State

- Street engaged in the transactions, practices, or courses of business described above that
operated or would operate as a fraud or deceit upon the purchasers of such securities.

Respondent's Cooperation and Remedial Acts

34. In determining to accept State Street's settlement offer, the Commission took
into account the company's remediation and its cooperation. Among other things, State
Street: (a) replaced key senior personnel and portfolio managers; (b) conducted a review of its
procedures and revised its risk controls; (c) entered into private settlements agreeing to pay
over $300 million to investors; (d) agreed to pay an additional $250 million to compensate

- investors; and (e) recently agreed - pursuant to a limited privilege waiver - to provide
information it was not otherwise obligated to provide to enable the Commission to assess the
potential liability of individuals with respect to certain investor communications.

10

 .. '"

... ­

.­ IV.

-- In view of the foregoing, the Commission deems it appropriate and in the public

interest to impose the sanctions agreed to in the Respondent's Offer.

-- Accordingly, pursuant to Section 8A of the Securities Act, it is hereby ORDERED that

State Street shall cease and desist from committing or causing any violations, and any future
violations of Section 17(a)(2) and Section 17(a)(3) of the Securities Act.

-- By the Commission.

Elizabeth M. Murphy
Secretary

_...

II
-

- ISDA Credit Default Swaps

Summitry of Deliverable Obligation Types, 2005- March 3, 2010

-
om! • sea.rllIes! • Loans! % Securities!Status !ooteType
AIFUl Corporation 3/3/2010 17 31 35.4% Active "Auction Settlement Terms Olte B
CEMEX, 5.A.B. DE C.V. 2/16/2010 5 7 41.7% Active Auction Settlement Terms Date B
Financial Guaranty Insurance Company 1/7/2010 117 o 109.0% Active Credit Event Auction SUmma ry Date 5
Nahogaz 12/16/2009 1 o 100.0% Active Credit Event Auction SUmmary Date 5

-
HelJas Telecommunications (luxembourg) II 12/15/2009 2 o 100.0% Active Credtt Event Auction SUmmary Date 5
Thomson (Bankruptcy) 12/10/2009 9 1 90.0% Active Credit Event Auction Summary Date B
CiT Group 11/20/2009 29S 4 9B.7% Active Credit Event Auction Summary Date B
Thomson (Restructuring) 10/22/2009 9 1 90.0% Active Credit Event Auction Summary Dlte B
Bradford & Bins:ley senior COS 7/30/2009 32 o 100.0% Closed Credit Event Auction Summa ry Date 5

-
8radford & Bingrey Subordinated COS 7/30/2009 36 o 100.0% Closed Credit Event Auction Summary Date 5
lear Corporation 7/21/2009 3 o 100.0% Closed Credit Event Auction SUmmary Date 5
Six Flags, Inc. 7/9/2009 4 o 100.0% Closed Credit Event Auction Summary Date 5
Visteon Corp 6/23/2009 4 o 100.0% Closed Credit Event Auction SUmmary Date 5
JSC Alliance Bank 6/1S/2009 6 2 75.0% CIo..,d Credit Event Auction Summary Date B
General Motors Corp 6/12/2009 21 o 100.0% Closed Credit Event Auction Summary Date 5

- R. H. Donneltv
JSC BTA Bank
Syncora
Bowater Incorporate
Idearc, Inc.
6/11/2009
6/10/2009
5/27/2009
5/12/2009
4/23/2009
16
34
6
7

2
o
9
o
o
o
100.0%
64.0%
100.0%
100.0%
100.0%
Closed
Closed
Closed
Closed
Closed
Credit Event Auction Summary Date
Credit Event Auction Summary Date
Credit Event Auction Summary Date
Credit Event Auction Summary Date
Credit Event Auction SUmmary Date
5
B
5
5
5

-
Capmark Financial Group, Inc. 4/22/2009 3 1 75.0% Closed Credit Event Auetfon Summary Oate B
Charter Communications Holdings LlC 4/21/2009 19 o 100.0% Closed Credit Event Auction Summary Date 5
Abitibi -Consolidated, Inc. 4/17/2009 13 o 100.0% Closed Credit Event Auction Summary Date 5
lyondellbasellindustries AF S.C.A. 4/16/2009 4 o 100.0% Closed Credit Event Auction Summary Date 5
o

-
The Rouse Company lP 4/15/2009 5 100.0% Closed Credit Event Auction Summary Date 5
Chemtura Corporation I Great lakes Chemiul Corporation 4/14/2009 3 o 100.0% Closed Credit Event Auction Summary Date 5
Station Casinos, Inc. 3/31/2009 2 o 100.0% Closed Credit Event Auction Summary Date 5
Smurfit-Stone Container Enterprises, Inc. 2/19/2009 5 o 100.0% Closed Credit Event Auction Summary Date 5
Nortel Networks Corporation 2/10/2009 14 o 100.0% Closed Credit Event Auction Summary Date 5
Nortel NetworQ ltd. 2/10/2009 12 o 100.0% Closed Credit Event Auction Summary Date 5

-
lvondell Chemical Company CDS senior Unsecured 2/3/2009 3 5 37.5" Closed Credit Event Auction Summary Date B
Millenium America Inc. 2/3/2009 1 o 100.0% Closed Credit Event Auction Summary Dlte 5
Equistar Chemicals, lP 2/3/2009 1 o 100.0% Closed Credit Event Auction Summary Date 5
The Republic of Ecuador 1/14/2009 3 o 100.0% Closed Credit Event Auction Summary Date 5
Tribune Company 12/16/200S 6 6 $0.0% dosed CD5 Protocol B

- landsbanki islands hf
Glitnir B.nld hf
kaup~jng Banki hf
Washington Mutual Inc.
lehman Brothers Holdings Inc.
Federal Nationa' Mortgage Association (FNMA)
10/27/2008
10/27/200S
10/27/2008
10/15/2008
10/6/2OOS
9/29/200S
61
77
61
9
206
161
2
1
6
o
o
o
96.8%
9B.7%
91.0%
100.0%
100.0%
Closed
Closed
Closed
Closed
Closed
100.0% Closed
COS Protocol
CD5 Protocol
CD5 Protocol
COS Protocol
CD5 Protocol
COS Protocol
B
B
B
5
5
5

- Freddie Mac
Tembec Industries Inc.
Quebecor World Inc.
Dura Operating Corp
Dana Corporation
9/29/2008
9/17/200S
1/30/200S
11/S/2006
3/16/2006
191
o

3
13
6
o
1
o
o
o
100.0%
0.0%
100.0%
100.0%
100.0%
Closed
Closed
Closed
Closed
Closed
COS Protocol
CD5 Protocol
COS Protocol
COS Protocol
CD5 Protocol
5
l
5
5
5

- Calpine Corporation
Delphi Corporation
Delta Air lines, Inc.
Northwest Air lines, Inc.
Collins & Aikman Products Co.
1/9/2006
10/2S/2005
9/23/2005
9/23/2005
5/26/2005
14
4
S
5
1
o
o
o
o
o
100.0%
100.0%
100.0%
100.0%
100.0%
Closed
Closed
Closed
Closed
Closed
CD5 Protocol
COS Protocol
COS Protocol
CDS Protocol
COS Protocol
5
5
5
5
5

- .. Deliverable obligations were loansll), Securities I S), or 80th I BJ.

Obfigations were categorized as either a loanor a security in the following manner:

1.) If the documentation listed separate obligations as either "bonds" or ")oans: aU "bonds· were classified as "Securities," while all "loans" were claS$rfied as "loans.·

-
2,) If the documentation did not categorize the obligations and the obligation had a CUSIP it was classified as a -securfty," otherwise itwiJS classified as a "Loan.·

Summary Statistics
"Entfty-Events: 51

" Entity-Events w/Loans Only: 1 2.0%

" Entity-Events w/Securities & loans: 13 25.5%

" Entity-Events wlSecurities Only: 37 72.5%

" Securities: 1,543 95.2%

" Loans: 77 4.8%

- Total Deliverable Obligations:

Ratio of Securities/Loans:
Average" of Each Entity-Event's Obligations that are Securities:
"of Entity-Events with only Securities:
1,620

20.04
91.1%
72.5%

-
Sourcesj

http://credltfixinss.com

http://jsda.oIJ

hllp:!/WwW-isela.Q{glpro!ocoVoro! cds Icels euro!cds.hlml#cds

-
- AHMIGAM/TMJ
Special Grand Jury # _I
Dec. 2008

- IN THE UNITED STATES DISTRICT COURT FOR THE

NORTHERN DISTRICT OF ALABAMA

- SOUTHERN DIVISION

- UNITED STATES OF AMERICA )

)
v. ) 2:08-CR-00245-LSC-PWG
- )
LARRY P. LANGFORD, ) SUPERSEDING
-
- THE GRAND JURY CHARGES:
INDICTMENT

- INTRODUCTION

- At all times material to this Indictment:

1. Jefferson County, Alabama, was a local government that received

- benefits in excess of $1 0,000 under a Federal program involving a grant, contract,

subsidy, loan, guarantee or other form of federal assistance during each fiscal year

- beginning with fiscal year 2001 and continuing through fiscal year 2007.
2. The Jefferson County Commission was the governing body of Jefferson

- County, Alabama, and was comprised of five Commissioners, each elected by the

- voters ofhislher district. The President of the Commission presided over the
Commission, signed contracts and other agreements on behalf of the Commission,

- and served as the head of the Finance and General Services Department.

- 3. Defendant LARRY P. LANGFORD was elected to the Jefferson

County Commission in 2002 and was a member of the Commission until
November 2007. Defendant LARRY P. LANGFORD served as President ofthe

1
-
-
- Commission and head of the Department of Finance and General Services from in
or about November 2002 until November 2006. As head of the Department of
- Finance and General Services, defendant LARRY P. LANGFORD was

- responsible for the administration of the financial affairs of Jefferson County; he

made recommendations to the Commission regarding proposed financial

- transactions of Jefferson County and firms that would participate in financial

transactions.

- 4. Based on his position with the Jefferson County Commission, defendant

LARRY P. LANGFORD owed a duty ofloyalty to Jefferson County, Alabama,
- and its citizens, free from deceit, self-enrichment, concealment, and conflict

- between his personal interests and the interests of Jefferson County, Alabama.
Specifically, as a county commissioner in Alabama, defendant LARRY P.

- LANGFORD owed Jefferson County, Alabama, and its citizens a duty to, among

-
other things: (a) refrain from using his official position or office to obtain personal
benefit for himself or a family member, pursuant to Ala. Code § 36-25-5;

- (b) refrain from soliciting or receiving a thing of value for himself or a family

- member for the purpose of influencing official action, pursuant to Ala. Code §
36-25-7; and (c) disclose, and not conceal, personal financial interests, the nature
and amount of income received, and other material financial information, pursuant
to Ala. Code § 36-25-14.
- 5. In or about 1996, the Jefferson County Commission entered into a

- consent decree under which Jefferson County agreed to repair its sewer system to
bring it into compliance with the Clean Water Act. To fund those improvements

- and other needs of Jefferson County, the Jefferson County Commission authorized
and entered into several financial transactions involving billions of dollars.

- 2

- 6. Blount Parrish & Co., Inc., was an investment banking finn located in
Montgomery, Alabama. Defendant WILLIAM B. BLOUNT was the Chainnan
- and an owner of Blount Parrish & Co., Inc. and other companies. Defendant

- WILLIAM B. BLOUNT and his companies received approximately $7.1 million

in fees in connection with Jefferson County financial transactions.

- 7. Defendant ALBERT W. LAPIERRE was a lobbyist registered in the

State of Alabama and was paid approximately $219,500.00 by defendant

- WILLIAM B. BLOUNT and his companies in connection with Jefferson County

- financial transactions.

Count One

Bribery

- Title 18, United States Code, Section 666(a)(l)(B)

On or about June 16,2003, within Jefferson County in the Northern District
-. of Alabama, and elsewhere, the defendant

- LARRY P. LANGFORD
being an agent of Jefferson County, Alabama, which county received federal

- benefits in excess of $1 0,000 in a one-year period, did corruptly solicit and

demand for the benefit of any person, and accept and agree to accept, anything of
value from any person, intending to be influenced and rewarded in connection

-
with any business, transaction, and series of transactions of Jefferson County
involving anything of value of $5,000 or more, that is, defendant LARRY P.

- LANGFORD, being the President of the Jefferson County Commission and the
head of the Department of Finance and General Services, corruptly solicited,
accepted, and agreed to accept money, cash, and checks valued at approximately
$69,000 from William B. Blount, Blount Parrish & Co., Inc., and Albert W.
..... LaPierre, intending to be influenced and rewarded in connection with bond

- 3

- transactions and swap agreements involving Jefferson County.

All in violation of Title 18, United States Code, Section 666(a)(l )(B).
-
- Count Three
Money Laundering

- Title 18, United States Code, Section 1957

On or about June 14,2003, in Jefferson County in the Northern District of

- Alabama, and elsewhere, the defendant

LARRY P. LANGFORD
- did knowingly engage and attempt to engage in a monetary transaction by,

- through, and to a financial institution, affecting interstate or foreign commerce, in

criminally derived property of a value greater than $10,000, that is, withdrawal

- and transfer of funds in the amount of $12,000, such property having been derived
from a specified unlawful activity, that is, bribery, in violation of Title 18, United

- States Code, Section 666 (a)(1)(B), in that defendant LARRY P. LANGFORD

paid Likis Audio $12,000 for audio equipment with·a check drawn on his account
at Compass Bank, into which bribery proceeds had previously been deposited.

-
All in violation of Title 18, United States Code, Section 1957.

-
- Count Four
Money Laundering
- Title 18, United States Code, Section 1957

- 4

,...

- On or about June 14, 2003, in Jefferson County in the Northern District of

Alabama, and elsewhere, the defendant

-
LARRY P. LANGFORD
- did knowingly engage and attempt to engage in a monetary transaction by,

- through, and to a financial institution, affecting interstate or foreign commerce, in

criminally derived property of a value greater than $10,000, that is exchange and

- transfer of funds in the amount of $12,000 by, through, and to a financial

institution, such property having been derived from a specified unlawful activity,
... that is, bribery, in violation of Title 18, United States Code, Section 666 (a)(1)(B),
in that defendant LARRY P. LANGFORD paid Shaia's $12,000 for luxury
...
clothing items with a cashiers check purchased at Compass Bank using funds paid

... to him as a bribe.

All in violation of Title 18, United States Code, Section 1957.
...
...
Count Five
- Money Laundering
Title 18, United States Code, Section 1957
... On or about June 14, 2003, in Jefferson County in the Northern District of

- Alabama, and elsewhere, the defendant

LARRY P. LANGFORD

- did knowingly engage and attempt to engage in a monetary transaction by,

through, and to a financial institution, affecting interstate or foreign commerce, in

- criminally derived property ofa value greater than $10,000, that is deposit of

- 5

-
-
- funds in the amount of $40,589 by, through, and to a financial institution, such
property having been derived from a specified unlawful activity, that is, bribery, in

- violation of Title 18, United States Code, Section 666 (a)(1 )(B), in that defendant

- LARRY P. LANGFORD deposited $40,589 into his account at Compass Bank

using funds paid to him as a bribe.

- All in violation of Title 18, United States Code, Section 1957.

.­
.­

Count Six

Conspiracy

,-­ Title 18, United States Code, Section 371

-- THE CONSPIRACY
1. The Grand Jury repeats and realleges the allegations contained in

- paragraphs 1 through 7 of the Introduction to this Indictment as though fully set

out herein.

- 2. From in or about July 2002 and continuing until in or about May 2007,

- the exact dates being unknown, within Jefferson County in the Northern District of
Alabama, and elsewhere, defendants

- LARRY P. LANGFORD,
WILLIAM B. BLOUNT, and
ALBERT W. LAPIERRE

-
- 6

.....
MANNER AND MEANS OF THE CONSPIRACY

- 3. It was a part of the conspiracy that defendant LARRY P. LANGFORD

would and did use his power and influence as President of the Jefferson County

- Commission and head of the Department of Finance and General Services to

include defendant WILLIAM B. BLOUNT and Blount Parrish & Co., Inc., in
- Jefferson County financial transactions involving billions of dollars and thereby

- generate millions of dollars in fees for defendant WILLIAM B. BLOUNT and his
compames.
.. 4. It was a further part of the conspiracy that defendant WILLIAM B.
BLOUNT and his companies would and did pay defendant ALBERT W.
- LAPIERRE hundreds of thousands of dollars in connection with Jefferson
County financial transactions.
- 5. It was a further part of the conspiracy that defendants WILLIAM B.

- BLOUNT and ALBERT W. LAPIERRE would and did give money to and pay
off loans and buy expensive clothing and jewelry for defendant LARRY P.

- LANGFORD to influence and reward him in connection with Jefferson County

- financial transactions.
6. It was a further part of the conspiracy that defendant LARRY P.
LANGFORD would and did solicit, demand, accept, and agree to accept items of
value totaling approximately $235,000.00 from defendants WILLIAM B.

- BLOUNT and ALBERT W. LAPIERRE intending to be influenced and

rewarded in connection with Jefferson County financial transactions.
- 7. It was a further part of the conspiracy that defendants LARRY P.
LANGFORD, WILLIAM B. BLOUNT, and ALBERT W. LAPIERRE would
and did conceal the payment and receipt of items of value.

- 8

-
- OVERT ACTS

In furtherance of the conspiracy and to achieve the objects thereof, the

- conspirators committed and caused to be committed the following overt acts,

- among others, in the Northern District of Alabama and elsewhere:

8. On or about July 19,2002, defendant WILLIAM B. BLOUNT helped

- defendant LARRY P. LANGFORD obtain a $50,000.00 unsecured loan with a

six month term from Colonial Bank.
- 9. On or about February 14,2003, defendant ALBERT W. LAPIERRE
obtained a $50,000.00 loan from Colonial Bank to payoff defendant LARRY P.
- LANGFORD's note, which was then past due.

- 10. On or about March 6,2003, defendant LARRY P. LANGFORD and

the Jefferson County Commission approved a Resolution ordering the issuance of

- the Series 2003-A General Obligation Capital Improvement and Refunding

Warrants in the amount of$94 million. Defendant LARRY P. LANGFORD and
- the Jefferson County Commission selected Blount Parrish & Co., Inc., as an
underwriter, for which defendant WILLIAM B. BLOUNT and Blount Parrish &
- Co., Inc., received over $200,000.00 in fees.

- 11. On or about March 27,2003, defendant LARRY P. LANGFORD and

the Jefferson County Commission approved a Resolution authorizing Jefferson

- County to enter into an interest rate swap transaction with lP Morgan Chase Bank
in the approximate amount of $1.1 billion.
- 12. On or about March 28, 2003, defendant LARRY P. LANGFORD

- received letters confirming that lP Morgan had been requested, as a condition to

entering the swap transaction, to include Goldman Sachs in the transaction and

- confirming that Goldman Sachs intended to pay consulting fees to Blount Parrish
& Co., Inc.

- 9

-
- 13. On or about April 22, 2003, defendant LARRY P. LANGFORD and
the Jefferson County Commission approved a Resolution ordering the issuance of
- the Series 2003-B Warrants in an amount not exceeding $1.17 billion. Defendant
LARRY P. LANGFORD and the Jefferson County Commission selected Blount
Parrish & Co., Inc" as a Remarketer, for which defendant WILLIAM B.

- BLOUNT and Blount Parrish & Co., Inc., received substantial fees.
14. On or about May 7,2003, defendant WILLIAM B. BLOUNT and
- Blount Parrish & Co., Inc., received $500,000.00 from Chase Bank in connection
with a Jefferson County financial transaction.
15. On or about May 27,2003, defendant WILLIAM B. BLOUNT and

- Blount Parrish & Co., Inc., received $300,000.00 from Goldman Sachs in
connection with a Jefferson County financial transaction.

- 16. On or about May 28,2003, defendant WILLIAM B. BLOUNT wrote a

check for $50,000.00 to defendant ALBERT W. LAPIERRE.
... 17. On or about May 30,2003, defendant ALBERT W. LAPIERRE paid
$20,000.00 toward the loan at Colonial Bank he obtained to payoff defendant
- LARRY P. LANGFORD'S loan.

- 18. On or about June 5, 2003, defendant ALBERT W. LAPIERRE paid

approximately $30,000.00 toward the loan at Colonial Bank he obtained to payoff

- defendant LARRY P. LANGFORD'S loan.

19. On or about June 12,2003, defendant WILLIAM B. BLOUNT wrote a
- check for $69,000.00 to defendant ALBERT W. LAPIERRE.

... 20. On or about June 16, 2003, defendant ALBERT W. LAPIERRE wrote
a check for $69,000.00 to defendant LARRY P. LANGFORD.

... 21. On or about July 1,2003, defendant LARRY P. LANGFORD and the
Jefferson County Commission approved a Resolution authorizing Jefferson
... 10

- County to enter into an interest rate swap transaction with JP Morgan Securities
and Bank of America in the approximate amount of $1.1 billion.
- 22. On or about July 25, 2003, while on a trip to New York City with
defendant LARRY P. LANGFORD and others related to a Jefferson County bond
- transaction, defendant WILLIAM B. BLOUNT paid approximately $2,850.00 to

- Oxford Clothes for clothing for defendant LARRY P. LANGFORD.

23. On or about July 28,2003, defendant WILLIAM B. BLOUNT and his

- companies received approximately $2.6 million from JP Morgan Chase in

connection with a Jefferson County financial transaction.
- 24. On or about July 29,2003, defendant WILLIAM B. BLOUNT paid

- defendant ALBERT W. LAPIERRE $100,000.00 in connection with a Jefferson

County financial transaction.

- 25. On or about August 5, 2003, defendant LARRY P. LANGFORD and

the Jefferson County Commission approved a Resolution ordering the issuance of
- the Series 2003-C Warrants in the approximate amount of $1.05 billion and

- naming JP Morgan Securities and Banc of America Securities as underwriters.

26. On or about October 1, 2003, defendant WILLIAM B. BLOUNT paid

- $3,134.70 to Bromberg & Company for jewelry for defendant LARRY P.

LANGFORD.

- 27. On or about October 2, 2003, defendant WILLIAM B. BLOUNT and

Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson
- County financial transaction.

- 28. On or about October 20,2003, defendant LARRY P. LANGFORD,

acting for the Jefferson County Commission, entered into a financial transaction in
the approximate amount of $11 0 million that included Bank of America and
Lehman Brothers Special Financing, Inc. The agreement required Lehman

- 11

- Brothers to pay a broker's fee or arrangement fee of$35,000 to Blount Parrish &
Co., Inc.
- 29. On or about November 6, 2003, defendant WILLIAM B. BLOUNT

- and Blount Parrish & Co., Inc., received $35,000 from Lehman Brothers.
30. On or about November 7, 2003, defendant LARRY P. LANGFORD,

- acting for the Jefferson County Commission, entered into a swap transaction in the
approximate amount of$112 million with JP Morgan Chase & Company.
- 31. On or about November 13,2003, defendant WILLIAM B. BLOUNT

- paid defendant ALBERT W. LAPIERRE $18,500 in connection with a Jefferson

County financial transaction.
32. On or about November 24,2003, defendant LARRY P. LANGFORD
received a letter from JP Morgan Chase & Company confirming that JP Morgan

- Chase had been requested, as a condition to entering the $112 million swap
transaction, to make payments to Blount Parrish & Co., Inc., in the amount of
- $225,000.00.

- 33. On or about November 27,2003, defendant WILLIAM B. BLOUNT

and Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson

- County financial transaction.

34. On or about December 10,2003, while on a trip to New York City with

- defendant LARRY P. LANGFORD and others related to a Jefferson County bond

transaction, defendant WILLIAM B. BLOUNT paid approximately $1,110.00 to
- Turnbull & Asser for clothing for defendant LARRY P. LANGFORD.
35. On or about February 12,2004, defendant WILLIAM B. BLOUNT
- and Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson

- County financial transaction.

36. On or about April 14,2004, while on a trip to New York City with
- 12

- defendant LARRY P. LANGFORD and others related to a Jefferson County bond

transaction, defendant WILLIAM B. BLOUNT paid approximately $3,290.00 to
- Ermenegildo Zegna for a suit and two jackets for defendant LARRY P.
LANGFORD.
- 37. On or about April 27, 2004, defendant LARRY P. LANGFORD and

- the Jefferson County Commission approved a Resolution authorizing Jefferson

County to enter into interest rate swap transactions with Bear Stearns Capital

- Markets, Inc., and Bank of America in the approximate amount of $3 billion.

-
38. On or about April 29, 2004, defendant WILLIAM B. BLOUNT paid
approximately $2,133.00 to Remon's Clothiers for clothing for defendant LARRY

- P. LANGFORD.
39. On or about May 20, 2004, defendant WILLIAM B. BLOUNT and

- Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson
County financial transaction.
- 40. On or about May 26,2004, defendant ALBERT W. LAPIERRE paid

- approximately $2,707.56 to Remon's Clothiers for clothing for defendant LARRY

P. LANGFORD.

- 41. On or about June 10,2004, defendant LARRY P. LANGFORD, acting

for the Jefferson County Commission, entered into swap transactions with Bear
- Stearns Capital Markets, Inc., and Bank of America.

- 42. On or about June 22, 2004, defendant LARRY P. LANGFORD

received letters from Bear Stearns confirming that Blount Parrish & Co., Inc., was

- employed in the role of banker with special knowledge of the background and
structure of Jefferson County's outstanding bond issues and that Bear Stearns

- 13

-
-
- would pay Blount Parrish & Co., Inc., approximately $2.4 million in connection
with the swap transactions.
-
- 43. On or about June 23, 2004, defendant WILLIAM B. BLOUNT and
Blount Parrish & Co., Inc., received approximately $2.4 million from Bear Stearns

- in connection with the swap transactions.

44. On or about July 11, 2004, while on a trip to New York City with

- defendant LARRY P. LANGFORD and others related to a Jefferson County bond

transaction, defendant WILLIAM B. BLOUNT paid approximately $2,796.00 to
- Salvatore Ferragamo for clothing for defendant LARRY P. LANGFORD.

- 45. On or about July 13,2004, while on a trip to New York City with
defendant LARRY P. LANGFORD and others related to a Jefferson County bond

- transaction, defendant WILLIAM B. BLOUNT paid approximately $1,854.96 to

Century 21 for clothing for defendant LARRY P. LANGFORD.
- 46. On or about July 16, 2004, defendant WILLIAM B. BLOUNT paid

- defendant ALBERT W. LAPIERRE $101,000.00 in connection with a Jefferson

County financial transaction.

- 47. On or about July 27, 2004, defendant LARRY P. LANGFORD and the
Jefferson County Commission approved a Resolution ordering the issuance of the

- General Obligation Warrants Series 2004-A in the amount of approximately

$53 million. Defendant LARRY P. LANGFORD and the Jefferson County
- Commission selected Blount Parrish & Co., Inc., as an underwriter, for which

- defendant WILLIAM B. BLOUNT and Blount Parrish & Co., Inc., received
substantial fees.

- 48. On or about August 11, 2004, defendant WILLIAM B. BLOUNT

wrote a check for $30,000.00 to defendant ALBERT W. LAPIERRE.

- 14

-
-
-
- 49. On or about August 12,2004, defendant ALBERT W. LAPIERRE
wrote a check for $30,000.00 to defendant LARRY P. LANGFORD.

- 50. On or about August 14,2004, defendant LARRY P. LANGFORD

- obtained an official check from Compass Bank in the amount of $29,241.00 to pay
his personal taxes.

- 51. On or about August 18, 2004, defendant ALBERT W. LAPIERRE

paid approximately $3,450.00 to Remon's Clothiers for clothing for defendant

- LARRY P. LANGFORD.
52. On or about August 19,2004, defendant WILLIAM B. BLOUNT and
- Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson

- County financial transaction.

53. On or about September 8,2004, defendant WILLIAM B. BLOUNT

- paid approximately $4,050.00 to Remon's Clothiers for clothing for defendant

LARRY P. LANGFORD.

-
- 54. On or about September 23, 2004, defendant WILLIAM B. BLOUNT
and Blount Parrish & Co., Inc., received $31,350.00 in connection with a Jefferson

- County financial transaction.

55. On or about October 13,2004, defendant ALBERT W. LAPIERRE

- paid approximately $4,250.00 to Remon's Clothiers for clothing for defendant

LARRY P. LANGFORD.
- 56. On or about November 7,2004, while on a trip to New York City with
defendant LARRY P. LANGFORD and others related to a Jefferson County bond
- transaction, defendant WILLIAM B. BLOUNT paid approximately $895.00 to

- Salvatore Ferragamo for clothing for defendant LARRY P. LANGFORD.

57. On or about November 9,2004, while on a trip to New York City with

- 15

-
- defendant LARRY P. LANGFORD and others related to a Jefferson County bond
transaction, defendant WILLIAM B. BLOUNT paid approximately $12,015.00

- to Toumeau for a watch for defendant LARRY P. LANGFORD.

- 58. On or about November 19,2004, defendant ALBERT W. LAPIERRE

paid approximately $1,662.60 to Remon's Clothiers for clothing for defendant

- LARRY P. LANGFORD.
59. On or about December 9,2004, defendant WILLIAM B. BLOUNT

- and Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson
County financial transaction.
- 60. On or about December 16,2004, defendant LARRY P. LANGFORD

- and the Jefferson County Commission approved a Resolution ordering the

issuance of the Series 2004-A Limited Obligation School Warrants in the amount

- of approximately $675 million. Defendant LARRY P. LANGFORD and the

Jefferson County Commission selected Blount Parrish & Co., Inc., as an

- underwriter, for which defendant WILLIAM B. BLOUNT and Blount Parrish &
Co., Inc., received substantial fees.
- 61. On or about December 29,2004, defendant WILLIAM B. BLOUNT

- paid approximately $11,750.40 to Bromberg & Company for a Rolex watch and
other jewelry for defendant LARRY P. LANGFORD.

- 62. On or about January 11,2005, defendant ALBERT W. LAPIERRE

paid approximately $2,239.97 to Remon's Clothiers for clothing for defendant
- LARRY P. LANGFORD.

- 63. On or about February 14, 2005, defendant ALBERT W. LAPIERRE

paid approximately $2,800.00 to Remon's Clothiers for clothing for defendant

- LARRY P. LANGFORD.

64. On or about February 24,2005, defendant WILLIAM B. BLOUNT

- 16

-
-
- and Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson
County financial transaction.
- 65. On or about February 25,2005, defendant WILLIAM B. BLOUNT

- and Blount Parrish & Co., Inc., received $445,000.00 in connection with a
Jefferson County financial transaction.

- 66. On or about June 2, 2005, defendant WILLIAM B. BLOUNT and

Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson

- County financial transaction.

67. On or about June 30, 2005, defendant WILLIAM B. BLOUNT paid
- approximately $3,547.00 to Remon's Clothiers for clothing for defendant LARRY
P. LANGFORD.
- 68. On or about August 11, 2005, defendant WILLIAM B. BLOUNT and

- Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson
County financial transaction.

- 69. On or about October 5, 2005, defendant WILLIAM B. BLOUNT paid

approximately $2,000.00 to Remon's Clothiers for clothing for defendant LARRY
- P. LANGFORD.

- 70. On or about October 6,2005, defendant ALBERT W. LAPIERRE

paid approximately $5,000.00 to Remon's Clothiers for clothing for defendant

- LARRY P. LANGFORD.
71. On or about October 26,2005, defendant WILLIAM B. BLOUNT
- paid approximately $2,500.00 to Remon's Clothiers for clothing for defendant
LARRY P. LANGFORD.
72. On or about November 18, 2005, defendant WILLIAM B. BLOUNT

- and Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson
County financial transaction.

- 17

-
- 73. On or about December 21,2005, defendant WILLIAM B. BLOUNT
paid approximately $2,800.00 to Remon's Clothiers for clothing for defendant
- LARRY P. LANGFORD.

- 74. On or about December 21,2005, defendant ALBERT W. LAPIERRE

paid approximately $1,800.00 to Remon's Clothiers for clothing for defendant

- LARRY P. LANGFORD.
75. On or about January 12,2006, defendant WILLIAM B. BLOUNT and

- Blount Parrish & Co., Inc., received approximately $65,000.00 from Jefferson

- County, Alabama, in connection with a Jefferson County financial transaction.

76. On or about March 8, 2006, defendant WILLIAM B. BLOUNT paid
approximately $1,876.00 to Remon's Clothiers for clothing for defendant LARRY
- P. LANGFORD.

-
77. On or about March 23,2006, defendant WILLIAM B. BLOUNT and
Blount Parrish & Co., Inc., received $8,608.69 in connection with a Jefferson
County financial transaction.
78. On or about May 25, 2006, defendant WILLIAM B. BLOUNT paid

- approximately $1,000.00 to Remon's Clothiers for clothing for defendant LARRY

P. LANGFORD.

- 79. On or about June 20, 2006, defendant WILLIAM B. BLOUNT paid

approximately $1,047.96 to Remon's Clothiers for clothing for defendant LARRY
- P. LANGFORD.

- 80. On or about August 1, 2006, defendant LARRY P. LANGFORD and

the Jefferson County Commission approved a Resolution ordering the issuance of

- the Series 2006 Public Building Authority Lease Revenue Warrants in the amount
of approximately $92,500,000.00. Defendant LARRY P. LANGFORD and the

18

-
.. Jefferson County Commission selected Blount Parrish & Co., Inc., as an
underwriter, for which defendant WILLIAM B. BLOUNT and Blount Parrish &
- Co., Inc., received substantial fees.

- 81. On or about September 13, 2006, defendant WILLIAM B. BLOUNT

and Blount Parrish & Co., Inc., received $249,062.50 in connection with a

- Jefferson County financial transaction.

82. On or about September 13,2006, defendant WILLIAM B. BLOUNT
paid approximately $1,500.00 to Remon's Clothiers for clothing for defendant
LARRY P. LANGFORD.
83. On or about December 8, 2006, defendant ALBERT W. LAPIERRE

- paid approximately $1,000.00 to Remon's Clothiers for clothing for defendant

LARRY P. LANGFORD.

- 84. On or about May 17,2007, defendant WILLIAM B. BLOUNT paid

approximately $7,536.00 to Remon's Clothiers for clothing for defendant LARRY
- P. LANGFORD.

- All in violation of Title 18, United States Code, Section 371.

Count Seven

.. Bribery
Title 18, United States Code, Section 666(a)(l)(B)

- 1. The Grand Jury repeats and realleges the allegations contained in

paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

- through 7 of Count 6 of this Indictment as though fully set out herein.

2. On or about August 12,2004, in Jefferson County in the Northern
- District of Alabama and elsewhere, the defendant

... LARRY P. LANGFORD,

being an agent of Jefferson County, Alabama, which county received federal

- 19

benefits in excess of $1 0,000 in a one-year period, did corruptly solicit and

demand for the benefit of any person, and accept and agree to accept, anything of
- value from any person, intending to be influenced and rewarded in connection

- with any business, transaction, and series of transactions of Jefferson County

involving anything of value of$5,000 and more, that is, defendant LARRY P.

- LANGFORD corruptly solicited, accepted, and agreed to accept money, cash, and
checks valued at approximately $30,000 from William B. Blount and Albert W.
LaPierre, intending to be intluenced and rewarded in connection with financial
transactions of Jefferson County involving $5,000 and more.
- All in violation of Title 18, United States Code, Section 666(a)(1 )(B).
Count Nine

Money Laundering

Title 18, United States Code, Section 1957

On or about August 14,2004, in Jefferson County in the Northern District

of Alabama, and elsewhere, the defendant
LARRY P. LANGFORD
did knowingly engage and attempt to engage in a monetary transaction by,

- through, and to a financial institution, affecting interstate or foreign commerce, in

criminally derived property of a value greater than $10,000, that is an exchange
and transfer of funds in the amount of$29,241.00 by, through, and to a financial
institution, such property having been derived from a specified unlawful activity,
.... that is, bribery, in violation of Title 18, United States Code, Section 666 (a)(1 )(B),
in that defendant LARRY P. LANGFORD obtained an official check in the
- amount of $29,241.00 from Compass Bank to pay his personal taxes using funds

- paid to him as a bribe.

All in violation of Title 18, United States Code, Section 1957.

- 20

 Counts Ten - Thirty Six

Bribery

Title 18, United States Code, Section 666(a)(1)(B)

.­ 1. The Grand Jury repeats and realleges the allegations contained in

paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3
through 7 of Count 6 of this Indictment as though fully set out herein.
2. On or about the date set forth below for each count, in Jefferson County
in the Northern District of Alabama and elsewhere, the defendant
LARRY P. LANGFORD,
being an agent of Jefferson County, Alabama, which county received federal
,.. benefits in excess of $1 0,000 in a one-year period, did corruptly solicit and
demand for the benefit of any person, and accept and agree to accept, anything of
value from any person, intending to be influenced and rewarded in connection

,.. with any business, transaction, and series of transactions of Jefferson County
involving anything of value of$5,000 and more, that is, defendant LARRY P.
LANGFORD corruptly solicited, accepted, and agreed to accept merchandise
from the store and in the amount described below for each count from the person
identified below intending to be influenced and rewarded in connection with
financial transactions of Jefferson County involving $5,000.00 and more.
3. The allegations of paragraphs land 2 above are realleged for each of
Counts 10 through 36 below as though fully set forth therein.
COUNT DATE AMOUNT STORE PAYOR
,.
10 December 10, 2003 $1,110.00 Turnbull William B. Blount
11 April 14,2004 $3,290.00 Zegna William B. Blount
,.

12 April 29, 2004 $2,133.00 Remon's William B. Blount

21
 -
-

....

-
- Counts Sixty Four through Sixty Eight

Mail Fraud

Title 18, United States Code, Sections 1341, 1346, and 2

-
1. The Grand Jury repeats and realleges the allegations contained in

.....

paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

through 7 of Count 6 ofthis Indictment as though fully set out herein.
Purpose of the Scheme and Artifice
2. From in or about July 2002, and continuing to in or about May 2007, the
exact dates being unknown, within Jefferson County in the Northern District of

- Alabama, and elsewhere, defendants

LARRY P. LANGFORD

- and
WILLIAM B. BLOUNT

and others known and unknown to the Grand Jury, aided and abetted by one
another, devised and intended to devise a scheme and artifice to defraud Jefferson
County, Alabama, and its citizens ofthe intangible right to Jefferson County,

- 23

Alabama, Commissioner Larry P. Langford's honest services and to obtain money

and property by means of materially false and fraudulent pretenses,
representations, and promises.

- 3. It was a part of the scheme and artifice that defendant LARRY P.

LANGFORD would and did use his power and influence as President of the
Jefferson County Commission and head of the Department of Finance and General
Services to include defendant WILLIAM B. BLOUNT and Blount Parrish & Co.,
Inc., in Jefferson County financial transactions involving billions of dollars and
thereby generate millions of dollars in fees for defendant WILLIAM B.
- BLOUNT and his companies.
4. It was a further part of the scheme and artifice that defendant WILLIAM
B. BLOUNT and his companies would and did pay Albert W. LaPierre hundreds
of thousands of dollars in connection with Jefferson County financial transactions.
5. It was a further part of the scheme and artifice that defendant WILLIAM
- B. BLOUNT and Albert W. LaPierre would and did give money to and payoff
loans and buy expensive clothing and jewelry for defendant LARRY P.
LANGFORD to influence and reward him in connection with Jefferson County
financial transactions.
6. It was a further part of the scheme and artifice that defendant LARRY P.

- LANGFORD would and did solicit, demand, accept, and agree to accept items of
value totaling approximately $235,000.00 from defendant WILLIAM B.
BLOUNT and Albert W. LaPierre, intending to be influenced and rewarded in

- connection with Jefferson County financial transactions.

7. It was a further part of the scheme and artifice that defendants LARRY
P. LANGFORD and WILLIAM B. BLOUNT would and did conceal the

24
 -

- payment and receipt of items of value.

THE MAILINGS
8. On or about the date set forth below for each count, in Jefferson County
in the Northern District of Alabama, and elsewhere, defendants
LARRY P. LANGFORD
and
WILLIAM B. BLOUNT,

for the purpose of executing the above-described scheme and artifice and
attempting to do so, caused a package containing merchandise from the store
- identified for each count to be to be sent and delivered by interstate carrier to
Commissioner Larry P. Langford's county office at 716 Richard Arrington Blvd
No., Birmingham, Alabama, 35203.
9. The allegations of paragraphs 1 through 8 above are realleged for each of
Counts 64 through 68 below as though fully set forth therein.
COUNT DATE AMOUNT STORE
64 December 10, 2003 $1,110.00 Turnbull
65 April 14, 2004 $3,290.00 Zegna
66 July 11, 2004 $2,796.00 Ferragamo

..
67
68
July 13, 2004
November 9,2004
$1,854.96
$12,015.00
Century 21
Tourneau
All in violation of Title 18, United States Code, Sections 1341, 1346, and 2.
Counts Sixty Nine through Eighty

Wire Fraud

- Title 18, United States Code, Sections 1343, 1346, and 2

1. The Grand Jury repeats and re-alleges the allegations contained in

paragraphs 1 through 7 of Counts 64 through 68 of this Indictment as though fully

25

- set out herein.

THE WIRE COMMUNICATIONS
- 2. On or about the date set forth below for each count, in Jefferson County

- in the Northern District of Alabama, and elsewhere, defendants

LARRY P. LANGFORD

- and

WILLIAM B. BLOUNT,

for the purpose of executing the above-described scheme and artifice and
attempting to do so, did transmit and cause to be transmitted in interstate
- commerce, by means of a wire communication, certain signs and signals, that is,
defendants LARRY P. LANGFORD and WILLIAM B. BLOUNT caused an
interstate communication between Alabama and another state to be made on each

- occasion listed below when defendant WILLIAM B. BLOUNT used an

American Express credit card to make a purchase or pay ari account for defendant
LARRY P. LANGFORD.
3. The allegations of paragraphs I and 2 above are realleged for each of
Counts 69 through 80 below as though fully set forth therein.
COUNT DATE AMOUNT STORE
69 April 29, 2004 $2,133.00 Remon's

-
70
71
September 8, 2004
December 29,2004
$4,050.00
$11,750.40
Remon's
Bromberg
72 June 30, 2005 $3,547.00 Remon's

-
73
74
October 5, 2005
October 26, 2005
$2,000.00
$2,500.00
Remon's
Remon's

-
75
76
December 21,2005
March 8, 2006
$2,300.00
$1,876.00
Remon's
Remon's
77 May 25,2006 $1,000.00 Remon's

26

78 June 20, 2006 $1,047.96 Remon's

79 September 13, $1,500.00 Remon's
2006

-
80 May 17,2007 $7,536.00 Remon's
All in violation of Title 18, United States Code, Sections 1343, 1346, and 2.

-
-
Counts Eighty One through Eighty Six

Wire Fraud

Title 18, United States Code, Sections 1343, 1346, and 2

1. The Grand Jury repeats and realleges the allegations contained in

paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3
through 7 of Count 6 of this Indictment as though fully set out herein.
Purpose of the Scheme and Artifice
2. From in or about July 2002, and continuing to in or about May 2007, the
exact dates being unknown, within Jefferson County in the Northern District of
Alabama, and elsewhere, defendants

- LARRY P. LANGFORD
and

- ALBERT W. LAPIERRE

and others known and unknown to the Grand Jury, aided and abetted by one
- another, devised and intended to devise a scheme and artifice to defraud Jefferson

27

-
- County, Alabama, and its citizens of the intangible right to Jefferson County,
Alabama, Commissioner Larry P. Langford's honest services and to obtain money
and property by means of materially false and fraudulent pretenses,

- representations, and promises.

3. It was a part of the scheme and artifice that defendant LARRY P.

- LANGFORD would and did use his power and influence as President of the
Jefferson County Commission and head of the Department of Finance and General

- Services to include William B. Blount and Blount Parrish & Co., Inc., in Jefferson
County financial transactions involving billions of dollars and thereby generate
- millions of dollars in fees for William B. Blount and his companies.

... 4. It was a further part of the scheme and artifice that William B. Blount
and his companies would and did pay defendant ALBERT W. LAPIERRE

- hundreds of thousands of dollars in connection with Jefferson County financial

transactions.
5. It was a further part of the scheme and artifice that William B. Blount
and defendant ALBERT W. LAPIERRE would and did give money to and pay
off loans and buy expensive clothing and jewelry for defendant LARRY P.
LANGFORD to influence and reward him in connection with Jefferson County
financial transactions.

- 6. It was a further part of the scheme and artifice that defendant LARRY P.
LANGFORD would and did solicit, demand, accept, and agree to accept items of
value totaling approximately $235,000.00 from William B. Blount and defendant
ALBERT W. LAPIERRE intending to be influenced and rewarded in connection
with Jefferson County financial transactions.

- 7. It was a further part of the scheme and artifice that defendants LARRY
P. LANGFORD and ALBERT W. LAPIERRE would and did conceal the
payment and receipt of items of value.

28

-
- THE WIRE COMMUNICATIONS
8. On or about the date set forth below for each count, in Jefferson County
- in the Northern District of Alabama, and elsewhere, defendants

- LARRY P. LANGFORD
and
ALBERT W. LAPIERRE,

- for the purpose of executing the above-described scheme and artifice and

- attempting to do so, did transmit and cause to be transmitted in interstate

commerce, by means of a wire communication, certain signs and signals, that is,

- defendants LARRY P. LANGFORD and ALBERT W. LAPIERRE caused an

interstate communication between Alabama and another state to be made on each
- occasion listed below when defendant ALBERT W. LAPIERRE used an
American Express credit card to make a purchase or pay an account at Remon's
Clothiers for defendant LARRY P. LANGFORD.
9. The allegations of paragraphs 1 through 8 above are realleged for each of
.....
Counts 81 through 86 below as though fully set forth therein.

-
COUNT
81
DATE
May 26,2004
AMOUNT
$2,707.56
-
82 October 13,2004 $4,250.00

-
83
84
November 19,2004
October 6, 2005
$1,662.60
$5,000.00
85 December 21, 2005 $1,800.00
86 December 8, 2006 $1,000.00
- All in violation of Title 18, United States Code, Sections 1343, 1346, and 2.
Count Eighty Seven

Filing False Tax Return

Title 26, United States Code, Section 7206(1)

29
-

- 1. The Grand Jury repeats and realleges the allegations contained in

- paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

through 7 of Count 6 of this Indictment as though fully set out herein.

- 2. On or about August 16, 2004, in Jefferson County in the Northern

District of Alabama, and elsewhere, defendant
LARRY P. LANGFORD,
a resident of Fairfie1d, Alabama, did willfully make and subscribe a United States

- Individual Income Tax Return, Form 1040, for the calender year 2003, which was
verified by a written declaration that it was made under the penalties of perjury
- and was filed with the Internal Revenue Service, which he did not believe to be
true and correct as to every material matter in that the income tax return reported
taxable income of$238,758.00 and tax of $57,622.00 whereas, as the defendant

- then and there well knew and believed, his taxable income and tax for calender
year 2003 was substantially in excess of the amounts reported because the income
tax return failed to report as income his receipt of $125,356.73 from William B.

- Blount, Blount Parrish & Co., Inc., and Albert W. LaPierre.

All in violation of Title 26, United States Code, Section 7206( I).

- Count Eighty Eight

Filing False Tax Return

Title 26, United States Code, Section 7206(1)

- 1. The Grand Jury repeats and realleges the allegations contained in

paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3
through 7 of Count 6 of this Indictment as though fully set out herein.
2. On or about April 15,2005, in Jefferson County in the Northern District
of Alabama, and elsewhere, defendant
LARRY P. LANGFORD,

- a resident of Fairfield, Alabama, did willfully make and subscribe a United States

- 30
-

- Individual Income Tax Return, Fonn 1040, for the calender year 2004, which was
verified by a written declaration that it was made under the penalties of perjury
- and was filed with the Internal Revenue Service, which he did not believe to be

- true and correct as to every material matter in that the income tax return reported
taxable income of $130,423.00 and tax of $34,959.00 whereas, as the defendant
then and there well knew and believed, his taxable income and tax for calender
year 2004 was substantially in excess of the amounts reported because the income

- tax return failed to report as income his receipt of$81,419.52 from William B.
Blount, Blount Parrish & Co., Inc., and Albert W. LaPierre.
- All in violation of Title 26, United States Code, Section 7206(1).
Count Eighty Nine
Filing False Tax Return
Title 26, United States Code, Section 7206(1)

- 1. The Grand Jury repeats and realleges the allegations contained in

paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3
through 7 of Count 6 of this Indictment as though fully set out herein.
- 2. On or about April 17,2006, in Jefferson County in the Northern District
of Alabama, and elsewhere, defendant
LARRY P. LANGFORD,

- a resident of Fairfield, Alabama, did willfully make and subscribe a United States
Individual Income Tax Return, Fonn 1040, for the calender year 2005, which was

- verified by a written declaration that it was made under the penalties of perjury
and was filed with the Internal Revenue Service, which he did not believe to be
- true and correct as to every material matter in that the income tax return reported
taxable income of $98,818.00 and tax of $27,404.00 whereas, as the defendant
then and there well knew and believed, his taxable income and tax for calender
year 2005 was substantially in excess of the amounts reported because the income

31
-

- tax return failed to report as income his receipt of $22, 186.97 from William B.
Blount, Blount Parrish & Co., Inc., and Albert W. LaPierre.
- All in violation of Title 26, United States Code, Section 7206(1).

- Count Ninety Nine

Forfeiture Count
Title 18, United States Code, Section 98l(a)(l)(C)
Title 28, United States Code, Section 246l(c)

- 1. Counts One, Six and Seven, Ten through Thirty Six, and Sixty Four
through Eighty Six of this Indictment are incorporated by reference herein for the
- purpose of alleging criminal forfeiture pursuant to Title 18, United States Code,
Section 981(a)(1)(C) and Title 28, United States Code, Section 2461(c).
FORFEITURE

- 2. As a result of the foregoing offenses alleged in Counts One, Six and

Seven, Ten through Thirty Six, and Sixty Four through Eighty Six of this
Indictment, the defendant
LARRY P. LANGFORD
- shall forfeit to the United States any property constituting or derived from

- proceeds traceable to said violations committed by the defendant LARRY P.

LANGFORD. Such forfeitable interests include, but are not limited to the

-- aggregate sum of$7,623,521.00 and all interest and proceeds derived therefrom.
3. If any of the property described above as being subject to forfeiture
pursuant to Title 18, United States Code, Section 981(a)(1 )(C), and Title 28,
United States Code, Section 2461 (c), as a result of any act or omission of the
defendant LARRY P. LANGFORD:

- (1) cannot be located upon the exercise of due diligence;

(2) has been transferred to, sold to, or deposited with a third person;

- (3) has been placed beyond the jurisdiction of the Court;

- 32
-
-
- (4) has been substantially diminished in value; or
(5) has been commingled with other property that cannot be
subdivided without difficulty;
it is the intent of the United States, pursuant to Title 21, United States Code,
Section 853(P), to seek forfeiture of any other property of said defendant LARRY
P. LANGFORD, up to the value of the above forfeitable property.
All pursuant to Title 18, United States Code, Section 981(a)(l)(C) and Title

- 28, United States Code, Section 2461(c).

...

-
-
-
-

- 33
-

- AHM/GAM/TMJ
Special Grand Jury # _1_
Dec.2008
FILED
2008 Nov-25 AM 11:12
u.s. DISTRICT COURT
N.D. OF ALABAMA

IN THE UNITED STATES DISTRICT COURT FOR THE

NORTHERN DISTRICT OF ALABAMA
- SOUTHERN DIVISION

UNITED STATES OF AMERICA )

)
v. ) 2:08-CR-00245-LSC-PWG
)
LARRY P. LANGFORD, ) SUPERSEDING
- WILLIAM B. BLOUNT, and
ALBERT W. LAPIERRE
)
)

-
INDICTMENT
- THE GRAND JURY CHARGES:

INTRODUCTION

At all times material to this Indictment:

1. Jefferson County, Alabama, was a local government that received

benefits in excess of $1 0,000 under a Federal program involving a grant, contract,

- subsidy, loan, guarantee or other form of federal assistance during each fiscal year

- beginning with fiscal year 2001 and continuing through fiscal year 2007.

- 2. The Jefferson County Commission was the governing body of Jefferson

County, Alabama, and was comprised of five Commissioners, each elected by the

- voters of hislher district. The President of the Commission presided over the

- Commission, signed contracts and other agreements on behalf of the Commission,

- and served as the head of the Finance and General Services Department.
 3. Defendant LARRY P. LANGFORD was elected to the Jefferson

County Commission in 2002 and was a member of the Commission until

November 2007. Defendant LARRY P. LANGFORD served as President of the

Commission and head of the Department of Finance and General Services from in

or about November 2002 until November 2006. As head ofthe Department of

Finance and General Services, defendant LARRY P. LANGFORD was

responsible for the administration of the financial affairs of Jefferson County; he

made recommendations to the Commission regarding proposed financial

transactions of Jefferson County and finns that would participate in financial

,F transactions.

4. Based on his position with the Jefferson County Commission, defendant

LARRY P. LANGFORD owed a duty ofloyalty to Jefferson County, Alabama,

and its citizens, free from deceit, self-enrichment, concealment, and connict

between his personal interests and the interests of Jefferson County, Alabama.

Specifically, as a county commissioner in Alabama, defendant LARRY P.

LANGFORD owed Jefferson County, Alabama, and its citizens a duty to, among

other things: (a) refrain from using his official position or office to obtain personal

benefit for himself or a family member, pursuant to Ala. Code § 36-25-5;

2
 -

-
(b) refrain from soliciting or receiving a thing of value for himself or a family

- member for the purpose of influencing official action, pursuant to Ala. Code § 36­

25-7; and (c) disclose, and not conceal, personal financial interests, the nature and
- amount of income received, and other material financial information, pursuant to

Ala. Code § 36-25-14.

- 5. In or about 1996, the Jefferson County Commission entered into a

- consent decree under which Jefferson County agreed to repair its sewer system to

bring it into compliance with the Clean Water Act. To fund those improvements

and other needs of Jefferson County, the Jefferson County Commission authorized

- and entered into several financial transactions involving billions of dollars.

6. Blount Parrish & Co., Inc., was an investment banking firm located in
-
Montgomery, Alabama. Defendant WILLIAM B. BLOUNT was the Chairman
- and an owner of Blount Parrish & Co., Inc. and other companies. Defendant

- WILLIAM B. BLOUNT and his companies received approximately $7.1 million

in fees in connection with Jefferson County financial transactions.

7. Defendant ALBERT W. LAPIERRE was a lobbyist registered in the

.....
State of Alabama and was paid approximately $219,500.00 by defendant

- WILLIAM B. BLOUNT and his companies in connection with Jefferson County

- financial transactions.

3
 -

Count One

Bribery

- Title 18, United States Code, Section 666(a)(l)(B)

On or about June 16,2003, within Jefferson County in the Northern District

- of Alabama, and elsewhere, the defendant

LARRY P. LANGFORD

being an agent of Jefferson County, Alabama, which county received federal

- benefits in excess of $1 0,000 in a one-year period, did corruptly solicit and

demand for the benefit of any person, and accept and agree to accept, anything of

value from any person, intending to be influenced and rewarded in connection

- with any business, transaction, and series of transactions of Jefferson County

- involving anything of value of$5,000 or more, that is, defendant LARRY P.

- LANGFORD, being the President of the Jefferson County Commission and the

head of the Department of Finance and General Services, corruptly solicited,

- accepted, and agreed to accept money, cash, and checks valued at approximately

- $69,000 from William B. Blount, Blount Parrish & Co., Inc., and Albert W.

- LaPierre, intending to be influenced and rewarded in connection with bond

transactions and swap agreements involving Jefferson County.

All in violation of Title 18, United States Code, Section 666(a)(l)(B).

....

- 4

- Count Two

Bribery

Title 18, United States Code, Sections 666(a)(2) and 2

- On or about June 16,2003, within Jefferson County in the Northern District

of Alabama, and elsewhere, the defendants

- WILLIAM B. BLOUNT

and

- ALBERT W. LAPIERRE

- aided and abetted by each other, did corruptly give, offer, and agree to give

anything of value to any person, with intent to influence and reward an agent of
- Jefferson County, Alabama, which county received federal benefits in excess of

- $10,000 in a one-year period, in connection with any business, transaction, and

- series oftransactions of Jefferson County involving anything of value of$5,000 or

more, that is, defendants WILLIAM B. BLOUNT and ALBERT W.

LAPIERRE corruptly offered, gave, and agreed to give money, cash, and checks

valued at approximately $69,000 to Larry P. Langford, the President of the

- Jefferson County Commission and the head of the Department of Finance and

- General Services, intending to influence and reward him in connection with bond

transactions and swap agreements involving Jefferson County.

All in violation of Title 18, United States Code, Sections 666(a)(2) and 2.

- 5

-
 -

-
- Count Three

Money Laundering

- Title 18, United States Code, Section 1957

On or about June 14,2003, in Jefferson County in the Northern District of

- Alabama, and elsewhere, the defendant

- LARRY P. LANGFORD

- did knowingly engage and attempt to engage in a monetary transaction by,

through, and to a financial institution, affecting interstate or foreign commerce, in

criminally derived property of a value greater than $10,000, that is, withdrawal
- and transfer of funds in the amount of $12,000, such property having been derived

from a specified unlawful activity, that is, bribery, in violation of Title 18, United

- States Code, Section 666 (a)(1)(B), in that defendant LARRY P. LANGFORD

paid Likis Audio $12,000 for audio equipment with a check drawn on his account
- at Compass Bank, into which bribery proceeds had previously been deposited.

All in violation of Title 18, United Staies Code, Section 1957.

- Count Four

Money Laundering

- Title 18, United States Code, Section 1957

On or about June 14,2003, in Jefferson County in the Northern District of

- Alabama, and elsewhere, the defendant

-
- 6

 -
-
- LARRY P. LANGFORD

- did knowingly engage and attempt to engage in a monetary transaction by,

through, and to a financial institution, affecting interstate or foreign commerce, in

- criminally derived property of a value greater than $10,000, that is exchange and

- transfer of funds in the amount of$12,000 by, through, and to a financial

institution, such property having been derived from a specified unlawful activity,

that is, bribery, in violation of Title 18, United States Code, Section 666 (a)(l)(B),

in that defendant LARRY P. LANGFORD paid Shaia's $12,000 for luxury

- clothing items with a cashiers check purchased at Compass Bank using funds paid

to him as a bribe.

- All in violation of Title 18, United States Code, Section 1957.

Count Five

- Money Laundering

Title 18, United States Code, Section 1957

- On or about June 14,2003, in Jefferson County in the Northern District of

Alabama, and elsewhere, the defendant

LARRY P. LANGFORD
- did knowingly engage and attempt to engage in a monetary transaction by,

through, and to a financial institution, affecting interstate or foreign commerce, in

- criminally derived property of a value greater than $10,000, that is deposit of

-
7

 funds in the amount of $40,589 by, through, and to a financial institution, such

- property having been derived from a specified unlawful activity, that is, bribery, in

violation of Title 18, United States Code, Section 666 (a)(1 )(B), in that defendant
- LARRY P. LANGFORD deposited $40,589 into his account at Compass Bank

- using funds paid to him as a bribe.

- All in violation of Title 18, United States Code, Section 1957.

Count Six

Conspiracy

Title 18, United States Code, Section 371

- THE CONSPIRACY

- 1. The Grand Jury repeats and realleges the allegations contained in

- paragraphs 1 through 7 of the Introduction to this Indictment as though fully set

out herein.
- 2. From in or about July 2002 and continuing until in or about May 2007,

- the exact dates being unknown, within Jefferson County in the Northern District of

Alabama, and elsewhere, defendants

- LARRY P. LANGFORD,
WILLIAM B. BLOUNT, and
ALBERT W. LAPIERRE

knowingly and willfully conspired, combined, and agreed together and with other

- persons, known and unknown to the Grand Jury, to commit offenses against the

-
United States: that is,

(A) to corruptly solicit and demand for the benefit of any person, and
accept and agree to accept, anything of value from any person,
intending to be influenced or rewarded in connection with any
- business, transaction, and series of transactions involving any thing of
value of $5,000 or more of an organization, government, or agency
that receives more than $10,000 under a federal program during any
one year period, in violation of Title 18, United States Code, Section
666(a)(l)(B);

(B) to corruptly give, offer, and agree to give anything of value to

any person, intending to influence or reward an agent of an
organization, government, or agency that receives more than $10,000
under a federal program during anyone year period in connection

- with any business, transaction, and series oftransactions of such

organization, government, or agency involving any thing of value of
$5,000 or more, in violation of Title 18, United States Code, Section
666(a)(2);

- (C) to devise and intend to devise a scheme and artifice to defraud

Jefferson County, Alabama, and its citizens of their intangible right to
defendant LARRY P. LANGFORD'S honest services and to obtain
- money and property belonging to others by means of false and
fraudulent pretenses, representations, and promises by use of
interstate carrier, in violation of Title 18, United States Code,
Sections 1341 and 1346; and

- (D) to devise and intend to devise a scheme and artifice to defraud

Jefferson County, Alabama, and its citizens of their intangible right to
defendant LARRY P. LANGFORD'S honest services and to obtain
- money and property belonging to others by means of false and
fraudulent pretenses, representations, and promises by use of
interstate wire transmissions, in violation of Title 18, United States
Code, Sections 1343 and 1346.

-
-
9

MANNER AND MEANS OF THE CONSPIRACY

- 3. It was a part of the conspiracy that defendant LARRY P. LANGFORD

would and did use his power and influence as President of the Jefferson County

Commission and head of the Department of Finance and General Services to

- include defendant WILLIAM B. BLOUNT and Blount Parrish & Co., Inc., in

- Jefferson County financial transactions involving billions of dollars and thereby

generate millions of dollars in fees for defendant WILLIAM B. BLOUNT and his

compames.
- 4. It was a further part of the conspiracy that defendant WILLIAM B.

- BLOUNT and his companies would and did pay defendant ALBERT W.

- LAPIERRE hundreds of thousands of dollars in connection with Jefferson

County financial transactions.

- 5. It was a further part of the conspiracy that defendants WILLIAM B.

- BLOUNT and ALBERT W. LAPIERRE would and did give money to and pay

- offloans and buy expensive clothing and jewelry for defendant LARRY P.

- LANGFORD to influence and reward him in connection with Jefferson County

financial transactions.

- 6. It was a further part ofthe conspiracy that defendant LARRY P.

- LANGFORD would and did solicit, demand, accept, and agree to accept items of

- 10
-

-
value totaling approximately $235,000.00 from defendants WILLIAM B.

-
BLOUNT and ALBERT W. LAPIERRE intending to be influenced and

rewarded in connection with Jefferson County financial transactions.

-
7. It was a further part of the conspiracy that defendants LARRY P.
- LANGFORD, WILLIAM B. BLOUNT, and ALBERT W. LAPIERRE would

- and did conceal the payment and receipt of items of value.

OVERT ACTS

In furtherance of the conspiracy and to achieve the objects thereof, the

- conspirators committed and caused to be committed the following overt acts,

- among others, in the Northern District of Alabama and elsewhere:

- 8. On or about July 19,2002, defendant WILLIAM B. BLOUNT helped

defendant LARRY P. LANGFORD obtain a $50,000.00 unsecured loan with a

- six month term from Colonial Banle

- 9. On or about February 14,2003, defendant ALBERT W. LAPIERRE

obtained a $50,000.00 loan from Colonial Bank to payoff defendant LARRY P.

- LANGFORD's note, which was then past due.

10. On or about March 6, 2003, defendant LARRY P. LANGFORD and

- the Jefferson County Commission approved a Resolution ordering the issuance of

- the Series 2003-A General Obligation Capital Improvement and Refunding

- 11

-
-

Warrants in the amount of$94 million. Defendant LARRY P. LANGFORD and

the Jefferson County Commission selected Blount Parrish & Co., Inc., as an

- underwriter, for which defendant WILLIAM B. BLOUNT and Blount Parrish &

Co., Inc., received over $200,000.00 in fees.

- 11. On or about March 27, 2003, defendant LARRY P. LANGFORD and

- the Jefferson County Commission approved a Resolution authorizing Jefferson

County to enter into an interest rate swap transaction with JP Morgan Chase Bank

in the approximate amount of $1.1 billion.

12. On or about March 28, 2003, defendant LARRY P. LANGFORD

- received letters confirming that JP Morgan had been requested, as a condition to

- entering the swap transaction, to include Goldman Sachs in the transaction and

confirming that Goldman Sachs intended to pay consulting fees to Blount Parrish
- & Co., Inc.

- 13. On or about April 22, 2003, defendant LARRY P. LANGFORD and

- the Jefferson County Commission approved a Resolution ordering the issuance of

the Series 2003-B Warrants in an amount not exceeding $1.17 billion. Defendant
- LARRY P. LANGFORD and the Jefferson County Commission selected Blount

- Parrish & Co., Inc., as a Remarketer, for which defendant WILLIAM B.

- BLOUNT and Blount Parrish & Co., Inc., received substantial fees.

-
12

-
14. On or about May 7, 2003, defendant WILLIAM B. BLOUNT and

- Blount Parrish & Co., Inc., received $500,000.00 from Chase Bank in connection

with a Jefferson County financial transaction.

- 15. On or about May 27, 2003, defendant WILLIAM B. BLOUNT and

- Blount Parrish & Co., Inc., received $300,000.00 from Goldman Sachs in

- connection with a Jefferson County financial transaction.

16. On or about May 28, 2003, defendant WILLIAM B. BLOUNT wrote a

check for $50,000.00 to defendant ALBERT W. LAPIERRE.

17. On or about May 30, 2003, defendant ALBERT W. LAPIERRE paid

- $20,000.00 toward the loan at Colonial Bank he obtained to payoff defendant

- LARRY P. LANGFORD'S loan.

18. On or about June 5, 2003, defendant ALBERT W. LAPIERRE paid

- approximately $30,000.00 toward the loan at Colonial Bank he obtained to payoff

- defendant LARRY P. LANGFORD'S loan.

- 19. On or about June 12,2003, defendant WILLIAMB. BLOUNT wrote a

- check for $69,000.00 to defendant ALBERT W. LAPIERRE.

20. On or about June 16,2003, defendant ALBERT W. LAPIERRE wrote

- a check for $69,000.00 to defendant LARRY P. LANGFORD.

-
-
13

21. On or about July 1,2003, defendant LARRY P. LANGFORD and the

- Jefferson County Commission approved a Resolution authorizing Jefferson

- County to enter into an interest rate swap transaction with JP Morgan Securities

and Bank of America in the approximate amount of $1.1 billion.

- 22. On or about July 25, 2003, while on a trip to New York City with

- defendant LARRY P. LANGFORD and others related to a Jefferson County bond

transaction, defendant WILLIAM B. BLOUNT paid approximately $2,850.00 to

Oxford Clothes for clothing for defendant LARRY P. LANGFORD.

23. On or about July 28,2003, defendant WILLIAM B. BLOUNT and his

companies received approximately $2.6 million from JP Morgan Chase in

- connection with a Jefferson County financial transaction.

24. On or about July 29,2003, defendant WILLIAM B. BLOUNT paid

- defendant ALBERT W. LAPIERRE $100,000.00 in connection with a Jefferson

- County financial transaction.

- 25. On or about August 5, 2003, defendant LARRY P. LANGFORD and

- the Jefferson County Commission approved a Resolution ordering the issuance of

the Series 2003-C Warrants in the approximate amount of $1.05 billion and

- naming JP Morgan Securities and Banc of America Securities as underwriters.

-
- 14
-

-
26. On or about October 1,2003, defendant WILLIAM B. BLOUNT paid

- $3,134.70 to Bromberg & Company for jewelry for defendant LARRY P.

LANGFORD.

27. On or about October 2,2003, defendant WILLIAM B. BLOUNT and

- Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson

- County financial transaction.

28. On or about October 20,2003, defendant LARRY P. LANGFORD,

acting for the Jefferson County Commission, entered into a financial transaction in
- the approximate amount of $110 million that included Bank of America and

Lehman Brothers Special Financing, Inc. The agreement required Lehman

- Brothers to pay a broker's fee or arrangement fee of $35,000 to Blount Parrish &

- Co., Inc.

29. On or about November 6,2003, defendant WILLIAM B. BLOUNT

- and Blount Parrish & Co., Inc., received $35,000 from Lehman Brothers.

- 30. On or about November 7,2003, defendant LARRY P. LANGFORD,

- acting for the Jefferson County Commission, entered into a swap transaction in the

approximate amount of$ll2 million with JP Morgan Chase & Company.

- 31. On or about November 13,2003, defendant WILLIAM B. BLOUNT

- paid defendant ALBERT W. LAPIERRE $18,500 in connection with a Jefferson

- 15
-

-
County financial transaction.

32. On or about November 24, 2003, defendant LARRY P. LANGFORD

- received a letter from JP Morgan Chase & Company confirming that JP Morgan

Chase had been requested, as a condition to entering the $112 million swap
- transaction, to make payments to Blount Parrish & Co., Inc., in the amount of

- $225,000.00.

- 33. On or about November 27, 2003, defendant WILLIAM B. BLOUNT

and Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson
- County financial transaction.

- 34. On or about December 10,2003, while on a trip tO,New York City with

- defendant LARRY P. LANGFORD and others related to a Jefferson County bond

- transaction, defendant WILLIAMB. BLOUNT paid approximately $1,110.00 to

Turnbull & Asser for clothing for defendant LARRY P. LANGFORD.

- 35. On or about February 12,2004, defendant WILLIAM B. BLOUNT

- and Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson

County financial transaction.

36. On or about April 14, 2004, while on a trip to New York City with
- defendant LARRY P. LANGFORD and others related to a Jefferson County bond

- transaction, defendant WILLIAM B. BLOUNT paid approximately $3,290.00 to

16

-
Ennenegildo Zegna for a suit and two jackets for defendant LARRY P.

- LANGFORD.

37. On or about April 27, 2004, defendant LARRY P. LANGFORD and

- the Jefferson County Commission approved a Resolution authorizing Jefferson

- County to enter into interest rate swap transactions with Bear Steams Capital

- Markets, Inc., and Bank of America in the approximate amount of $3 billion.

38. On or about April 29, 2004, defendant WILLIAM B. BLOUNT paid

approximately $2,133.00 to Remon's Clothiers for clothing for defendant LARRY

P. LANGFORD.

- 39. On or about May 20, 2004, defendant WILLIAM B. BLOUNT and

- Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson

County financial transaction.

- 40. On or about May 26, 2004, defendant ALBERT W. LAPIERRE paid

- approximately $2,707.56 to Remon's Clothiers for clothing for defendant LARRY

- P. LANGFORD.

41. On or about June 10,2004, defendant LARRY P. LANGFORD, acting

-
for the Jefferson County Commission, entered into swap transactions with Bear

Steams Capital Markets, Inc., and Bank of America.

17

-
42. On or about June 22, 2004, defendant LARRY P. LANGFORD

- received letters from Bear Stearns confinning that Blount Parrish & Co., Inc., was

- employed in the role of banker with special knowledge of the background and

structure of Jefferson County's outstanding bond issues and that Bear Stearns

- would pay Blount Parrish & Co., Inc., approximately $2.4 million in connection

- with the swap transactions.

- 43. On or about June 23, 2004, defendant WILLIAM B. BLOUNT and

Blount Parrish & Co., Inc., received approximately $2.4 million from Bear Stearns
- in connection with the swap transactions.

- 44. On or about July 11,2004, while on a trip to New York City with

- defendant LARRY P. LANGFORD and others related to a Jefferson County bond

transaction, defendant WILLIAM B. BLOUNT paid approximately $2,796.00 to

- .

Salvatore Ferragamo for clothing for defendant LARRY P. LANGFORD.

45. On or about July 13,2004, while on a trip to New York City with

defendant LARRY P. LANGFORD and others related to a Jefferson County bond

- transaction, defendant WILLIAM B. BLOUNT paid approximately $1,854.96 to

Century 21 for clothing for defendant LARRY P. LANGFORD.

- 46. On or about July 16, 2004, defendant WILLIAM B. BLOUNT paid

defendant ALBERT W. LAPIERRE $101 ,000.00 in connection with a Jefferson

-
18

-
County financial transaction.

- 47. On or about July 27,2004, defendant LARRY P. LANGFORD and the

Jefferson County Commission approved a Resolution ordering the issuance of the

- General Obligation Warrants Series 2004-A in the amount of approximately

- $53 million. Defendant LARRY P. LANGFORD and the Jefferson County

Commission selected Blount Parrish & Co., Inc., as an underwriter, for which

- defendant WILLIAM B. BLOUNT and Blount Parrish & Co., Inc., received

substantial fees.
- 48. On or about August 11,2004, defendant WILLIAM B. BLOUNT

wrote a check for $30,000.00 to defendant ALBERT W. LAPIERRE.

- 49. On or about August 12,2004, defendant ALBERT W. LAPIERRE

wrote a check for $30,000.00 to defendant LARRY P. LANGFORD.

- 50. On or about August 14,2004, defendant LARRY P. LANGFORD

obtained an official check from Compass Bank in the amount of $29,241.00 to pay

- his personal taxes.

- 51. On or about August 18, 2004, defendant ALBERT W. LAPIERRE

paid approximately $3,450.00 to Remon's Clothiers for clothing for defendant

- LARRY P. LANGFORD.

-
19

-
52. On or about August 19,2004, defendant WILLIAM B. BLOUNT and

Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson

County financial transaction.

- 53. On or about September 8, 2004, defendant WILLIAM B. BLOUNT

- paid approximately $4,050.00 to Remon's Clothiers for clothing for defendant

- LARRY P. LANGFORD.

54. On or about September 23,2004, defendant WILLIAM B. BLOUNT

-
and Blount Parrish & Co., Inc., received $31,350.00 in connection with a Jefferson

County financial transaction.

- 55. On or about October 13,2004, defendant ALBERT W. LAPIERRE

- paid approximately $4,250.00 to Remon's Clothiers for clothing for defendant

LARRY P. LANGFORD.
- 56. On or about November 7,2004, while on a trip to New York City with

defendant LARRY P. LANGFORD and others related to a Jefferson County bond

- transaction, defendant WILLIAM B. BLOUNT paid approximately $895.00 to

Salvatore Ferragamo for clothing for defendant LARRY P. LANGFORD.

- 57. On or about November 9,2004, while on a trip to New York City with

- defendant LARRY P. LANGFORD and others related to a Jefferson County bond

- transaction, defendant WILLIAM B. BLOUNT paid approximately $12,015.00

- 20

-
to Tourneau for a watch for defendant LARRY P. LANGFORD.

58. On or about November 19,2004, defendant ALBERT W. LAPIERRE

paid approximately $1,662.60 to Remon's Clothiers for clothing for defendant

- LARRY P. LANGFORD.

- 59. On or about December 9, 2004, defendant WILLIAM B. BLOUNT

- and Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson

- County financial transaction.

60. On or about December 16,2004, defendant LARRY P. LANGFORD

- and the Jefferson County Commission approved a Resolution ordering the

- issuance of the Series 2004-A Limited.Obligation School Warrants in the amount

- of approximately $675 million. Defendant LARRY P. LANGFORD and the

Jefferson County Commission selected Blount Parrish & Co., Inc., as an

- underwriter, for which defendant WILLIAM B. BLOUNT and Blount Parrish &

Co., Inc., received substantial fees.

- 61. On or about December 29, 2004, defendant WILLIAM B. BLOUNT

paid approximately $11,750.40 to Bromberg & Company for a Rolex watch and
- other jewelry for defendant LARRY P. LANGFORD.

- 62. On or about January 11,2005, defendant ALBERT W. LAPIERRE

- paid approximately $2,239.97 to Remon's Clothiers for clothing for defendant

21

LARRY P. LANGFORD.

- 63. On or about February 14,2005, defendant ALBERT W. LAPIERRE

paid approximately $2,800.00 to Remon's Clothiers for clothing for defendant

- LARRY P. LANGFORD.

- 64. On or about February 24, 2005, defendant WILLIAM B. BLOUNT

and Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson

- County financial transaction.

65. On or about February 25,2005, defendant WILLIAM B. BLOUNT

- and Blount Parrish & Co., Inc" received $445,000.00 in connection with a

Jefferson County financial transaction.

66. On or about June 2, 2005, defendant WILLIAM B. BLOUNT and

- Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson

County financial transaction.

- 67. On or about June 30,2005, defendant WILLIAM B. BLOUNT paid

- approximately $3,547.00 to Remon's Clothiers for clothing for defendant LARRY

P. LANGFORD.

-
68. On or about August 11, 2005, defendant WILLIAM B. BLOUNT and
- Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson

- County financial transaction.

- 22

-
-

-
69. On or about October 5,2005, defendant WILLIAM B. BLOUNT paid

approximately $2,000.00 to Remon's Clothiers for clothing for defendant LARRY

- P. LANGFORD.

70. On or about October 6,2005, defendant ALBERT W. LAPIERRE

- paid approximately $5,000.00 to Remon's Clothiers for clothing for defendant

- LARRY P. LANGFORD.

- 71. On or about October 26, 2005, defendant WILLIAM B. BLOUNT

paid approximately $2,500.00 to Remon's Clothiers for clothing for defendant

- LARRY P. LANGFORD.

- 72. On or about November 18,2005, defendant WILLIAM B. BLOUNT

- and Blount Parrish & Co., Inc., received $11,000.00 in connection with a Jefferson

- County financial transaction.

73. On or about December 21,2005, defendant WILLIAM B. BLOUNT

- paid approximately $2,800.00 to Remon's Clothiers for clothing for defendant

- LARRY P. LANGFORD.

- 74. On or about December 21, 2005, defendant ALBERT W. LAPIERRE

paid approximately $1,800.00 to Remon's Clothiers for clothing for defendant

LARRY P. LANGFORD.

-
-
23

75. On or about January 12,2006, defendant WILLIAM B. BLOUNT and

- Blount Parrish & Co., Inc., received approximately $65,000.00 from Jefferson

County, Alabama, in connection with a Jefferson County financial transaction.

76. On or about March 8, 2006, defendant WILLIAM B. BLOUNT paid

- approximately $1,876.00 to Remon's Clothiers for clothing for defendant LARRY

P. LANGFORD.

- 77. On or about March 23, 2006, defendant WILLIAM B. BLOUNT and

Blount Parrish & Co., Inc., received $8,608.69 in connection with a Jefferson

County financial transaction.

78. On or about May 25, 2006, defendant WILLIAM B. BLOUNT paid

approximately $1,000.00 to Remon's Clothiers for clothing for defendant LARRY

P. LANGFORD.
- 79. On or about June 20,2006, defendant WILLIAM B. BLOUNT paid

approximately $1,047.96 to Remon's Clothiers for clothing for defendant LARRY

\.
P. LANGFORD.

- 80. On or about August 1,2006, defendant LARRY P. LANGFORD and

the Jefferson County Commission approved a Resolution ordering the issuance of

- the Series 2006 Public Building Authority Lease Revenue Warrants in the amount

- of approximately $92,500,000.00. Defendant LARRY P. LANGFORD and the

- 24
-

Jefferson County Commission selected Blount Parrish & Co., Inc., as an

- underwriter, for which defendant WILLIAM B. BLOUNT and Blount Parrish &

- Co., Inc., received substantial fees.

81. On or about September 13, 2006, defendant WILLIAM B. BLOUNT

- and Blount Parrish & Co., Inc., received $249,062.50 in connection with a

- Jefferson County financial transaction.

82. On or about September 13,2006, defendant WILLIAM B. BLOUNT

-
paid approximately $1,500.00 to Remon's Clothiers for clothing for defendant

LARRY P. LANGFORD.

83. On or about December 8, 2006, defendant ALBERT W. LAPIERRE

- paid approximately $1,000.00 to Remon's Clothiers for clothing for defendant

LARRY P. LANGFORD.
- 84. On or about May 17,2007, defendant WILLIAM B. BLOUNT paid

- approximately $7,536.00 to Remon's Clothiers for clothing for defendant LARRY

P. LANGFORD.

... All in violation of Title 18, United States Code, Section 371.

-
25

-
Count Seven

Bribery

- Title 18, United States Code, Section 666(a)(l)(B)

1. The Grand Jury repeats and realleges the allegations contained in

- paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

- through 7 of Count 6 of this Indictment as though fully set out herein.

- 2. On or about August 12, 2004, in Jefferson County in the Northern

District of Alabama and elsewhere, the defendant

-
LARRY P. LANGFORD,

being an agent of Jefferson County, Alabama, which county received federal

- benefits in excess of $1 0,000 in a one-year period, did corruptly solicit and

- demand for the benefit of any person, and accept and agree to accept, anything of

value from any person, intending to be influenced and rewarded in connection

- with any business, transaction, and series of transactions of Jefferson County

involving anything of value of$5,000 and more, that is, defendant LARRY P.

- LANGFORD corruptly solicited, accepted, and agreed to accept money, cash, and

- checks valued at approximately $30,000 from William B. Blount and Albert W.

LaPierre, intending to be influenced and rewarded in connection with financial

- transactions of Jefferson County involving $5,000 and more.

- All in violation of Title 18, United States Code, Section 666(a)(l)(B).

-
26

..
Count Eight

Bribery

- Title 18, United States Code, Sections 666(a)(2) and 2

1. The Grand Jury repeats and realleges the allegations contained in

- paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

- through 7 of Count 6 of this Indictment as though fully set out herein.

- 2. On or about August 12,2004, in Jefferson County in the Northern

- District of Alabama and elsewhere, the defendants

WILLIAM B. BLOUNT

and

ALBERT W. LAPIERRE,

- aided and abetted by each other, did corruptly give, offer, and agree to give

anything of value to any person, with intent to influence and reward an agent of

Jefferson County, Alabama, which county received federal benefits in excess of

$10,000 in a one-year period, in connection with any business, transaction, and

series of transactions of Jefferson County involving anything of value of$5,000

.... and more, that is, defendants WILLIAM B. BLOUNT and ALBERT W.

. LAPIERRE corruptly offered, gave, and agreed to give money, cash, and checks

valued at approximately $30,000 to Jefferson County, Alabama, Commissioner

Larry P. Langford intending to influence and reward him in connection with

.. financial transactions of Jefferson County involving $5,000 and more.

27

All in violation of Title 18, United States Code, Sections 666(a)(2) and 2.

- Count Nine
Money Laundering

- Title 18, United States Code, Section 1957

On or about August 14,2004, in Jefferson County in the Northern District

- of Alabama, and elsewhere, the defendant

- LARRY P. LANGFORD

- did knowingly engage and attempt to engage in a monetary transaction by,

through, and to a financial institution, affecting interstate or foreign commerce, in

- criminally derived property of a value greater than $10,000, that is an exchange

- and transfer of funds in the amount of $29,241.00 by, through, and to a financial

- institution, such property having been derived from a specified unlawful activity,

that is, bribery, in violation of Title 18, United States Code, Section 666 (a)(1 )(B),

in that defendant LARRY P. LANGFORD obtained an official check in the

.. amount of$29,241.00 from Compass Bank to pay his personal taxes using funds

... paid to him as a bribe.

All in violation of Title 18, United States Code, Section 1957.

- 28
-

Counts Ten - Thirty Six

Bribery
- Title 18, United States Code, Section 666(a)(l)(B)

1. The Grand Jury repeats and realleges the allegations contained in

...
paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

through 7 of Count 6 of this Indictment as though fully set out herein.

- 2. On or about the date set forth below for each count, in Jefferson County

in the Northern District of Alabama and elsewhere, the defendant

LARRY P. LANGFORD,
....
being an agent of Jefferson County, Alabama, which county received federal

- benefits in excess of $1 0,000 in a one-year period, did corruptly solicit and

demand for the benefit of any person, and accept and agree to accept, anything of

value from any person, intending to be influenced and rewarded in connection

with any business, transaction, and series of transactions of Jefferson County

involving anything of value of$5,000 and more, that is, defendant LARRY P.

- LANGFORD corruptly solicited, accepted, and agreed to accept merchandise

from the store and in the amount described below for each count from the person

identified below intending to be influenced and rewarded in connection with

- financial transactions of Jefferson County involving $5,000.00 and more.

29
-

3. The allegations of paragraphs 1 and 2 above are realleged for each of

- Counts 10 through 36 below as though fully set forth therein.

-
COUNT
10
DATE
December 10, 2003
AMOUNT
$1,110.00
STORE
Turnbull
PAYOR
William B. Blount
11 April 14, 2004 $3,290.00 Zegna William B. Blount
12 April 29, 2004 $2,133.00 Remon's William B. Blount
-
13 May 26,2004 $2,707.56 Remon's Albert W. LaPierre
14 July 11, 2004 $2,796.00 Ferragamo William B. Blount
-
15 July 13,2004 $1,854.96 Century 21 William B. Blount
16 August 18, 2004 $3,450.00 Remon's Albert W. LaPierre
17 September 8, 2004 $4,050.00 Remon's William B. Blount
-
18 October 13, 2004 $4,250.00 Remon's Albert W. LaPierre
19 November 7,2004 $895.00 Ferragamo William B. Blount
-
20 November 9,2004 $12,015.00 Tourneau William B. Blount
21 November 19,2004 $1,662.60 Remon's Albert W. LaPierre
22 December 29, 2004 $11,750.40 Bromberg William B. Blount
23 January 11,2005 $2,239.97 Remon's Albert W. LaPierre
24 February 14,2005 $2,800.00 Remon's Albert W. LaPierre
-
25 June 30, 2005 $3,547.00 Remon's William B. Blount

-
26
27
October 5, 2005
October 6, 2005
$2,000.00
$5,000.00
Remon's
Remon's
William B. Blount
Albert W. LaPierre

-
28
29
October 26, 2005
December 21,2005
$2,500.00
$2,300.00
Remon's
Remon's
William B. Blount
William B. Blount

30

30 December 21, 2005 $1,800.00 Remon's Albert W. LaPierre

....
31 March 8, 2006 $1,876.00 Remon's William B. Blount
32 May 25,2006 $1,000.00 Remon's William B. Blount
33 June 20, 2006 $1,047.96 Remon's William B. Blount
William B. Blount
-
34 September 13, 2006 $1,500.00 Remon's
35 December 8, 2006 $1,000.00 Remon's Albert W. LaPierre

-
36 May 17,2007 $7,536.00 Remon's William B. Blount

- All in violation of Title 18, United States Code, Section 666(a)(I)(B).

Counts Thirty Seven through Fifty Four

Bribery

Title 18, United States Code, Sections 666{a){2) and 2

1. The Grand Jury repeats and realleges the allegations contained in

paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

- through 7 of Count 6 of this Indictment as though fully set out herein.

- 2. On or about the date set forth below for each count, in Jefferson County

in the Northern District of Alabama and elsewhere, the defendant

- WILLIAM B. BLOUNT

did corruptly give, offer, and agree to give anything of value to any person, with

- intent to influence and reward an agent of Jefferson County, Alabama, which

- county received federal benefits in excess of $10,000 in a one-year period, in

... connection with any business, transaction, and series of transactions of Jefferson

-
31

County involving anything of value of$5,000 and more, that is, defendant

- WILLIAM B. BLOUNT corruptly offered, gave, and agreed to give merchandise

from the store and in the amount described below for each count intending to

influence and reward Jefferson County, Alabama, Commissioner Larry P.

- Langford in connection with financial transactions of Jefferson County involving

$5,000 and more.

- 3. The allegations of paragraphs 1 and 2 above are realleged for each of

Counts 37 through 54 below as though fully set forth therein.

COUNT DATE AMOUNT STORE

-
37
38
December 10, 2003
April 14, 2004
$1,110.00
$3,290.00
Turnbull
Zegna
-
39 April 29, 2004 $2,133.00 Remon's
40 July 11, 2004 $2,796.00 Ferragamo
41 July 13,2004 $1,854.96 Century 21
42 September 8, 2004 $4,050.00 Remon's
43 November 7, 2004 $895.00 Ferragamo

-
44 November 9,2004 $12,015.00 Tourneau

-
45
46
December 29, 2004
June 30, 2005
$11,750.40
$3,547.00
Bromberg's
Remon's

-
47
48
October 5,2005
October 26, 2005
$2,000.00
$2,500.00
Remon's
Remon's

- 32
 -

-
49 December 21, 2005 $2,300.00 Remon's

-
50
51
March 8, 2006
May 25, 2006
$1,876.00
$1,000.00
Remon's
Remon's

-
52 June 20, 2006 $1,047.96 Remon's

-
53
54
September 13, 2006
May 17,2007
$1,500.00
$7,536.00
Remon's
Remon's

All in violation of Title 18, United States Code, Sections 666(a)(2) and 2.

- Counts Fifty Five through Sixty Three

Bribery
Title 18, United States Code, Sections 666(a)(2) and 2
.....
1. The Grand Jury repeats and realleges the allegations contained in

paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

- through 7 of Count 6 of this Indictment as though fully set out herein.

2. On or about the date set forth below for each count, in Jefferson County
- in the Northern District of Alabama and elsewhere, the defendant

- ALBERT W. LAPIERRE

did corruptly give, offer, and agree to give anything of value to any person, with

intent to influence and reward an agent of Jefferson County, Alabama, which

county received federal benefits in excess of $10,000 in a one-year period, in

connection with any business, transaction, and series of transactions of Jefferson

County involving anything of value of$5,000 and more, that is, defendant

33

.­
-

-
ALBERT W. LAPIERRE corruptly offered, gave, and agreed to give

merchandise from the store and in the amount described below for each count to

Jefferson County, Alabama, Commissioner Larry P. Langford intending to

- influence and reward him in connection with financial transactions of Jefferson

- County involving $5,000 and more.

3. The allegations of paragraphs 1 and 2 above are realleged for each of

- Counts 55 through 63 below as though fully set forth therein.

-
COUNT
55
DATE
May 26,2004
AMOUNT
$2,707.56
STORE
Remon's

-
56
57
August 18, 2004
October 13,2004
$3,450.00
$4,250.00
Remon's
Remon's
58 November 19,2004 $1,662.60 Remon's
59 January 11, 2005 $2,239.97 Remon's
-
60 February 14, 2005 $2,800.00 Remon's

-
61
62
October 6, 2005
December 21, 2005
$5,000.00
$1,800.00
Remon's
Remon's

-
63 December 8, 2006 $1,000.00 Remon's

- All in violation of Title 18, United States Code, Sections 666(a)(2) and 2.

-
-
-
34

-
...
- Counts Sixty Four through Sixty Eight
Mail Fraud

- Title 18, United States Code, Sections 1341, 1346, and 2

- 1. The Grand Jury repeats and realleges the allegations contained in

paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

through 7 of Count 6 of this Indictment as though fully set out herein.

.Purpose of the Scheme and Artifice

- 2. From in or about July 2002, and continuing to in or about May 2007, the

exact dates being unknown, within Jefferson County in the Northern District of

Alabama, and elsewhere, defendants

- LARRY P. LANGFORD
and

- WILLIAM B. BLOUNT

and others known and unknown to the Grand Jury, aided and abetted by one
- another, devised and intended to devise a scheme and artifice to defraud Jefferson

County, Alabama, and its citizens of the intangible right to Jefferson County,

- Alabama, Commissioner Larry P. Langford's honest services and to obtain money

and property by means of materially false and fraudulent pretenses,

representations, and promises.

3. It was a part of the scheme and artifice that defendant LARRY P.

LANGFORD would and did use his power and influence as President of the

- 35

-
-

Jefferson County Commission and head of the Department of Finance and General

Services to include defendant WILLIAM B. BLOUNT and Blount Parrish & Co.,

Inc., in Jefferson County financial transactions involving billions of dollars and

- thereby generate millions of dollars in fees for defendant WILLIAM B.

- BLOUNT and his companies.

4. It was a further part of the scheme and artifice that defendant WILLIAM

- B. BLOUNT and his companies would and did pay Albert W. LaPierre hundreds

of thousands of dollars in connection with Jefferson County financial transactions.

- 5. It was a further part of the scheme and artifice that defendant WILLIAM

B. BLOUNT and Albert W. LaPierre would and did give money to and payoff

loans and buy expensive clothing and jewelry for defendant LARRY P.

LANGFORD to influence and reward him in connection with Jefferson County

- financial transactions.

- 6. It was a further part of the scheme and artifice that defendant LARRY P.

- LANGFORD would and did solicit, demand, accept, and agree to accept items of

value totaling approximately $235,000.00 from defendant WILLIAM B.

BLOUNT and Albert W. LaPierre, intending to be influenced and rewarded in

connection with Jefferson County financial transactions.

36

-
7. It was a further part of the scheme and artifice that defendants LARRY

- P. LANGFORD and WILLIAM B. BLOUNT would and did conceal the

- payment and receipt of items of value.

THE MAILINGS

8. On or about the date set forth below for each count, in Jefferson County

.... in the Northern District of Alabama, and elsewhere, defendants

- LARRY P. LANGFORD
and
WILLIAM B. BLOUNT,
- for the purpose of executing the above-described scheme and artifice and

- attempting to do so, caused a package containing merchandise from the store

identified for each count to be to be sent and delivered by interstate carrier to

Commissioner Larry P. Langford's county office at 716 Richard Arrington Blvd

- No., Birmingham, Alabama, 35203.

- 9. The allegations of paragraphs 1 through 8 above are realleged for each of

- Counts 64 through 68 below as though fully set forth therein.

-
COUNT
64
DATE
December 10, 2003
AMOUNT
$1,11 0.00
STORE
Turnbull
...
65 April 14, 2004 $3,290.00 Zegna
66 July 11, 2004 $2,796.00 Ferragamo

-
37

67 July 13, 2004 $1,854.96 Century 21

..
68 November 9,2004 $12,015.00 Tourneau

- All in violation of Title 18, United States Code, Sections 1341, 1346, and 2.

Counts Sixty Nine through Eighty

Wire Fraud

Title 18, United States Code, Sections 1343, 1346, and 2

- 1. The Grand Jury repeats and re-alleges the allegations contained in

- paragraphs 1 through 7 of Counts 64 through 68 of this Indictment as though fully

set out herein.

THE WIRE COMMUNICATIONS

- 2. On or about the date set forth below for each count, in Jefferson County

in the Northern District of Alabama, and elsewhere, defendants

- LARRY P. LANGFORD
and
WILLIAM B. BLOUNT,

- for the purpose of executing the above-described scheme and artifice and

- attempting to do so, did transmit and cause to be transmitted in interstate

commerce, by means of a wire communication, certain signs and signals, that is,

defendants LARRY P. LANGFORD and WILLIAM B. BLOUNT caused an

interstate communication between Alabama and another state to be made on each

occasion listed below when defendant WILLIAM B. BLOUNT used an

- 38
-

-
American Express credit card to make a purchase or pay an account for defendant

- LARRY P. LANGFORD.

3. The allegations of paragraphs 1 and 2 above are realleged for each of

- Counts 69 through 80 below as though fully set forth therein.

- COUNT DATE AMOUNT STORE

69 April 29, 2004 $2,133.00 Remon's
70 September 8,2004 $4,050.00 Remon's
-
71 December 29,2004 $11,750.40 Bromberg
72 June 30, 2005 $3,547.00 Remon's
73 October 5, 2005 $2,000.00 Remon's
74 October 26, 2005 $2,500.00 Remon's
75 December 21, 2005 $2,300.00 Remon's
76 March 8,2006 $1,876.00 Remon's
77 May 25, 2006 $1,000.00 Remon's
78 June 20, 2006 $1,047.96 Remon's
79 September 13,2006 $1,500.00 Remon's
-
80 May 17,2007 $7,536.00 Remon's

- All in violation of Title 18, United States Code, Sections 1343, 1346, and 2.

- 39
....

-
- Counts Eighty One through Eighty Six

- Wire Fraud

Title 18, United States Code, Sections 1343, 1346, and 2

- 1. The Grand Jury repeats and realleges the allegations contained in

paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

through 7 of Count 6 of this Indictment as though fully set out herein.

- Purpose of the Scheme and Artifice

- 2. From in or about July 2002, and continuing to in or about May 2007, the

-
exact dates being unknown, within Jefferson County in the Northern District of

Alabama, and elsewhere, defendants

- LARRY P. LANGFORD
and
ALBERT W. LAPIERRE

and others known and unknown to the Grand Jury, aided and abetted by one

another, devised and intended to devise a scheme and artifice to defraud Jefferson

- County, Alabama, and its citizens of the intangible right to Jefferson County,

- Alabama, Commissioner Larry P. Langford's honest services and to obtain money

and property by means of materially false and fraudulent pretenses,

representations, and promises.

3. It was a part of the scheme and artifice that defendant LARRY P.

- LANGFORD would and did use his power and influence as President of the

40

-
Jefferson County Commission and head of the Department of Finance and General

.. Services to include William B. Blount and Blount Parrish & Co., Inc., in Jefferson

County financial transactions involving billions of dollars and thereby generate

- millions of dollars in fees for William B. Blount and his companies.

4. It was a further part of the scheme and artifice that William B. Blount

- and his companies would and did pay defendant ALBERT W. LAPIERRE

- hundreds ofthousands of dollars in connection with Jefferson County financial

transactions.
- 5. It was a further part of the scheme and artifice that William B. Blount

- and defendant ALBERT W. LAPIERRE would and did give money to and pay

offloans and buy expensive clothing and jewelry for defendant LARRY P.

LANGFORD to influence and reward him in connection with Jefferson County

financial transactions.

- 6. It was a further part of the scheme and artifice that defendant LARRY P.

- LANGFORD would and did solicit, demand, accept, and agree to accept items of

value totaling approximately $235,000.00 from William B. Blount and defendant

ALBERT W. LAPIERRE intending to be influenced and rewarded in connection

- with Jefferson County financial transactions.

-
-
41

-
7. It was a further part ofthe scheme and artifice that defendants LARRY

- P. LANGFORD and ALBERT W. LAPIERRE would and did conceal the

payment and receipt of items of value.

- THE WIRE COMMUNICATIONS

8. On or about the date set forth below for each count, in Jefferson County

- in the Northern District of Alabama, and elsewhere, defendants

- LARRY P. LANGFORD
and
ALBERT W. LAPIERRE,

for the purpose of executing the above-described scheme and artifice and

- attempting to do so, did transmit and cause to be transmitted in interstate

commerce, by means of a wire communication, certain signs and signals, that is,

defendants LARRY P. LANGFORD and ALBERT W. LAPIERRE caused an

interstate communication between Alabama and another state to be made on each

- occasion listed below when defendant ALBERT W. LAPIERRE used an

American Express credit card to make a purchase or pay an account at Remon's

Clothiers for defendant LARRY P. LANGFORD.

- 9. The allegations of paragraphs 1 through 8 above are realleged for each of

Counts 81 through 86 below as though fully set forth therein.

- 42

-
-

-
COUNT DATE AMOUNT

-
81
82
May 26, 2004
October 13,2004
$2,707.56
$4,250.00

-
83
84
November 19, 2004
October 6, 2005
$1,662.60
$5,000.00
85 December 21, 2005 $1,800.00

-
86 December 8, 2006 $1,000.00

All in violation of Title 18, United States Code, Sections 1343, 1346, and 2.
- Count Eighty Seven

- Filing False Tax Return

Title 26, United States Code, Section 7206(1)

- 1. The Grand Jury repeats and realleges the allegations contained in

- paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

through 7 of Count 6 of this Indictment as though fully set out herein.

- 2. On or about August 16, 2004, in Jefferson County in the Northern

- District of Alabama, and elsewhere, defendant

LARRY P. LANGFORD,

a resident of Fairfield, Alabama, did willfully make and subscribe a United States

- Individual Income Tax Return, Form 1040, for the calender year 2003, which was

verified by a written declaration that it was made under the penalties of perjury

and was filed with the Internal Revenue Service, which he did not believe to be

43

-
true and correct as to every material matter in that the income tax return reported

- taxable income of$238,758.00 and tax of $57,622.00 whereas, as the defendant

- then and there well knew and believed, his taxable income and tax for calender

year 2003 was substantially in excess of the amounts reported because the income

- tax return failed to report as income his receiptof$125,356.73 from William B.

Blount, Blount Parrish & Co., Inc., and Albert W. LaPierre.

- All in violation of Title 26, United States Code, Section 7206(1).

Count Eighty Eight

- Filing False Tax Return

Title 26, United States Code, Section 7206{l)

1. The Grand Jury repeats and realleges the allegations contained in

paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

through 7 of Count 6 of this Indictment as though fully set out herein.

- 2. On or about April 15, 2005, in Jefferson County in the Northern District

- of Alabama, and elsewhere, defendant

- LARRY P. LANGFORD,

a resident of Fairfield, Alabama, did willfully make and subscribe a United States

Individual Income Tax Return, Form 1040, for the calender year 2004, which was

verified by a written declaration that it was made under the penalties of perjury

and was filed with the Internal Revenue Service, which he did not believe to be

- 44

-
-

- true and correct as to every material matter in that the income tax return reported

- taxable income of$130,423.00 and tax of$34,959.00 whereas, as the defendant

then and there well knew and believed, his taxable income and tax for calender
- year 2004 was substantially in excess of the amounts reported because the income

- tax return failed to report as income his receipt of$81,419.52 from William B.

- Blount, Blount Parrish & Co., Inc., and Albert W. LaPierre.

All in violation of Title 26, United States Code, Section 7206(1).

- Count Eighty Nine

- Filing False Tax Return

Title 26, United States Code, Section 7206(1)

- 1. The Grand Jury repeats and realleges the allegations contained in

- paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

through 7 of Count 6 of this Indictment as though fully set out herein.

2. On or about April 17,2006, in Jefferson County in the Northern District

of Alabama, and elsewhere, defendant

LARRY P. LANGFORD,

-
a resident of Fairfield, Alabama, did willfully make and subscribe a United States

Individual Income Tax Return, Form 1040, for the calender year 2005, which was

verified by a written declaration that it was made under the penalties of perjury

.. and was filed with the Internal Revenue Service, which he did not believe to be

- 45

-
-.

-
true and correct as to every material matter in that the income tax return reported

- taxable income of $98,818.00 and tax of $27,404.00 whereas, as the defendant

then and there well knew and believed, his taxable income and tax for calender
- year 2005 was substantially in excess of the amounts reported because the income

- tax return failed to report as income his receipt of $22,186.97 from William B.

- Blount, Blount Parrish & Co., Inc., and Albert W. LaPierre.

All in violation of Title 26, United States Code, Section 7206( 1).
- Count Ninety

- Mail Fraud
Title 18, United States Code, Sections 1341, 1346, and 2

1. The Grand Jury repeats and realleges the allegations contained in

paragraphs 1,2,5, and 6 of the Introduction to this Indictment as though fully set

out herein.

- 2. Mary M. Buckelew was elected to the Jefferson County, Alabama,

- Commission in November 1990 and served on the Commission until November

- 2006. Based on her position with the Jefferson County Commission, Mary M.

Buckelew owed a duty ofloyalty to Jefferson County, Alabama, and its citizens,

- free from deceit, self-enrichment, concealment, and conflict between her personal

- interests and the interests of Jefferson County, Alabama. Specifically, as a county

commissioner in Alabama, Mary M. Buckelew owed Jefferson County, Alabama,

46
-

- and its citizens a duty to, among other things: (a) refrain from using her official

- position or office to obtain personal benefit for herself or a family member,

pursuant to Ala. Code § 36-25-5; (b) refrain from soliciting or receiving a thing of
- value for herself or a family member for the purpose of influencing official action,

- pursuant to Ala. Code § 36-25-7; and (c) disclose, and not conceal, personal

- financial interests, the nature and amount of income received, and other material

financial information, pursuant to Ala. Code § 36-25-14.

- Purpose of the Scheme and Artifice

- 3. From in or about December 2003, and continuing to in or about

- November 2006, the exact dates being unknown, within Jefferson County in the

Northern District of Alabama, and elsewhere, defendant

WILLIAM B. BLOUNT

- and others known and unknown to the Grand Jury, aided and abetted by one

- another, devised and intended to devise a scheme and artifice to defraud Jefferson

County, Alabama, and its citizens of the intangible right to Jefferson County,

Alabama, Commissioner Mary M. Buckelew's honest services and to obtain

money and property by means of materially false and fraudulent pretenses,

- representations, and promises.

- 47

,­
 4. It was a part of the scheme and artifice that, while on trips to New York

- City with Commissioner Mary M. Buckelew and others related to a Jefferson

County bond transaction, defendant WILLIAM B. BLOUNT would and did buy

expensive items from the Salvatore Ferragamo store and a spa treatment at the

- Frederic Fekkai Spa for Commissioner Mary M. Buckelew to influence and

- reward her in connection with Jefferson County financial transactions.

5. It was a further part of the scheme and artifice that Commissioner Mary
- M. Buckelew would and did accept and agree to accept items of value from

- defendant WILLIAM B. BLOUNT during times when Jefferson County financial

- transactions were being considered and executed by the Jefferson County

Commission.

6. It was a further part of the scheme and artifice that Commissioner Mary

- M. Buckelew and defendant WILLIAM B. BLOUNT would and did conceal the

payment and receipt of items of value.

THE MAILING

7. On or about December 11,2003, in Jefferson County in the Northern

- District of Alabama, and elsewhere, defendant

- WILLIAM B. BLOUNT,

for the purpose of executing the above-described scheme and artifice and

- 48

-
-
- attempting to do so, caused a package containing merchandise from the Salvatore

- Ferragamo store at 655 Fifth Avenue, New York, New York, to be sent and

delivered by interstate carrier to Commissioner Mary M. Buckelew's county office

- at 716 Richard Arrington Blvd No., Birmingham, Alabama, 35203.

- All in violation of Title 18, United States Code, Sections 1341, 1346, and 2.

- Count Ninety One

Mail Fraud
Title 18, United States Code, Sections 1341, 1346, and 2
- 1. The Grand Jury repeats and realleges the allegations contained in

- paragraphs 1 through 6 of Count 90 of this Indictment as though fully set out

- herein.

THE MAILING

2. On or about November 7,2004, in Jefferson County in the Northern

- District of Alabama, and elsewhere, defendant

- WILLIAM B. BLOUNT,

,... for the purpose of executing the above-described scheme and artifice and

attempting to do so, caused a package containing merchandise from the Salvatore

Ferragamo store at 655 Fifth Avenue, New York, New York, to be sent and

- delivered by interstate carrier to Commissioner Mary M. Buckelew's county office

- at 716 Richard Arrington Blvd No., Birmingham, Alabama, 35203.

- 49

-
-

All in violation of Title 18, United States Code, Sections 1341, 1346, and 2.

- Count Ninety Two

Bribery

Title 18, United States Code, Sections 666(a)(2)

- 1. The Grand Jury repeats and realleges the allegations contained in

- paragraphs 1 through 6 of Count 90 of this Indictment as though fully set out

- herein.

2. On or about December 11,2003, in Jefferson County in the Northern

- District of Alabama and elsewhere, the defendant

- WILLIAM B. BLOUNT

- did corruptly give, offer, and agree to give anything of value to any person, with

intent to influence and reward an agent of Jefferson County, Alabama, which

county received federal benefits in excess of $1 0,000 in a one-year period, in

- connection with any business, transaction, and series of transactions of Jefferson

County involving anything of value of$5,000 and more, that is, defendant

WILLIAM B. BLOUNT corruptly offered, gave, and agreed to give merchandise

from Salvatore Ferragamo valued at approximately $1,449.00 to Commissioner

,..
Mary M. Buckelew intending to influence and reward her in connection with

- financial transactions of Jefferson County involving $5,000 and more.

- All in violation of Title 18, United States Code, Sections 666(a)(2) and 2.

-
50

Count Ninety Three

Bribery

- Title 18, United States Code, Sections 666(a)(2)

1. The Grand Jury repeats and realleges the allegations contained in

paragraphs 1 through 6 of Count 90 of this Indictment as though fully set out

- herein.

- 2. On or about November 7, 2004, in Jefferson County in the Northern

District of Alabama and elsewhere, the defendant

- WILLIAM B. BLOUNT

- did corruptly give, offer, and agree to give anything of value to any person, with

- intent to influence and reward an agent of Jefferson County, Alabama, which

- county received federal benefits in excess of $1 0,000 in a one-year period, in

connection with any business, transaction, and series oftransactions of Jefferson

- County involving anything of value of$5,000 and more, that is, defendant

- WILLIAM B. BLOUNT corruptly offered, gave, and agreed to give merchandise

from Salvatore Ferragamo in New York City valued at approximately $1,119.00 to

Commissioner Mary M. Buckelew intending to influence and reward her in

connection with financial transactions of Jefferson County involving $5,000 and

- more.

-
All in violation of Title 18, United States Code, Sections 666(a)(2) and 2.

- 51

-
-

-
Count Ninety Four

Bribery

- Title 18, United States Code, Sections 666(a)(2)

1. The Grand Jury repeats and realleges the allegations contained in

- paragraphs 1 through 6 of Count 90 of this Indictment as though fully set out

- herein.

- 2. On or about November 9, 2004, in Jefferson County in the Northern

District of Alabama and elsewhere, the defendant

- WILLIAM B. BLOUNT

- did corruptly give, offer, and agree to give anything of value to any person, with

- intent to influence and reward an agent of Jefferson County, Alabama, which

- county received federal benefits in excess of $1 0,000 in a one-year period, in

connection with any business, transaction, and series of transactions of Jefferson

- County involving anything of value of $5,000 and more, that is, defendant

- WILLIAM B. BLOUNT corruptly offered, gave, and agreed to give a spa

- treatment from the Frederic Fekkai Spa in New York City valued at approximately

$1,373.00 to Commissioner Mary M. Buckelew intending to influence and reward

her in connection with financial transactions of Jefferson County involving $5,000

and more.

All in violation of Title 18, United States Code, Sections 666(a)(2) and 2.

- 52

-
 Count Ninety Five

Filing False Tax Return

- Title 26, United States Code, Section 7206(1)

1. The Grand Jury repeats and realleges the allegations contained in

paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

through 7 of Count 6 of this Indictment as though fully set out herein.

2. On or about October 15,2004, in Jefferson County in the Northern

District of Alabama, and elsewhere, defendant

- ALBERT W. LAPIERRE,

- a resident of Birmingham, Alabama, did willfully make and subscribe a United

- States Individual Income Tax Return, Fonn 1040, for the calender year 2003,

- which was verified by a written declaration that it was made under the penalties of

perjury and was filed with the Internal Revenue Service, which he did not believe

- to be true and correct as to every material matter in that the income tax return

- reported taxable income of$102,006.00 and tax of $37,872.00 whereas, as the

- defendant then and there well knew and believed, his taxable income and tax for

calender year 2003 was substantially in excess of the amounts reported because

the income tax return failed to report his receipt of additional taxable income of

- $80,777.00.

All in violation of Title 26, United States Code, Section 7206(1).

- 53

Count Ninety Six

Filing False Tax Return

- Title 26, United States Code, Section 7206(1)

1. The Grand Jury repeats and realleges the allegations contained in

paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

through 7 of Count 6 of this Indictment as though fully set out herein.

- 2. On or about October 17, 2005, in Jefferson County in the Northern

District of Alabama, and elsewhere, defendant

ALBERT W. LAPIERRE,

- a resident of Birmingham, Alabama, did willfully make and subscribe a United

- States Individual Income Tax Return, Form 1040, for the calender year 2004,

which was verified by a written declaration that it was made under the penalties of
- perjury and was filed with the Internal Revenue Service, which he did not believe

- to be true and correct as to every material matter in that the income tax return

- reported taxable income of$177,767.00 and tax of $63,478.00 whereas, as the

- defendant then and there well knew and believed, his taxable income and tax for

calender year 2004 was substantially in excess of the amounts reported because

the income tax return failed to report his receipt of additional taxable income of

- $95,700.00.

All in violation of Title 26, United States Code, Section 7206(1).

-
54

Count Ninety Seven

Filing False Tax Return

- Title 26, United States Code, Section 7206(1)

1. The Grand Jury repeats and realleges the allegations contained in

- paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

through 7 of Count 6 of this Indictment as though fully set out herein.

- 2. On or about October 18,2006, in Jefferson County in the Northern

- District of Alabama, and elsewhere, defendant

ALBERT W. LAPIERRE,

- a resident of Birmingham, Alabama, did willfully make and subscribe a United

- States Individual Income Tax Return, Form 1040, for the calender year 2005,

- which was verified by a written declaration that it was made under the penalties of

perjury and was filed with the Internal Revenue Service, which he did not believe

- to be true and correct as to every material matter in that the income tax return

- reported taxable income of$104,718.00 and tax of$38,988.00 whereas, as the

defendant then and there well knew and believed, his taxable income and tax for
-
calender year 2005 was substantially in excess of the amounts reported because
- the income tax return failed to report his receipt of additional taxable income of

- $28,561.00.

- All in violation of Title 26, United States Code, Section 7206( 1).

-
55

-
- Count Ninety Eight

Filing False Tax Return

- Title 26, United States Code, Section 7206(1)

1. The Grand Jury repeats and realleges the allegations contained in

- paragraphs 1 through 7 of the Introduction to this Indictment and paragraphs 3

- through 7 of Count 6 of this Indictment as though fully set out herein.

- 2. On or about October 19,2007, in Jefferson County in the Northern

District of Alabama, and elsewhere, defendant

- ALBERT W. LAPIERRE,

- a resident of Birmingham, Alabama, did willfully make and subscribe a United

- States Individual Income Tax Return, Form 1040, for the calender year 2006,

which was verified by a written declaration that it was made under the penalties of
- perjury and was filed with the Internal Revenue Service, which he did not believe

- to be true and correct as to every material matter in that the income tax return

reported taxable income of$120,459.00 and tax of$44,093.00 whereas, as the

- defendant then and there well knew and believed, his taxable income and tax for

calender year 2006 was substantially in excess of the amounts reported because
- the income tax return failed to report his receipt of additional taxable income of

- $74,968.22.

- All in violation of Title 26, United States Code, Section 7206(1).

- 56

-
-

Count Ninety Nine

Forfeiture Count

Title 18, United States Code, Section 981(a)(l)(C)

Title 28, United States Code, Section 2461(c)

- I. Counts One, Six and Seven, Ten through Thirty Six, and Sixty Four

through Eighty Six of this Indictment are incorporated by reference herein for the
-
purpose of alleging criminal forfeiture pursuant to Title 18, United States Code,

Section 981 (a)(l )(C) and Title 28, United States Code, Section 2461 (c).

- FORFEITURE

- 2. As a result of the foregoing offenses alleged in Counts One, Six and

Seven, Ten through Thirty Six, and Sixty Four through Eighty Six ofthis
- Indictment, the defendant

- LARRY P. LANGFORD

- shall forfeit to the United States any property constituting or derived from

proceeds traceable to said violations committed by the defendant LARRY P.

LANGFORD. Such forfeitable interests include, but are not limited to the

aggregate sum of $7,623,521.00 and all interest and proceeds derived therefrom.

- 3. If any of the property described above as being subject to forfeiture

- pursuant to Title 18, United States Code, Section 981(a)(l)(C), and Title 28,

United States Code, Section 2461 (c), as a result of any act or omission of the

-
-
57

defendant LARRY P. LANGFORD:

- (1) cannot be located upon the exercise of due diligence;

(2) has been transferred to, sold to, or deposited with a third person;

(3) has been placed beyond the jurisdiction of the Court;

- (4) has been substantially diminished in value; or

(5) has been commingled with other property that cannot be

subdivided without difficulty;

it is the intent of the United States, pursuant to Title 21, United States Code,

- Section 853(p), to seek forfeiture of any other property of said defendant LARRY

- P. LANGFORD, up to the value of the above forfeitable property.

All pursuant to Title 18, United States Code, Section 981(a)(1)(C) and Title

-
28, United States Code, Section 2461 (c).

Count One Hundred

Forfeiture Count

- Title 18, United States Code, Section 981(a)(l)(C)

Title 28, United States Code, Section 246l(c)

- 1. Counts Two, Six, Eight, Thirty Seven through Fifty Four, Sixty Four

- through Eighty, and Ninety through Ninety Four of this Indictment are

- incorporated by reference herein for the purpose of alleging criminal forfeiture

pursuant to Title 18, United States Code, Section 981 (a)(1)(C) and Title 28,
-
- 58

-
-

United States Code, Section 2461 (c).

- FORFEITURE

2. As a result of the foregoing offense alleged in Counts Two, Six, Eight,

- Thirty Seven through Fifty Four, Sixty Four through Eighty, and Ninety through

- Ninety Four of this Indictment, the defendant

- WILLIAM B. BLOUNT

shall forfeit to the United States any property constituting or derived from

proceeds traceable to said violations committed by the defendant WILLIAM B.

- BLOUNT. Such forfeitable interests include, but are not limited to the aggregate

sum of$7,623,521.00 and all interest and proceeds derived therefrom.

3. If any of the property described above as being subject to forfeiture

-
pursuant to Title 18, United States Code, Section 981 (a)(l)(C), and Title 28,

- United States Code, Section 2461 (0), as a result of any act or omission of the

- defendant WILLIAM B. BLOUNT:

- (1) cannot be located upon the exercise of due diligence;

(2) has been transferred to, sold to, or deposited with a third person;
- (3) has been placed beyond the jurisdiction of the Court;

- (4) has been substantially diminished in value; or

-
59
-

-
-
- (5) has been commingled with other property that cannot be

- subdivided without difficulty;

it is the intent of the United States, pursuant to Title 21, United States Code,

Section 853(p), to seek forfeiture of any other property of said defendants

- WILLIAM B. BLOUNT, up to the value of the above forfeitable property.

All pursuant to Title 18, United States Code, Section 981(a)(l)(C) and Title

28, United States Code, Section 2461(c).

- Count One Hundred One

- Forfeiture Count

Title 18, United States Code, Section 98l(a)(l)(C)

Title 28, United States Code, Section 246l(c)

-
1. Counts Two, Six, Eight, Fifty Five through Sixty Three, and Eighty One
- through Eighty Six of this Indictment are incorporated by reference herein for the

purpose of alleging criminal forfeiture pursuant to Title 18, United States Code,

Section 981(a)(l)(C) and Title 28, United States Code, Section 2461(c).

- FORFEITURE

2. As a result of the foregoing offenses alleged in Counts Two, Six, Eight,

Fifty Five through Sixty Three, and Eighty One through Eighty Six of this

- Indictment, the defendant

- ALBERT W. LAPIERRE

60

-
- shall forfeit to the United States any property constituting or derived from

- proceeds traceable to said violations committed by the defendant ALBERT W.

LAPIERRE. Such forfeitable interests include, but are not limited to the
- aggregate sum of $7,623,521.00 and all interest and proceeds derived therefrom.

- 3. If any of the property described above as being subject to forfeiture

- pursuant to Title 18, United States Code, Section 981 (a)(1)(C), and Title 28,

United States Code, Section 2461 (c), as a result of any act or omission of the
- defendant ALBERT W. LAPIERRE:

- (1) cannot be located upon the exercise of due diligence;

- (2) has been transferred to, sold to, or deposited with a third person;

(3) has been placed beyond the jurisdiction of the Court;

- (4) has been substantially diminished in value; or

- (5) has been commingled with other property that cannot be

- subdivided without difficulty;

- it is the intent of the United States, pursuant to Title 21, United States Code,

Section 853(p), to seek forfeiture of any other property of said defendant

- ALBERT W. LAPIERRE, up to the value of the above forfeitable property.

All pursuant to Title 18, United States Code, Section 981 (a)(1)(C) and Title

- 28, United States Code, Section 246l(c).

- 61

,..
-
-
-
A TRUE BILL

-
lsi
Foreperson of the Grand Jury

- ALICE H. MARTIN

- United States Attorney

- lsi

- GEORGE A. MARTIN, JR.

Assistant United States Attorney

lsi
- TAMARRA MATTHEWS JOHNSON
Assistant United States Attorney

-
- lsi
SCARLETT M. SINGLETON
Assistant United States Attorney

62
-

:FILED

- UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ALABA~ flPR 30 AM l{': ~f)

- Southern Division ; . ',,!-·:";rCT c·:; ::;\

I!. c·. t r'.~:~B.~.;:A
i..

CASE NO.:
- -----------------
- SECURITIES AND EXCHANGE
COMMISSION,

- Plaintiff,
- --- --_. -- ---..
- v.

LARRY P. LANGFORD,
GV-08-B-0761-S

- WILLIAM B. BLOUNT,

BLOUNT PARRISH & CO., INC~ AND

- ALBERT W. LAPIERRE,

Defendants.

- COMPLAINT

Plaintiff Securities and JExchange Commission alleges as follows:

f. INTRODUCfION

- ]. This case involves a p:.lblic official accepting undisclosed payments

from a broker-dealer in cormection with the offer, purchase and sale of almost $2.9

billion of Jefferson County, AJabam{! municipal bonds and $3.5 billion of Jefferson

- County security-based swap agreements. The broker-dealer and his finn reaped

millions of dollars in fees in cOIUlection with these bond offerings and swap
- agreements.
.... 2. Larry Langford, the current mayor of Binningham, Alabama and

- fonner president of the Jefferson County commission, received more than

$156,000 in cash and benefits from July 2002 through August 2004 from his

- friend, William Blount, chairman of a Montgomery, Alabama broker-dealer and

- municipal securities dealer. To conceal Blount's direct role in conferring benefits

on Langford, Blount and Langford employed their long-time friend, Albert

.......

LaPierre, a registered political lobbyist, as a conduit to make the payme~ts..

3. In connection with Blount's undisclosed payments to Langford,

- Langford awarded County business to Blount's finn, Blount Parrish & Co., Inc., in

- every County bond offering or swap agreement from March 2003 through

December 2004. During this time, Blount Parrish received more than $6.7 million

- in fees relating to County bond underwriting and swap agreements, comprising

- more than 70 percent of the firm's annual revenue.

- 4. Langford, Blount and Blount Parrish failed to disclose any of the

payments and benefits to Langford, either to the County or investors in bond

- offerings, or to the County in the swap agreements at issue. Furthermore, their

- course of conduct operated. as a fraud and deceit on the County and investors by

depriving the County and investors of objective and impartial bond underwriting
- "
processes and swap agreement negotiations.

- 5. By engaging in the conduct described above and more fully below: (1)

- 2

-
- Langford, Blount and Blount Parrish violated Section I7(a) of the Securities Act of

- 1933 ("Securities Act") and Section 1O(b) of the Securities Exchange Act of 1934
.
("Exchange Act") and Rule IOb-5; (2) BloWlt and Blount Parrish violated Section

- 1SB(c)(I) of the Exchange Act and Municipal Securities Rulemaking Board

- ("MSRB") Rules G-17 and G-20; and (3) LaPierre aided and abetted Blount and

Blount Parrish's violations of the aforementioned statutes and rules. Unless the
- , Court enjoins the four defendants, they are reasonably likely to continue to violate

the federal securities laws.

II. DEFENDANTS

- 6. Langford, 60, is the mayor of Birmingham, Alabama.

November 2002 until November 2007, Langford was the President of the Jefferson
From

- County commission, in charge of finance and general services for the commission.

7. Blount, 54, of Montgomery, Alabama, is co-owner and chairman of

BloWlt Parrish, a broker-dealer and municipal securities broker-dealer registered

with the Securities and Exchange Commission. BloWlt holds Series 7, 24, and 53
.. securities licenses.

8. Blount Pmish is an Alabama corporation with its principal place of

- business in Montgomery, Alabama. It has been registered with the Commission as

a' broker-dealer since 1987 and is also a registered municipal securities broker-

- dealer. In August 1991, the National Association of Securities Dealers ("NASD")

- 3

censured and fined I\lount Parrish and Blount $150,000 for violations of MSRB

... : Rule G-17 for failing to disclose material facts to purchasers in connection with the

offering of municipal bonds. In June 1996, the NASD also charged Blount Parrish

- with violations of MSRB Rules G-17 and G-37, and Blount with violations of

MSRB Rule G-37, for engaging in municipal securities business on nine bond

- offerings within two years of making indirect contributjons to officials of state and

local bond issuers using a lobbyist and a political action committee. /In January

- 1997, Blount Parrish and Blount settled the NASD action~ agreeing: to pay a

- $55,000 fine; not to make contributions to any political action committee; and to

.. refrain from doing business with any lobbyist who controlled or operated a

political action committee.

- 9. LaPierre, 57, is a lobbyist registered in the State of Alabama and a

- fonner executive director of the Alabama Democratic Party. LaPierre has never

been licensed in the securities industry. LaPierre served as a consultant to Blount

Parrish on three Jefferson County bond and swap transactions in 2003 and 2004,

for which Blount Parrish paid LaPierre approximately $219,500.

III. JURISDICTION AND VENUE

. 10. This complaint concerns conduct, fees, and payments in connection

with five County bond offerings and four security-based swap agreements between

March 2003 and December 2004.

4
-
- 11. The five bond offerings are: (1) a $94 million capital improvement

bond offering that closed on March 1, 2003 ("the 2003-A bonds"); (2) a $1.1

billion sewer bond offering that closed on May 1,2003 ("the 2003-B bonds"); (3) a
,..
$1.05 billion sewer bond offering that closed on August 7, 2003 ("the 2003~C

- bonds"); (4) a $51 million general obligation bond offering that closed on August

- 1, 2004 ("the 2004-A bonds"); and (4) a $650 million limited obligation school

bond offering that closed on December 20,2004 ("the 2004 school bonds").

- 12. The four County swap agreements are: (1) a $1.1 million swap

agreement with JP Morgan Chase Bank ("IP Morgan") executed in connection

- with the 2003-B bonds; (2) a $789 million swap agreement with IP Morgan

executed in connection with the 2003-C bonds; (3) a $111 million swap agreement

- with JP Morgan with an effective date of May 1, 2004; and (4) a $1.5 billion swap

- agreement with Bear Steams & Co. with an effective date of June 24, 2004.

13. The Court has jurisdiction over conduct involving these transactions

and this action pursuant to Sections 2(a)(I), 17(a), 20(b), 20(d) and 22(a) of the

- Securities Act, 15 U.S.C. §§ 77b(a)(1), 77q(a), 77t(b), 77t(d), and 77v(a); and

- Sections 3(a)(10), 10(b), 2I(d), 21(e), and 27 of the Exchange Act, 15 U.S.c. §§

- 78c(a)(10), 78j(10), 78u(d), 78u(e), and 78aa.

14. More specifically, the Court has jurisdiction over the five bond

offerings and fraudulent conduct in connection with them because bonds are

- 5

- included in the definition of the term "security" in Section 2(a)(1) of the Securities

Act and Section 3(a)(10) of the Exchange Act.

15. The Court also has jurisdiction over the fraudulent conduct in

connection with the four swap agreements because they were security-based swap

agreements. Security-based swap agreements are defined in Section 206B of the

- Gramm-Leach-Bliley Act, as amended by the Commodity Futures Modernization

Act of 2000, as agreements "of which a material term is based on the price, yield,

- value, or volatility of any security or any group or index of securities, or any

- interest therein."

- 16. The terms of the three County swap agreements with JP Morgan

stated the County was entitled to receive floating interest rate payments from JP

- Morgan based on the value of The Bond Market Association's Municipal Swap

- Index ("BMA"), an index of securities used to establish the floating rate yield (the

Bond Market Association is now known as the Securities Industry and Financial

Markets Association). Furthermore, the June 2004 swap agreement with Bear

Steams specified the County had to make interest rate payments to Bear Steams

- based in part on the floating value of the BMA's Municipal Swap Index. Thus, all

four transactions constituted security-based swap agreements because a material

- tenn in each agreement was based on an index of securities.

17. The express terms of Section 17(a) of the Securities Act, Section

- 6

-
10(b) of the Exchange Act, and Rule 10b-S (among other statutes and rules) give

... the Commission the authority to prosecute anti-fraud violations ofthose sections in

connection with security-based swap agreements.

- 18. An additional basis for the Court's jurisdiction jover fraudulent

.. . conduct in connection with the 2003-B and 2003-C swap agreements is that the

- County negotiated, executed, and entered into these two swap agreements

simultaneously with the 2003-B and 2003-C bonds, respectively. The swap
- agreements were therefore part of the bond offerings over which the Court already

- has jurisdiction.

19. The Court has personal jurisdiction over the defendants and venue is

proper in the Northern DIstrict of Alabama because: (1) Langford and LaPierre

- reside in the Northern District of Alabama; (2) all of the bond offerings and swap

- agreements at issue in the complaint were executed by, on behalf of, and in

Jefferson County, which is located in the Northern District of Alabama; and (3)

Blount and Blount Parrish solicited business from and conducted it with Jefferson

- County, Langford, and LaPierre in the Northern District of Alabama.

- 20. The defendants, directly and indirectly, have made use of the means

- and· instrumentalities of interstate commerce, the means and instruments of

transportation and communication in interstate commerce, and the mails, III

-
- 7

connection with the acts, practices, and courses of business set forth In this

complaint.

IV. FACTS

- A. County Sewer Bond Offerings And Swap Agreements

21. . Jeffer~on County's sewer revenue bond offerings began in the 1990s

- pursuant to a consent decree with the U.S. Environmental Protection Agency and

the U.S. Department of Justice to renovate the County's sewer system. To fund the

- improvements, the County commission approved issuing more than $3 billion in

- variable interest rate bonds between 2001 and 2004.

22. In connection with the bond offerings, the County simultaneously

entered into 18 swap agreements, with a current notional amount of $5.6 billion. A

- swap agreement IS an agreement between two parties to exchange interest

payments on a specified principal amount (referred to as the notional amount) for a

specified period oftime.

- B. The Relationship Between Langford, Blount, And LaPierre

23. Langford, Blount and LaPierre have long-standing personal, political,

- and professional relationships with each other. For example, Langford and Blount

have known each other almost 30 years, and describe each other as close friends.
- .. -
Langford and LaPierre have known each other for more than two decades. Blount

- and LaPierre have known each other for close to 30 years, including when Blount

- 8

-
served as chairman of the Alabama Democratic Party at the same time LaPierre

- was the party's executive director.

24. Langford hired LaPierre as a lobbyist for the city of Fairfield,

- Alabama for part of the time when Langford was mayor there from 1988 to 2002.

In addition, LaPierre's political action committees were among the largest

campaign contributors to Langford's 2002 campaign for County commissioner.

25. Langford and Blount also have professional ties. In 1998, Blount
- Parrish served as lead underwriter for a $90 million bond offering by a Fairfield,

- Alabama authority, headed by Langford, to finance the construction of a local

theme park. However, the park defaulted on its bond debt and bondholders put the

park into receivership in 2001 due to mismanagement and accounting

- irregularities.

- 26. From at least 1997 through 2002, Blount Parrish did not participate in

- any Jefferson County bond offerings. However, that changed almost immediately

-
after Langford took office as County commission president in November 2002.

27. When Langford served as president of the County commission, he met

- with Blount and LaPierre a minimum of once a week, including a dinner meeting

- ata Birmingham restaurant the three had almost every Wednesday which other

local political figures sometimes attended. Most of Blount's payments to or on

-
9

- behalf of Langford (through LaPierre) occurred m close proximity to those.

-
Wednesday meetings.

C. Blount's Payments And Benefits To Langford

- 1. Blount Helps Langford Db/ainA $50,000 Loan

- 28. Blount's financial favors to Langford began immediately after

- Langford won his primary election for County commissioner in June 2002. The

following month, Langford was having personal financial difficulties, owing about

- $70,000 in credit card debt and department store clothing bills.

- 29. Langford discussed his need for money with his longtime friends

- LaPierre and Blount, and told LaPierre he was trying to obtain a bank loan to pay

off his debts. LaPierre suggested to Langford that he approach Colonial Bank,

- N.A. in Birmingham for a loan.

- 30. Langford heeded the suggestion and applied to Colonial Bank for a

loan in July 2002. The bank approved him for an unsecured $50,000 loan with a

- six-month term, even though Langford's loan file showed he had considerable debt

. and a poor credit score.

- 31. Blount was influential in Langford obtaining the $50,000 loan, which

Langford knew through his discussions about the loan with Blount. Blount
- contacted histhen-girlfriend, who was the chief credit officer for Colonial Bank's

- parent corporation and a member or chairwoman of all of the bank's loan

- ]0

- committees, and personally requested the loan for Langford. Although it was not

- her nonnal practice to approve loans of this size, Blount's girlfriend reviewed and

approved Langford's loan. At no time did she speak to Langford about the loan,

- and, in fact, she only met Langford once in her life.

- 2. Blount And LaPierre Help Langford Repay The $50,000 Loan

- 32. When Langford's Colonial Bank loan came due in January 2003, he

did not make any of the required principal or interest payments. Instead, he asked

- LaPierre to pay off the entire $50,000 plus interest.

- 33. Blount, Langford, and LaPierre met together on January 15,2003 and

- February 6, 2003, at which time they discussed the fact that Langford needed help

paying off his $50,000 loan and how that would be accomplished. The- three also

- discussed - Blount, Blount Parrish and LaPierre's work on Jefferson County

financing transactions at these meetings.

34. LaPierre did not use his own funds to satisfY Langford's loan.
- Instead, LaPierre himself applied for, and received, a six-month unsecured loan

- from Colonial Bank for the same amount as Langford's loan, plus interest, listing

- Blount as a reference on his loan application. At Blount's request, his girlfriend,

- Colonial Bank's chief credit officer, also personally approved LaPierre's loan.

35. Colonial Bank memorialized the purpose of LaPierre's loan in a one­

- page signed agreement between the bank and LaPierre, dated February 14, 2003,

- II

-
- which stated Langford's loan, "will be paid in full and the balance transferred to a

new contracted note in the name of Albert W. LaPierre."

36. On March 1,2003 - only two weeks after LaPierre repaid Langford's

loan - Jefferson County closed on the first bond offering of Langford's

- administration, the $94 million 2003-A bonds. Langford and the County

- commission selected Blount Parrish to serve as lead underwriter in that offering,

for which Blount Parrish received $251 ,685 in underwriting fees from the County.

- 3. Blount Pays Langford $75, 000 Using Concealed Payments To LaPierre

- 37. Langford continued to have financial difficulties in the spring of 2003,

- which he discussed in conversations with Blount and LaPierre. As a result, Blount

and LaPierre made efforts to get Langford another loan from Colonial Bank, this

- time for $75,000. Blount conpnunicated extensively bye-mail with his girlfriend

- at the bank for weeks in May and June 2003, trying to convince the bank to

approve a new loan for Langford.

38. Around this same time, on May 9, 2003, Blount sent an e-mail to

Langford regarding County business, during which he specifically told Langford

- "need to know loan request from Colonial."

- 39. A series of e-mails in June 2003 between Blount and his girlfriend

show Blount was lobbying her, a bank director, and the bank's CEO to approve the

- new $75,000 loan for Langford. But before considering Langford's new loan

- 12

request, e-mails show the bank required complete satisfaction of the "Langford

- note," as Blount referred to the February 2003 LaPierre loan in an e-mail.

40. In an effort to induce Colonial Bank to approve a new loan for

Langford, Blount himself provided more than $50,000 to payoff the "Langford

- note" now in LaPierre's name. On May 28, 2003, -Blount wrote a $50,000 check

- to LaPierre's lobbyist firm. Blount and Langford met the same day, at which time

they discussed Blount's payment of the $50,000 to LaPierre.

- 41. Prior to receiving the $50,000 check from Blount, LaPierre's firm

- only had about $8,000 in its bank account. Two days after receiving the check,

LaPierre wrote a $20,000 check to Colonial Bank to payoff a portion of the

- $50,000 loan. He used the rest of Blount's money to pay various office and

- personal expenses.

- 42. Following this senes of checks, Blount continued to e-mail his

girlfriend at Colonial Bank asking about the status of the proposed $75,000 loan to
- Langford. On June 4, 2003, Blount sent her an e-mail stating the "Langford note

- will be paid by LaPierre today ... Think we will be ok by tl~en?"

- 43. That same day, Blount wrote another check to LaPierre's lobbyist

firm for $30,000. The next day, June 5, 2003, LaPierre wrote a $31,644 check to

Colonial Bank to payoff the remaining principal and interest balance of his

$50,000 loan.

- 13

-
-
- 44. Despite arranging to payoff the $50,000 loan, Blount's attempts to

- ) secure a new loan for Langford were Unsuccessful. Having failed to persuade

Colonial Bank to loan Langford money, Blount provided the funds himself

45. On June 12, 2003, Blount wrote a $~9,000 check to LaPierre's

- lobbyist firm. At the time, the firm had just $37,000 in its bank account. Four

- days later, LaPierre used Blount's money to write a $69,000 check to Langford.

All of this occurred after Blount and Langford met on June 11, at which time they
- discussed Blount loaning money to Langford through LaPierre.

- .46. Langford received an additional $6,000 in cash from Blount through

- LaPierre. On June 6, 2003, Blount issued a $6,000check to LaPierre's consulting

firm with the reference "loan proceeds." The same day, LaPierre wrote a $6,500

- check to cash, $6,000 of which he gave to Langford.

47. Langford used the $75,000 to, among other things, pay $12,000 to a

- clothing store, $9,410 to a jewelry store, and $14,000 to a home entertainment

store.

- 4. Blount Pays Langford $30,000 Using Further Concealed Payments To LaPierre

- 48. In August 2004, just weeks after Blount Parrish participated in a $1.5

billion County swap agreement and served as co-underwriter for a $51 million
- County bond offering, and a month before Langford and the County selected

- Blount Parrish to serve as co-underwriter on another bond offering, Blount again

14
-
-
- bailed Langford out of tens of thousands of dollars of debt.

- 49. On August 11, 2004, Blount wrote a $30,000 check to LaPierre's

lobbyist finn, the same day he met with Langford and LaPierre to discuss the

- "
payment. The next day, LaPierre wrote a $30,000 check to Langford. Langford

- used the funds to pay $29,283 in taxes to the Internal Revenue Service.

- 5. Further Efforts By Langford And LaPierre To Conceal Payments

50. As an elected official, Langford is required under Alabama law to file

- an annual Statement of Economic Interests with the Alabama Ethics Commission.

- On annual statements filed on April 20, 2004, March 29, 2005, and March 16,

2006, Langford did not disclose LaPierre's payment to Colonial Bank on his behalf

in February 2003, or the $75,000 he received from Blount through LaPierre in June

- 2003.

51. It was only on September 21, 2007 that Langford filed an amended

- Statement with the Ethics Commission disclosing he owed debts to an individual,

instead of a bank as he previously reported, of between $100,000 and $150,000.

- 52. As a registered lobbyist in Alabam~, LaPierre is required to file a

-
,..
Quarterly Statement of Lobbying Activities. LaPierre did not disclose his

payments to or on behalf of Langford in February or June 2003 on any of his

quarterly forms from the third quarter of 2003 through the second quarter of 2007.

Like Langford, on September 21, 2007 he wrote a letter to the Ethics Commission

15
-
-
- in which he disclosed the payments for the first time.

- 53. Furthermore, neither Langford nor LaPierre has ever identified the

$30,000 payment in August 2004 on any required Ethics Commission filing.

- D. Langford Returns Blount's Favors By Selecting Blount Parrish To

- Participate In County Bond And Swap Transactions In 2003 And 2004

54. Langford quickly made sure Blount and Blount Parrish benefited from

- Blount's financial assistance to him. Although Blount Parrish had not received any

County bond business for years before 2003, early in his administration Langford

met with the County's financial advisor and told him he wanted Blount involved in
- County financing transactions.

- 55. Langford provided vague explanations of what services he thought

- Blount and Blount Parrish would provide the County, at one point stating he

wanted Blount to help evaluate proposed bond deals and swap agreements and

whether the financial institutions involved in them were appropriate and could do

- the work. Yet the County had a written agreement with a large bank to provide

- exactly the same advice for a percentage of the fees realized in each transaction.

56. As discussed above, Blount and Blount Parrish were involved in every
- County bond offering and swap agreement in 2003 and 2004 - this despite being a

- six-person firm far smaller than most of the other underwriters the County selected

- during the same time period.

57. Blount Parrish received more than $6.7 million in fees relating to the
- 16

 five bond offerings and four swap agreements that are the subject of this

- complaint, which comprised more than 70 percent of Blount Parrish's annual

revenue in 2003 and 2004.

- 58. In none of these transactions did Langford, Blount, or Blount Parrish

- disclose to investors or the County the payments Blount made to Langford through

- LaPierre, or Blount's assistance to Langford in obtaining and paying off his loan

with Colonial Bank.

- 1. The 2003-A Bonds

- 59. On January 28, 2003, Langford and the other Jefferson County

- commissioners voted to approve a resolution authorizing the first bond offering of

Langford's administration - a $94 million County capital improvement offering

- known as the 2003-A bonds. The resolution also approved Blount Parrish as

underwriter. The transaction closed on March 1,2003, just two weeks after Blount

and LaPierre arranged to repay Langford's $50,000 loan to Colonial Bank.

-
60. Langford signed the official statement for the transaction on behalf of
- the County, and in so doing certified the accuracy and completeness of the official

- statement. In none of the actions he took or documents he signed in connection

with the 2003-A bonds did Langford disclose the assistance Blount had given him
\,

in obtaining the Colonial Bank loan, or Blount and LaPierre's help in repaying the

- loan.

- 17

-
61. In its role as lead underwriter, Blount Parrish (and Blount) offered and

,... sold the 2003-A bonds to investors. In doing so, Blount and Blount Parrish

- transmitted the official statement to investors. At no time during this process did

Blount or Blount Parrish disclose the assistance Blount had given Langford. in

- obtaining the Colonial Bank loan, or Blount and LaPierre's help in repaying the

- loan.

62. Furthermore, a Blount Parrish representative signed a tax certificate in

- connection with the 2003-A bonds in which the firm represented it had made a

- "bona fide" offering of the County's bonds to investors. That statement was

- materially misleading because it did not disclose the assistance Blount had

provided to Langford in obtaining the Colonial Bank loan, or Blount and

- LaPierre's help in repaying the loan.

- 63. Blount Parrish received $251,685 in fees for its work as underwriter

- on the 2003-A bonds.

2. The 2003-B Bonds And Simultaneous Swap Agreement

- 64. Langford also included Blount Parrish in the County's next major

- finance transaction, a $1.1 billion sewer bond offering that closed on May 1, 2003

known as the 2003-B bonds. Blount solicited Langford in e-mails and meetings to
-
include Blount Parrish as a participant in the transaction. In addition, Blount
- traveled with county officials to New York City on March 11-14, 2003 to meet

- ]8

-
-
- with bond rating agencies and bond insurers to discuss the bond issue.

-
~

65. Langford and other Jefferson County commissioners voted on April

22, 2003 to approve a resolution authorizing the 2003-B bonds. The resolution
- included Blount Parrish as remarketing agent for a $55 million sub-series of the

- bonds.

66. Langford signed the official statement for this bond offering on behalf .
-
of the County, and in so doing again certified the accuracy and completeness of the
- official statement.

- 67. In its role as remarketing agent, Blount Parrish (and Blount) offered

- and sold the $55· million sub-series being remarketed to investors, and in so doing

transmitted the official statement relating to those bonds to investors. Furthermore,

- pursuant to the remarketing agreement executed by Blount Parrish and signed by

Langford on behalf of the County, dated May I, 2003, Blount Parrish specifically

- agreed to comply with the federal securities laws, including Exchange Act Rule

15c2-12 governing the obligations of underwriters to avoid fraudulent conduct, and

- to prepare an official statement relating to the bonds to be remarketed.

- 68. Blount and Blount Parrish's role was not limited to the bond offering,

however. To coincide with this offering, Langford and the other County

cOffinusslOners also approved a resolution authorizing a $1.1 billion swap

- agreement with JP Morgan, executed on March 28, 2003 and with an effective date

- 19

-
of May 1, 2003. The resolution authorized Langford, acting with the advice of the

- County's swap advisor, to approve the specific terms of the swap agreement and

execute the transaction confinnation. The 2003-B bonds' official statement

- included a section regarding the swap agreement stating, among other things: "In

- connection with the issuance of the 2003-B [bonds], the County has entered into an

- interest rate swap agreement with JP Morgan."

- 69. Because an Alabama law requiring counterparties to swap transactions

to have a net worth of at least $100 million meant Blount Parrish could not be a

- counterparty, Blount solicited Langford to select Goldman Sachs Capital Markets

- to participate in this swap agreement. Blount Parrish had a consulting agreement

with Goldman Sachs.

- 70. Blount's efforts· were successful, as Jefferson County hired Goldman

- Sachs and Blount Parrish to participate in the swap agreement at Langford's

- request. The hirings are evidenced by two letters to Langford, one which JP

Morgan sent and the other which Goldman Sachs sent, disclosing payments in
- connection with the swap agreement.

- 71. JP Morgan's letter to Langford, dated March 28, 2003, stated in

relevant part that the County had specifically requested JP Morgan to use Goldman

Sachs in the swap agreement as a condition to selecting JP Morgan as the

- counterparty so Goldman Sachs would receive "a specified percentage of

-
20

-
JPMorgan's net economic benefit." Langford signed this letter on behalf of the

County.

72. Goldman Sachs also sent a letter to Langford, dated March 28,
- advising him it intended to pay "consuiting fees in connection with [its]

- participation in the above-noted swap to Blount Parrish."

- 73. The terms of the May 1, 2003, 39-year swap agreement with JP

Morgan required the County to make a fixed 3.6 percent interest rate payment to JP

Morgan, and had JP Morgan making payments to the County based on the floating

rate of the BMA's Municipal Swap Index. Langford signed the swap agreement

- on behalf of the County.

74. In none of the actions he took or documents he signed on behalf of the

- County in connection with the 2003-B bonds, including the swap agreement with

- JP Morgan, did Langford disclose the assistance Blount had provided to Langford

- in obtaining the Colonial Bank loan, or Blount and LaPierre's help in repaying the

loan.
- 75. At no time in its remarketing of the 2003-B bonds to investors, or at

- no time during its work with the County on either the bond offering or the swap

- agreement in which Blount Parrish served as a consultant did Blount or Blount

Parrish disclose the assistance Blount had provided to Langford in obtaining the
- Colonial Bank loan, or Blount and LaPierre's help in repaying the loan.

-
21

-
76. Blount Parrish received a fee from the County of $500,000 for its

remarketing services, which was the highest fee paid to any remarketing agent on

this transaction. Furthermore, Goldman Sachs wired a $300,000 fee to Blount

- . Parrish on May 27, 2003, for services to the County in connection with the swap

- agreement.

- 3. The 2003-C Bonds And Simultaneous Swap Agreement

77. From May through August 2003, Blount actively solicited Langford to
- involve Blount Parrish in another County sewer bond offering (the 2003-C bonds)

- and to enter into another simultaneous swap agreement. Blount had frequent

- meetings with Langford and other County officials during this time period in

which they discussed the proposed bond offering and swap agreement. LaPierre

- was present at some of those meetings.

- 78. For example, on June 11,2003, the day after Blount Parrish submitted

- a formal proposal to the County to hire the firm on new transactions, Langford and

Blount met to discuss the 2003-C bonds and swap agreement. As discussed above,
- the following day Blount wrote a $69,000 check to LaPierre's consulting firm in .

- order for LaPierre to pay the money to Langford, which LaPierre did on June 16.

- 79. Langford and the other County commissioners voted to approve a

resolution on July 1, 2003 authorizing the 2003-C $1 billion bond offering, with JP

- Morgan Securities (also "lP Morgan") serving as lead underwriter.

-
22

-
80. In the same resolution, Langford and the other commissioners also

- authorized a swap agreement "in connection with" the offering. The resollltion

authorized Langford, acting with the advice of the County's swap advisor, to
- approve the specific terms of the swap agreement and execute the transaction

- confirmation. While the resolution specifically listed the underwriters, swap

providers, advisors, legal counsel and remarketing agents selected to serve on the

2003-C bond offering and swap agreement, it made no mention of Blount Parrish.
- 81. The County then executed a $789 million swap agreement with JP

- Morgan on July 14, 2003, with an effective date of August 7 to coincide with the

- 2003-C bond offering closing date. The terms of the 39-year swap agreement

required the County to make a fixed 3.6 percent interest rate payment to JP
- Morgan, and for IP Morgan to make a payment to the County based on the floating

rate of the BMA's Municipal Swap Index through February 2005, and thereafter

- based on the floating value of the London Inter-Bank Offering Rate.

82. Langford signed the agreement on behalf of the County. Although the

- agreement had a separate category called "Fees," in which payments to the

- County's swap advisor, financial advisor, and legal advisor were listed, the

agreement did not mention fees to Blount Parrish.

83. On August 6, 2003, the 2003-C bond offering closed. On behalf of

- the County, Langford signed and certified the accuracy of the official statement,

-
23

-
which included a statement that "In connection with the issuance of the 2003-C

- [bonds], the County has entered into separate interest rate swap transactions with

JP Morgan Chase Bank" and another financial institution.

- 84. For Blount Parrish's role in the swap agreement and bond offering,

- which according to the County's finance director and its financial advisor

- amounted to little more than attending some m_eetings and traveling to New York

with County officials to meet with bond rating agencies and insurers, Blount
- submitted a three-line invoice to JP Morgan for $2.6 million stating "Directed Fee

- payment pursuant to instructions from Jefferson County Commission related to

- Interest Rate Swap executed between lP Morgan and Jefferson County as part of

the 2003C [bonds]." JP Morgan promptly paid the invoice. The $2.6 millionwas

- more than seven times as large as fees the County paid to any other consultant or

- advisor in the swap agreement, including its swap and financial advisors and legal

counsel.

85. Out of this money, Blount Parrish paid $100,000 to LaPierre as a

- purported consultant on the swap agreement. During the course of the transaction,

- LaPierre attended some meetings where Blount, Langford, and other County

- officials discussed the structure of and participants in the swap agreement, and was

included on e-mails discussing the same topics.

- 86. Langford had, in fact, approved the County hiring Blount Parrish and

-
24

- JP Morgan paying the finn on behalf of the County, as set forth in a letter the finn

- drafted confirming it had paid Blount Parrish at the County's direction.

87. Nowhere in any of the actions he took or documents he signed on

- behalf of the County in connection with the 2003-C bonds and the simultaneous

- swap agreement with JP Morgan did Langford disclose the payments Blount had

- made to him through LaPierre in June 2003, or the assistance Blount and LaPierre

had provided to Langford in obtaining and repaying the Colonial Bank loan.
- 88. Similarly, Blount and Blount Parrish never disclosed the same

- information in connection with their work on the transaction.

- 89.
4. The $111 Million Swap Agreement In November 2003

On the closing date of the 2003-C transaction, Langford met with

- Blount, LaPierre, a JP Morgan representative, the County's finance director, and

- the County's financial advisor, during which Blount asked the County to enter into

another swap agreement.

- 90. Again, Blount succeeded, as on November 24, 2003, the County

- executed a $111 million swap agreement with JP Morgan (related to interest

- payments on the County's 2003-C sewer bonds) with an effective date of May 1,

2004, in which Blount Parrish was compensated as a consultant.

- 91. Pursuant to the terms of the swap agreement, which Langford signed

- on behalf of the County, the County was required to make a fixed 3.5 percent.

- 25

-
interest rate payment to lP Morgan, and JP Morgan was required to make a

- payment to the County based on the floating rate of the BMA's Municipal Swap

Index.
- 92. Blount Parrish sent an invoice to lP Morgan for its services on this

- agreement very similar to the invoice for the 2003-C swap agreement, stating that

- its $225,000 fee on this transaction also was pursuant to instructions from the .

County commission.
- 93. On November 24; the same day the swap agreement was executed, lP

- Morgan sent a letter to· Langford disclosing payments to Blount Parrish in

- connection· with the deal.

County, stated:
The letter, which Langford signed on behalf of the

- The County has requested, as a condition to entering into the

Transaction with lPMorgan, that JPMorgan make payments to Blount
- Parrish &.Company, Inc. in the amount of $225,000 . .. for services
rendered to or on behalf of the County in connection with the

- Transaction. Such payments are· an expense that was incorporated

into JPMorgan's pricing of the Transaction at the time of execution
thereof, which pncing has been approved by the County and its

- advisors. The purpose of this letter is to provide written disclosure to

the County that .. ' such payments were made at the direction of the
County. The County acknowledges that such payments were made at
- its sole discretion, and that JPMorgan had no involvement in the
decision to make such payments, the determination of the amounts of
such payments, or whether such payments represent fair consideration
- for any s~rvices.

- 94. At no time during the execution of this transaction or in documents he

signed in connection with it did Langford disclose the payments Blount had made
- 26

-
to him through LaPierre in June 2003, or the assistance Blount and LaPierre had

- provided to Langfo~,d in obtaining and paying off the Colonial Bank loan.

- 95. Similarly, Blount and Blount Parrish never disclosed the same

information in connection with their work on this swap agreement.

- 96. Out of the $225~000 it received in fees, Blount Parrish paid LaPierre

- $18,500, again as a purported consultant.

97. For 2003, Blount Parrish received more than $4 million from serving
- as underwriter and remarketing agent on County bond offerings and participating

- in County interest rate swap agreements. This represented 72 percent of Blount

- Parrish's 2003 total revenue.

5. The $1.5 Billion Swap Agreement InJune 2004

- 98. Langford next selected Blount and Blount Parrish to participate in the

largest swap agreement in the history of the County, a $1.5 billion transaction

- completed in June 2004.

99. The deal had its geneSIS III December 2003, when Bear Stearns,
- .­
Blount Parrish and another Birmingham broker-dealer submitted a proposal to the

- County to conduct a swap agreement and debt offering. Langford and Blount

- traveled to New York together in April 2004 to meet with ratings agencies and

bond insurers for this transaction.

- 100. Langford and the other County commissioners approved a resolution

-
27

-
on April 27, 2004, authorizing a swap agreement between the County and Bear

- Stearns. As in the resolution approving the 2003-C swap agreement, this

resolution authorized Langford to approve the specific terms of the swap .J

- agreement. The resolution furthermore listed participants in the transaction,

- including the County's swap advisor, financial advisor, counsel, tax counsel and

- counsel to the financial advisor, but did not mention Blount or Blount Parrish.

101. As evidenced bye-mails Blount sent to Langford and others in the

- days leading up to the April 27 meeting, Langford and Blount did not want to

- name Blount Parrish as a participant in the County resolution. E-mails dated April

- 26 indicated Blount and Langford were well aware that at least one other

commissioner was questioning Blount Parrish's involvement in the transaction.

- Blount was so intent on not having Blount Parrish publicly identified in the

- resolution that he e-mailed Langford reasons he could give other Commissioners

why Blount Parrish should not be identified in the resolution.

- 102. Ultimately, the County executed three simultaneous swap agreement

- confirmations with Bear Stearns on June 10, 2004. Although all three

- confirmations listed fees paid at the request of the County for advisory and legal

- services, none listed' Blount Parrish as a participant. Langford signed all three

confirmations on behalf of the County.

- 103. The three confirmations, related to interest payments on the County's

- 28

-
-
- 2002-A, 2002-C and 2003-B sewer bonds, were worth a total of $1.5 billion and

- had an average tenn of 32 years. Each continuation stated that all three "together

shall constitute one and the same instrument." One of the agreements, worth $110
- million, required Bear Stearns to pay an interest rate to the County based on the

- value of the BMA's Municipal Swap Index.

- 104. Because of the way the swap transaction was structured, for tax

purposes the County's finance director requested in an e-mail to all, transaction

- participants that they disclose to the County any payments they made to advisors,

consultants, or others in connection with the deal.

- 105. In response to the e-mail, Blount wrote a letter to Langford as

president of the County commission dated April 19,2004, in which he disclosed he

- had hired a fonner JP Morgan representative as a consultant in connection with this

- transaction. The letter did not disclose any of his assistance to Langford in

- obtaining and paying off Langford's loan with Colonial Bank, or any of Blount's

payments to Langford through LaPierre.

- 106. For its work on this transaction, Bear Stearns paid Blount Parrish $2.4

- million on behalf of the County. This was a significantly higher amount than the

fees the County paid to its legal counsel and swap and financial advisors on the
-
transaction.
- 107. Bear Stearns disclosed the payments in three letters it sent to Langford

- 29

-
-
- on June22, 2004. All three letters contained the same language, stating the County

- had decided to employ Blount Parrish "in the role of bankers with special

knowledge of the background and structure of the County's outstanding bond issue
- to which the Transaction relates," and that Blount Parrish performed services for

- .the County on the swap deal. Langford signed all three letters on behalf of the

- County.

108. The letters also stated Bear Stearns was paying Blount Parrish and
- another consulting broker-dealer directly out of proceeds from the transaction that

- otherwise would have gone to the County. Therefore, while the County received

- $23 million in upfront payments from Bear Stearns in the swap agreement, it lost

an additional $2.4 million through fee payments made to Blount Parrish. Blount

- Parrish used a portion of its $2.4 million fee to pay a $101,000 fee to LaPierre for

- . purported services on this swap agreement. LaPierre had attended some meetings

involving Blount and Langford where they discussed the transaction.

- 109. At no time during the execution of this transaction or in documents he

- signed in connection with it did Langford disclose the payments Blount had made

- to him through LaPierre in June 2003, or the assistance Blount and LaPierre had

provided to Langford in obtaining and paying off the Colonial Bank loan.
- Similarly, Blount and Blount Parrish never disclosed the same infonnation in

- cormection with their work on this swap agreement.

- 30

-
6. The 2004-A Bonds

- 110. On July 27, 2004, Langford and. the other County commissioners

voted to approve a resolution authorizing a $51 million general obligation bond

- offering (the 2004-A bonds), which closyd
,
on
­
August 1, 2004. The resolution

- selected Blount Parrish to serve as a co-underwriter, for which the firm would

- receive $31,350 in fees.

111. Langford signed.the offi<;ial statement for the offering on behalf of the

County, and in so doing certified the accuracy and completeness of the official

- statement. In none of the documents he signed or actions he took in connection

- with the 2004-A bonds did Langford disclose the assistance Blount and LaPierre

had provided in obtaining and paying off his Colonial Bank loan or the $75,000

- payment Blount had made to him through LaPierre.

- 112. In its role as co-underwriter, Blount Parrish (and Blount) offered and

- sold the 2004-A bonds to investors. In doing so, Blount and Blount Parrish

transmitted the official statement to investors. At no time during this process did

- Blount or Blount Parrish disclose the assistance Blount and LaPierre had provided

- in obtaining and payingoffLangford's Colonial Bank loan or the $75,000 payment

- to Langford through LaPierre.

113. Just ten days after this offering closed, as discussed above, Blount

- wrote a $30,000 check to LaPierre's lobbyist firm. The next day, LaPierre wrote a

- 31

-
-
- $30,000 check directly to Langford, which Langford used to pay taxes.

- 7. The 2004 School Bonds

114. Just three weeks after that $30,000 payment, on September 7, 2004,
- Langford and the other County commissioners voted. to approve a resolution

- authorizing a $650 million school bond offering that closed on December 20, 2004

- (the 2004 school bonds). The resolution also approved Blount Parrish as co­

underwriter, for which the finn would receive $445,000 in underwriting fees.
- 115. Langford signed the official statement for the offering on behalf of the

- County, and in so doing certified the accuracy and completeness of the official

- statement. In none of the documents he signed or actions he took in connection

with the 2004 school bonds did Langford disclose the assistance Blount and

- LaPierre had provided in obtaining and paying off his Colonial Bank loan or any of

- the payments Blount had made to him through LaPierre.

- 116. In its role as underwriter, Blount Parrish (and Blount) offered and sold

the 2004 school bonds to investors. In doing so, Blount and Blount Parrish

- transmitted the official statement to investors. At no time during this process did

- Blount or Blount Parrish disclose the assistance Blount and LaPierre had provided

- in obtaining and paying off Langford's Colonial Bank loan or the payments to

Langford through LaPierre.

- 117. For. 2004, Blount Parrish received more than $3.4 million from

-
-

32

-
serving as underwriter on. County bond offerings and participating III County

- interest rate swap agreements. This revenue represented more than 70 percent of

Blount Parrish's 2004 total revenue.

- V. CLAIMS FOR RELIEF

COUNT I

- Fraud In Violation Of Section 17(a)(1) Of The Securities Act

(Against Langford, Blount And Blount Parrish)

- 118. The Commission repeats and realleges Paragraphs 1 through 117 of

- this complaint as if fully restated herein.

- 119. From at least 2~03 through 2004, the Defendants directly and

indirectly, by use of the means or instruments of transportation or communication

- in interstate commerce and by use of the mails, in the offeror sale of securities, as

- described in this complaint, knowingly, willfully or recklessly employed devices,

- schemes or artifices to defraud.

120. By reason of the foregoing, the Defendants have directly or indirectly

- violated and, unless enjoined, are reasonably likely to continue to violate, Section

-
17(a)(1) of the Securities Act, 15 U.S.c. §77q(a)(1).

33

-
COUNT II

- Fraud In Violation Of Sections 17(3)(2) And 17(a)(3) Of The Securities Act

(Against Langford, Blount And Blount Parrish)

- 121. The Commission repeats and realleges Paragraphs 1 through 117 of

- the complaint as if fully restated herein.

- 122. From at least 2003 through 2004, the Defendants, directly and

indirectly, by use of the means or instruments of transportation or communication

- in interstate commerce and by the use of the mails, in the offer or sale of securities,

- as described in this complaint: (a) obtained money or property by means of untrue

- statements of material facts and omissions to state material facts necessary to make

- the statements made, in the light of the circumstances under which they were

made, not misleading; and/or (b) engaged in transactions, practices and courses of

- busine§.s which are now operating and will operate as a fraud or deceit upon

- purchasers and prospective purchasers of such securities.

123. By reason of the foregoing, the Defendants have directly or indirectly

- . violated and, unless enjoined, are reasonably likely to continue to violate, Sections

- 17(a)(2) and 17(a)(3) of the Securities Act, 15 U.S.C. §§77q(a)(2) and 77q(a)(3).

-
-
34

- COUNT III

- Fraud In Violation Of Section lO(b) Of The Exchange Act And Rule 10b-5

- .(Against Langford, Blount And Blount Parrish)

124. The Commission repeats and realleges Paragraphs 1 through 117 of

- the complaint as if fully restated herein.

- 125. From at least 2003 through 2004, the Defendants directly and

- indirectly, by use of the means and instrumentality of interstate commerce, and of

the mails in connection with the purchase or sale of the securities, as described in
- this complaint, knowingly, willfully or recklessly: (a) employed devices, schemes

- . or artifices to defraud; (b) made untrue statements of material facts and omitted to

state material facts necessary in order to make the statements made, in the light of
- the circumstances under which they were maqe, not misleading; and/or (c) engaged

- in acts, practices and courses of business which have operated as a fraud upon the

- purchasers of such securities.

- 126. By reason of the foregoing, the Defendants have directly or indirectly

violated and, unless enjoined, are reasonably likely to continue to violate, Section

- 10(b) of the Exchange Act, 15 U.S.C. §78j(b), and Rule 10b-5, 17 C.P.R.

- §240.1 Ob-5.

-
-
- 35
-

-
COUNT IV

- Violation Of Sections 15B(c)(l) Of The Exchange Act And MSRB Rule G-17

- (Against Blount And Blount Parrish)

127. The Commission repeats and realleges Paragraphs 1-67, 75-76, and

- 110-117 of the complaint as if fully restated herein.

- 128. Section 15B(c)(1) of the Exchange Act, 15 U.S.C. §780-4(c)(l),

makes it unlawful for any broker, dealer or municipal securities dealer to make use
- of the mails or any means or instrumentality of interstate commerce to effect any

- transaction in, or to induce or to attempt to induce the purchase or sale of any

- municipal security in contravention of any rule of the MSRB.

- 129. Pursuant to Section 15B(b)(2) of the Exchange Act, 15 U.S.C. §780­

4(b)(2), the MSRB proposes and adopts rules governing the conduct of brokers and

- dealers and municipal securities dealers in connection with municipal securities.

- Pursuant to Section 21(d)(l) of the Exchange Act, 15 U.S.C. §78u(d)(1), the

- Commission is charged with enforcing the MSRB rules.

130. MSRB Rule G-17 requires every broker, dealer and municipal

- securities dealer, and their associated persons, in the conduct of their municipal

- securities business, to deal fairly with all persons and not to engage in any

- deceptive, dishonest or unfair practice.

-
- 36
-
-
- 131. From at least 2003 through 2004, through the actions set forth in this

- complaint and in the conduct of Blount Parrish's municipal securities business, .

Blount and Blount Parrish engaged in deceptive, dishonest or unfair practices, and
- failed to deal fairly with all persons in connection with the 2003-A bonds, the

- 2003-B bonds, the 2004-A bonds, and the 2004 school bonds.

- 132. From at least 2003 through at least 2q04, Blount and Blount Parrish

- made use of the. mails or means or instrumentality of interstate commerce to effect

transactions in, or to induce or attempt to induce the purchase or sale of, municipal

- securities in contravention ofMSRB Rule G-17.

- 133. By reason of the foregoing, Blount and Blount Parrish have directly or

indirectly violated and, unless enjoined, are reasonably likely to continue to

violate, Section 15B(c)(I) of the Exchange Act, 15 U;S.C. §780-4(c)(I), and

- MSRB Rule G-17.

- COUNT V

Violation Of Sections 15B(c)(l) Of The Exchange Act And MSRB Rule G-20

- (Against Blount And Blount Parrish)

- 134. The Commission repeats and realleges Paragraphs 1-67, 75-76, and

- 110-117 of the complaint as if fully restated herein.

135. Section 15B(c)(1) of the Exchange Act, 15 U.S.C. §780-4(c)(1),

- makes it unlawful for any broker, dealer or municipal securities dealer to make use

-
- 37
-

-
of the mails or any means or instrumentality of interstate commerce to effect any

- transaction in, or to induce or to attempt to. induce the purchase or sale of any

- municipal security in contraven,tion ofany rule of the MSRB.

136. Pursuant to Section 15B(b)(2) of the Exchange Act; 15 U.S.c. §780­

, .
4(b)(2), the MSRB proposes and adopts rules governing the conduct of brokers and

- dealers and municipal securities dealers in connection with municipal securities.

- Pursuant to Section 21(d)(l) of the Exchange Act, 15 U.S.C. §78u(d)(I), the

Commission is charged with enforcing the MSRB rules.

- 137. MSRB Rule G-20 makes it unlawful for any municipal securities

- broker or dealer, and their associated persons, to give or permit to be given,

directly or indirectly, any thing or service of value, including gratuities, in excess

of $100 per year to a person other than an employee or partner of the municipal

- securities broker or dealer, where such payments or services relate to the municipal

- securities activities of the employer of the recipient of the payment or service.

138. From at least 2003 through 2004, in relation to the municipal

- securities activities of Langford and Jefferson County, Blount and Blount Parrish,

- directly or indirectly, gave or permitted to be given to Langford, things or services

- of value in excess of$100 per year in connection with the 2003-A bonds, the 2003­

B bonds, the 2004-A bonds, and the 2004 school bonds.

-
-
- 38
-

-
139. From at least 2003 through 2004, Blount and Blount Parrish made use

- of the mails or means or instrumentality of interstate commerce to effect

- transactions in, or to induce or attempt to induce the purchase or sale of, municipal

securities in contravention ofMSRB Rule 0-20.

- 140. By reason of the foregoing, Blount and Blount Parrish have directly or

- indirectly violated and, unless enjoined, are reasonably likely to continue to

- violate, Section 15B(c)(I) of the Exchange Act, 15 U.S.C. §780-4(c)(l), and

MSRB Rule 0-20.

- COUNT VI

- Aiding And Abetting Blount And Blount Parrish's Violations Of Section 17(a)

Of The Securities Act, Section 10(b) Of The Exchange Act, Rule 10b-5,

Section 15B(c)(l) Of The Exchange Act And MSRB Rules G-17 And G-20

- (Against LaPierre)

- 141. The Commission repeats and realleges Paragraphs 1 through 117 of'

- the complaint as if fully restated herein;

- 142. From at least 2003 through 2004, Blount and Blount Parrish, directly

and indirectly, by use' of the means or instruments of transportation or

- communication in interstate commerce and by use of the mails, in the offer or sale

- of securities, as described in this complaint: (1) knowingly, willfully or recklessly

employed devices, schemes or artifices to defraud; (2) obtained money or property

- by means of untrue statements of material facts and omissions to state material

-
- 39
-

-
facts necessary to make the statements made, in the light of the circumstances

- under which they were made, not misleading; and/or (3) engaged in transactions,

- practices .and courses of business which are now operating and will operate as a

fraud or deceit lipon purchasers and prospective purchasers of such securities, in

- violation of Section 17(a.) of the Securities Act, 15 U.S.c. §77q(a).

- 143. From at least 2003 through 2004, Blount and Blount Parrish, directly

and indirectly, by use of the means and instrumentality of interstate commerce, and
- of the mails in connection with the purchase or sale of the securities, as described .

- in this Complaint, knowingly, willfully or recklessly: (a) employed devices,

- schemes or artifices to defraud; (b) made untrue statements of material facts and

omitted to state material facts necessary in order to make the statements made, in
- the light of the circumstances under which they were made, not misleading; and/or

- (c) engaged in acts, practices and courses of business which have operated as a

- fraud upon the purchasers of such securities, in violation of Section 1O(b) of the

Securities Act, 15 U.S.c. § 78j(b), and Rule IOb-5, 17 C.F.R. § 240.10b-5.

- 144. From at least 2003 through 2004, through the actions set forth in this

- complaint and in the conduct of Blount Parrish's municipal securities business,

- Blount and Blount Parrish: engaged in deceptive, dishonest or unfair practices, and

failed to deal fairly with all persons in violation of MSRB Rule G-17; and in
- relation to the municipal securities activities of Langford and Jefferson County,

-
- 40
-

-
directly or indirectly, gave or permitted to be given to Langford, things or services

- of value in excess of $100 per year in violation MSRB Rule G-20. By reason of

the foregoing, Blount and Blount Parrish also violated Section 15B(c)(1) of the
- Exchange Act, 15 U.S.c. §78o-4(c)(1).

- 145. LaPierre, directly and indirectly, from at least 2003 through 2004,

- aided and abetted Blount and Blount Parrish's violations of Section 17(a) of the

Securities Act, Section 1O(b) of the Exchange Act and Rule 10b-5, and Section

- 15B(c)(1) of the Exchange Act and MSRB Rules G-17 and G-20.

- 146. By.reason of the foregoing, LaPierre has directly or indirectly violated

- and, unless enjoined, is reasonably likely to continue to violate, Section 17(a) of

the Securities Act, 15 U.S.C. §77q(a)(1); Section 10(b) of the Securities Act, 15
- U.S.C. § 78j(b); Rule 10b-5, 17 C.F.R. § 240.10b-5; Section 15B(c)(1) of the

- Exchange Act, 15 U.S.C. §780-4(c)(1); and MSRB Rules G-17 and G-20.

- .'
VI. RELIEF REQUESTED

WHEREFORE, the Commission respectfully requests that the Court:

- I. Declaratory Relief

- Declare, determine and find the Defendants have committed the violations of

- the federal securities laws alleged herein.

II. Permanent Injunction

-

- 41
-
-
- Issue a Pennanent Injunction, enJOlmng the Defendants, their officers,

- agents, servants, employees, attorneys, and representatives, and all persons in

- active concert or participation with them, and each of them, from violating Section

17(a) of the Securities Act, 15 U.S.C. §77q(a); Section 10(b) and Rule 10b-5 of the

- Exchange Act, 15 U.S.C. §78j(b) and 17 C.F.R. §240.l0b-5; and Section 15B(c)(1)

- of the Exchange Act, 15 U.S.C. §780-4(c)(l) and MSRB Rules G-17 and G-20.

- ,III. Disgorgement

Issue an Order directing the Defendants to disgorge all profits or proceeds

- that they have received as a result ofthe acts and/or courses of conduct complained

- of herein, with prejudgment interest.

IV. Penalties
- Issue an Order directing all Defendants to pay civil money penalties

- pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section

- 21(d) of the Exchange Act, 15 U.S.C. § 78u(d).

V. Further Relief
- Grant such other and further relief as may be necessary and appropriate.

- VI. Retention Of Jurisdiction

- Further, the Commission respectfully requests that the Court retain

jurisdiction over this action in order to implement and carry out the tenns of all
- orders and decrees that may hereby be entered, or to entertain any suitable

[ 42
-

-
application or motion by the Commission for additional relief within the

- jurisdiction of this Court.

- April 30, 2008 Respectfully submitted,

-
- Robert K. Levenson
Florida Bar No. 0089771
- Regional Trial Counsel
U.S. Securities and Exchange Commission

- 801 Brickell Avenue, Suite 1800

Miami, Florida 33131
(305) 982-6341 (direct dial)
- (305) 536-4154 (facsimile)
levensonr@sec.gov

- Lead attorney, trial attorney and attorney

to be noticed
Appearing pursuant to Local Rule 83.1(c)
.

- \ Jason R. Berkowitz
Pennsylvania Bar No. 87775

- Senior Counsel
U.S. Securities and Exchange Commission
801 Brickell Avenue, Suite 1800
- Miami, Florida 33131
(305) 982-6309 (direct dial)

- berkowitzj@sec.gov

Appearing pursuant to Local Rule 83.I(c)

- 43

- Press Release: SEC Charges Birmingham Mayor and Friends for Undisclosed Payment S... Page 1 00

- U.S. Secunties and Exchange Commlsslo

Home I Previous Page

-
- SEC Charges Birmingham Mayor ana Friends for
Undisclosed Payment Scheme in Municipal Bond Deals

- FOR IMMEDIATE RELEASE

2008-69

- Washington, D. c., April 30, 2008 - The Securities and Exchange

Commission today charged Birmingham Mayor Larry Langford and two of
his friends in connection with undisclosed payments to Langford related to

- municipal bond offerings and swap agreement transactions Langford

directed on behalf of Jefferson County, Ala. Also charged was the Alabama
broker-dealer firm that reaped millions of dollars in fees from the deals.

- The SEC alleges that while Langford served as president of the County
Commission of Jefferson County, he accepted more than $156,000 in
undisclosed cash and benefits over the course of two years from William

- Blount, the chairman of Blount Parrish & Co, Inc.

.. Additional Materials
)0 Litigation Release No. 20545
)0 $~L<;:omQ1illo!

- Linda Chatman Thomsen, Director of the SEC's Division of Enforcement,

- said, "Today's enforcement action demonstrates not only our continued

commitment to the protection of investors in municipal bonds, but also our
intention to Vigorously pursue fraudulent conduct related to security-based
swap agreements."

- David Nelson, Director of the SEC's Miami Regional Office, said, "These
defendants engaged in misconduct that defrauded Jefferson County and

.. municipal bond investors. By failing to disclose the payment scheme, they

deprived Jefferson County and investors of an objective and impartial bond
underwriting process and swap agreement negotiations."

- According to the SEC's complaint filed in the U.S. District Court for the
Northern District of Alabama, Langford selected Blount Parrish to participate

.. in every Jefferson County municipal bond offering and security-based swap

agreement transaction during 2003 and 2004, enabling the firm to collect
more than $6.7 million in fees.

- Moreover, the SEC alleges, Langford and Blount concealed the payment
scheme by using their long-time friend, Albert LaPierre, an Alabama
registered political lobbyist, as a conduit.

- http://www.sec.gov/news/press/2008/2008-69.htm 4/7/2010
-

- Press Release: SEC Charges Birmingham Mayor and Friends for Undisclosed Payment S... Page 2 of3

-
The case is the SEC's first enforcement action involving security-based
swap agreements. A swap agreement is a financial derivative instrument
where, for example, an issuer such as Jefferson County agrees to exchange
periodic interest rate payments on a specified principal amount of debt with

- a counterparty. A security-based swap agreement is a type of swap

agreement in which a material term is based on the price, yield, value or
volatility of any security, group or index of securities.

- The SEC is charging Langford, Blount, and Blount Parrish with antifraud
violations of the federal securities laws. LaPierre is charged with aiding and

-
abetting Blount and Blount Parrish's violations.

The SEC's complaint alleges that prior to Langford's election to the County
Commission, Blount Parrish had not received any municipal bond business

- from Jefferson County for years. After Langford won his primary election for
the County Commission, however, the SEC alleges that Blount began
making payments and conferring other benefits to Langford, funneling
funds through LaPierre. The SEC alleges Blount's efforts were rewarded

- because Langford, who served as president of the County Commission from

November 2002 to November 2007, selected Blount Parrish to participate in
$6.4 billion worth of Jefferson County bond offerings and swap agreement
transactions from March 2003 to December 2004. Blount Parrish's fees for
these transactions comprised over 70 percent of the firm's annual revenue
during the relevant period, according to the SEC's complaint.

- The SEC alleges that of the five municipal bond offerings at issue, Blount
Parrish participated as lead or co-underwriter on three municipal bond
offerings, and as a remarketing agent on a fourth bond offering. In

- connection with all five bond offerings, Langford signed the official
statements, which were intended to disclose material information to
investors, on behalf of Jefferson County. In its role as underwriter or
remarketing agent of four of the bond offerings, Blount Parrish reviewed

- the official statements and distributed those materials to investors in

connection with its sale of these securities. The official statements did not
disclose Blount's payments to Langford.

- The SEC further alleges that Langford directed that Blount Parrish be
included in four security-based swap transactions, including a $1.5 billion
transaction that was the largest swap transaction in Jefferson County's

- history. Langford signed letter agreements with the counterparties to the

swap transactions representing that Jefferson County had requested and
approved fee payments to Blount's firm for services to Jefferson County.

- Other than the swap counterparties, the fees Blount Parrish received on
these swap transactions were substantially larger than those received by
other professionals on the deals. However, neither Langford nor Blount
disclosed to Jefferson County the payments from Blount to Langford.

- The complaint charges Langford, Blount and Blount Parrish with violations
of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the
Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5
thereunder. Blount and Blount Parrish are charged with violations of Section
15B(c)(1) of the Exchange Act and Municipal Securities Rulemaking Board
Rules G-17 and G-20. LaPierre is charged with aiding and abetting Blount
and Blount Parrish's violations. The SEC's complaint seeks judgments
against each defendant providing for permanent injunctions, disgorgement

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http://www.sec.gov/news/pressI2008/2008-69.htm 4/7/2010
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- Press Release: SEC Charges Binningham Mayor and Friends for Undisclosed Payment S...

with prejudgment interest, and financial penalties.

Page 3 of 3

- The SEC's investigation is continuing.

- For more information, contact:

###

- David Nelson
Regional Director

- SEC's Miami Regional Office

(305) 982-6331

Glenn S. Gordon

- Associate Regional Director

SEC's Miami Regional Office
(305) 982-6360

- Teresa J. Verges
Assistant Regional Director
SEC's Miami Regional Office

- (305) 982-6384

- http://www.sec.gov/news/press/2008/2008-69.htm

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- Larry P. Langford, William B. Blount, Blount Parrish & Co., Inc., and Albert W. LaPierre... Page 1 of2

- Home I Previous Page

.S. Secuntles and Exchange Commlsslo

-
- U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 20545 / April 30, 2008

- Securities and Exchange Commission v. Larry P. Langford, William

B. Blount, Blount Parrish & Co., Inc., and Albert W. LaPierre, Case
No. Case No. cv-08-B-0761-S (N.D. Ala., filed April 30, 2008)

- The Securities and Exchange Commission filed a civil action today in the
U.s. District Court for the Northern District of Alabama against Birmingham

- Mayor Larry Langford, William Blount, and Albert LaPierre. The SEC's
complaint alleges that while Langford served as president of the County
Commission of Jefferson County, Alabama (County Commission), he
accepted more than $156,000 in undisclosed cash and benefits over the

- course of two years from Blount, the chairman of Blount Parrish & Co, Inc.
Blount Parrish is a broker-dealer based in Montgomery, Alabama.

- According to the SEC's complaint, Langford selected Blount Parrish to

participate in every Jefferson County municipal bond offering and security­
based swap agreement transaction during 2003 and 2004, earning Blount

-
Parrish over $6.7 million in fees. Moreover, the SEC alleges, Langford and
Blount concealed the payment scheme by using their long-time friend,
LaPierre, an Alabama registered political lobbyist, as a conduit. The case is
the SEC's first enforcement action involving security-based swap

- agreements.

The SEC's complaint alleges that prior to Langford's election to the County

- Commission, Blount Parrish had not received any municipal bond business
from Jefferson County for years. After Langford won the primary election in
2002 for the County Commission, however, Blount began making payments
and conferring other benefits to Langford, funneling funds through LaPierre.

- The SEC alleges Blount's efforts were rewarded because Langford, who
served as president of the County Commission from November 2002 to
November 2007, selected Blount Parrish to participate in $6.4 billion of

- Jefferson County bond offerings and swap agreement transactions from

March 2003 to December 2004. Blount Parrish's fees for these transactions
comprised over 70% of the firm's annual revenue during the relevant
period, according to the SEC's complaint.

- The SEC alleges that of the five municipal bond offerings at issue, Blount
Parrish participated as lead or co-underwriter on three municipal bond

-
offerings, and as a remarketing agent on a fourth bond offering. In
connection with all five bond offerings, Langford signed the official
statements, which were intended to disclose material information to
investors, on behalf of Jefferson County. In its role as underwriter or
remarketing agent as to four of the bond offerings, Blount Parrish reviewed
the official statements and distributed those materials to investors in
connection with its sale of these securities. The official statements did not

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httn'llwww sP.r. O"ov/litio";ltion/litrp.lp';lsp..s/)OOR/lr70",4", htm 4/7001 0
-
- Larry P. Langford, William B. Blount, Blount Parrish & Co., Inc., and Albert W. LaPierre... Page 2 of2

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disclose Blount's payments to Langford.

The SEC further alleges that Langford directed that Blount Parrish be
included in four security-based swap transactions, including a $1. 5 billion

- transaction which was the largest swap transaction in Jefferson County's

history. Langford signed letter agreements with the counterparties to the
swap transactions representing that Jefferson County had requested and

- approved fee payments to Blount's firm for services to Jefferson County in

connection with the swap transactions. Other than the swap counterparties,
the fees Blount Parrish received on these swap transactions were
substantially larger than those received by other professionals on the deals.

- However, according to the SEC's complaint, neither Langford nor Blount

disclosed to Jefferson County Blount's payments to Langford.

- The complaint charges Langford, Blount and Blount Parrish with violations
of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the
Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5
thereunder; Blount and Blount Parrish for violations of Section 15B(c)(1) of

- the Exchange Act and Municipal Securities Rulemaking Board Rules G-17
and G-20; and LaPierre with aiding and abetting Blount and Blount Parrish's
violations. The complaint seeks judgments against each defendant

- providing for permanent injunctions, disgorgement with prejudgment

interest and a civil money penalty. The SEC preViously prevailed in
subpoena enforcement actions filed against Langford and Blount, both of
whom had refused to either testify or assert a valid privilege when

- questioned about these payments during the SEC's investigation.

[Securities and Exchange Commission v. Larry P. Langford and William B.
Blount, Case No. 07-23271-MC-Huck-Simonton (S.D. Fla., filed December

-
17, 2007)] [Litigation Release No. 20400/ December 17,2007]

The SEC's investigation is continuing.

- )0 SEC Complaint in this matter

- http://www.sec.gov/litigation/litreleases/2008/lr20545.htm

- Home I Previous Page Modified: xx/xx/200B

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-
UNITED STATES OF AMERICA

Before the

-
SECURITIES AND EXCHANGE COMMISSION

SECURITIES ACT OF 1933

- Release No. 9078 / November 4,2009

- SECURITIES EXCHANGE ACT OF 1934

Release No. 60928/ November 4,2009

ADMINISTRATIVE PROCEEDING

- File No. 3-13673

ORDER INSTITUTING ADMINISTRATIVE

- In the Matter of
AND CEASE-AND-DESIST PROCEEDINGS,
PURSUANT TO SECTION 8A OF THE
SECURITIES ACT OF 1933, AND SECTIONS

- J.P. MORGAN SECURITIES INC.

Respondent.
15(b) AND 21C OF THE SECURITIES
EXCHANGE ACT OF 1934, MAKING
FINDINGS, AND IMPOSING REMEDIAL

- SANCTIONS AND A CEASE-AND-DESIST

ORDER

-
I.

- The Securities and Exchange Commission ("Commission") deems it appropriate and in the
public interest that public administrative and cease-and-desist proceedings be, and hereby are,
instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), and Sections
15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against J.P. Morgan
- Securities Inc. ("lP. Morgan Securities" or "Respondent").

II.
- In anticipation of the institution of these proceedings, Respondent has submitted an Offer
of Settlement (the "Offer") which the Commission has determined to accept. Solely for the

- purpose of these proceedings and any other proceedings brought by or on behalf of the
Commission, or to which the Commission is a party, and without admitting or denying the findings
herein, except as to the Commission's jurisdiction over it and the subject matter of these

- proceedings, which are admitted, Respondent consents to the entry of this Order Instituting
Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of
1933, and Sections 15(b) and 21C of the Securities Exchange Act of 1934, Making Findings, and

- Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order"), as set forth below.

-
-
-

-
III.

On the basis of this Order and Respondent's Offer, the Commission finds! that:
- SUMMARY

1. This case involves payments by a national broker-dealer to local firms whose

principals or employees were friends of Jefferson County, Alabama public officials in connection
with $5 billion in County bond underwriting and interest rate swap agreement business awarded to
the broker-dealer. J.P. Morgan Securities Inc. and two of its managing directors, Charles LeCroy
and Douglas MacFaddin, agreed at the direction of certain County commissioners to pay more than
$8.2 million in 2002 and 2003 to, in most instances, local broker-dealers. The County officials
were instrumental in selecting J.P. Morgan Securities as the underwriter, and its affiliated
commercial bank as the swap provider, on County transactions. The broker-dealers had no official
role in the transactions and performed few, if any services.

- 2. J.P. Morgan Securities, LeCroy, and MacFaddin did not disclose any of the
payments or the conflicts of interest raised by the agreements with individual commissioners in the

- swap agreement confirmations or the bond offering documents. J.P. Morgan Securities
incorporated certain of the costs of these payments into higher swap interest rates it charged the
County, directly increasing the swap transaction costs to the County and its taxpayers. By

- engaging in the conduct described above and more fully below, J.P. Morgan Securities violated
Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 ("Securities Act"), Section 15B(c)(l) of
the Securities Exchange Act of 1934 ("Exchange Act"), and Municipal Securities Rulemaking

- Board ("MSRB") Rule G-17.

RESPONDENT

- 3. J.P. Morgan Securities is a Delaware corporation with its principal place of

business in New York, New York. It has been registered with the Commission as a broker-dealer

- since 1985 and is also a registered municipal securities broker-dealer. From 2001 to 2003, J.P.
Morgan Securities managed or co-managed seven County sewer bond underwritings, of which
three are at issue in this complaint. Its affiliated commercial bank entered into eight interest rate

-
swap agreements with the County, of which three are at issue in this complaint.

OTHER RELATED INDIVDUALS

- 4. LeCroy, 55, of Winter Park, Florida, joined J.P. Morgan Securities as a vice
president in March 1999. He was subsequently promoted to Managing Director of J.P. Morgan
Securities' Southeast Regional office in Orlando. LeCroy left the firm in March 2004. He held
Series 7, 24, 53 and 63 securities licenses.

- I The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding
on any other person or entity in this or any other proceeding.

- 2

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 5. MacFaddin, 48, of Cos Cob, Connecticut, served as Managing Director and head of
J.P. Morgan Securities' Municipal Derivatives Desk from 2001 until March 2008. He holds Series

- 7,24,53 and 63 securities licenses.

FACTS

- A. County Sewer Bond Offerings And Swap Agreements

6. Jefferson County's sewer revenue bond offerings began in the 1990s pursuant to a
consent decree with the U.S. Environmental Protection Agency and the U.S. Department of Justice
to renovate the County's sewer system. To help fund the improvements, the County commission
approved issuing more than $3 billion in auction, variable and fixed interest rate bonds between
- 2001 and 2003. J.P. Morgan Securities served as lead underwriter for the majority of the auction

and variable rate debt.

- 7. In connection with the bond offerings, the County entered into 18 swap agreements,
with a notional amount of $5.6 billion. An interest rate swap agreement is an agreement between

two parties to exchange interest payments on a specified principal amount (referred to as the

- notional amount) for a specified period oftime. J.P. Morgan Securities' affiliated commercial

bank served as the largest provider for interest rate swap agreements in 2002 and 2003.

- 8. This matter concerns conduct and payments in connection with three County bond

offerings and three security-based swap agreements between October 2002 and November 2003.

- 9. The three bond offerings, with a total par value of about $3 billion, are: (1) an $839
million sewer bond offering that closed on October 24, 2002 ("the 2002-C bonds"); (2) a $1.1
billion sewer bond offering that closed on May 1,2003 ("the 2003-B bonds"); and (3) a $1.05

- billion sewer bond offering that closed on August 7, 2003 ("the 2003-C bonds").

10. The three swap agreements, with a notional amount of about $2 billion, are: (1) a

- $1.1 billion swap agreement executed in connection with the 2003-B bonds ("the 2003-B swap
agreement"); (2) a $789 million swap agreement executed in connection with the 2003-C bonds
("the 2003-C swap agreement"); and (3) a $111 million swap agreement executed on November 7,

- 2003 with an effective date of May 1,2004 ("the November 2003 swap agreement").

B. The 2002-C Bonds

- 11. In March 2002, as J.P. Morgan Securities was vying with many firms for the
County's next proposed sewer bond deal, LeCroy devised a new plan to earn the County's
business. In e-mails, LeCroy described a rival firm's purportedly successful tactic for winning
- municipal finance business of paying small local firms in unrelated transactions to enlist those
firms' political support for the County hiring the rival firm.

... 12. In the e-mails, LeCroy suggested that J.P. Morgan Securities pay two small local
broker-dealers, Gardnyr Michael Capital and ABI Capital Management. LeCroy wrote that the

- 3

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- firms each had a close relationship with a County commissioner and could help win the support of
the commissioners. He estimated the typical payments would be $5,000 to $25,000 per deal.

- 13. As discussed in more detail throughout this order, J.P. Morgan Securities made a
series of payments to local firms whose principals or employees were close friends of certain

- County commissioners, but that were unable to participate as auction rate underwriters, or as swap
providers under Alabama law. J.P. Morgan Securities did not disclose the payments in the official
transaction documents. Far from the $5,000 to $25,000 originally discussed, the payments wound
up running into the millions of dollars and cost the County because J.P. Morgan Securities

- incorporated certain of them into the cost of the swap transactions, even though the firms
performed virtually no services for the County.

- 14. In July 2002, LeCroy and MacFaddin solicited the County on behalf of J.P. Morgan
Securities for a $1.4 billion sewer bond deal. LeCroy and MacFaddin knew several County
commissioners wanted to complete the transaction before November, when two commissioners

- would leave office and lose their ability to funnel payments to their supporters' firms. As a result,
LeCroy, MacFaddin, and J.P. Morgan Securities specifically targeted their efforts at two
commissioners who had just lost primary elections and would leave office in November.

- 15. On July 15, LeCroy told MacFaddin in a telephone conversation about his efforts to
persuade the two commissioners to select J.P. Morgan Securities for the deal. He discussed
beating out a rival firm by agreeing J.P. Morgan Securities would pay Gardnyr Michael and ABI
Capital, whom one of the commissioners had directed them to pay in order to win his support for
J.P. Morgan Securities.

- 16. Ultimately, the County selected J.P. Morgan Securities as underwriter on the 2002­
C transaction, which was an $839 million deal that used a combination of auction rate bonds and

- interest rate swap agreements. Neither Gardnyr Michael nor ABI Capital had the ability to
underwrite the 2002-C auction rate bonds or serve as an interest rate swap provider under Alabama
law.

- 17. Nevertheless, LeCroy and MacFaddin arranged for J.P. Morgan Securities to pay
Gardnyr Michael and ABI Capital on this transaction at the direction of a commissioner. On

.. October 28, 2002, five days after the 2002-C bond offering closed, the two discussed in a
telephone conversation that they had agreed with one commissioner to pay $250,000 each to
Gardnyr Michael and ABI Capital for the 2002-C transaction.

- 18. MacFaddin expressed concern that anyone reviewing the payments would question
them because of their size. LeCroy, however, allayed his fears by telling him other County
commissioners did not know about the payments.

- 19. The official documents associated with the 2002-C transaction did not disclose the
payments to Gardnyr Michael and ABI Capital. For example, the October 23,2002 County
resolution authorizing issuance of the 2002-C bonds listed the underwriters, swap providers, swap

- 4

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- advisor and remarketing agents selected to serve on the 2002-C transaction, but did not mention
Gardnyr Michael or ABI Capital.

- 20. In its role as managing underwriter, J.P. Morgan Securities offered and sold the
2002-C bonds to investors, and in so doing transmitted the official statement to investors. The
official statement disclosed the roles of numerous deal participants, including the underwriters,
underwriters' counsel, bond counsel, structuring agent, and the County's financial and swap
advisors. It also listed underwriting fees. However, it did not disclose the payments to ABI

-
Capital and Gardnyr Michael.

C. The 2003-B Bonds And Swap Agreement

- 21. In November 2002, Larry Langford became president of the County commission
and head of the commission's finance committee that had significant authority over approval of
County bond deals and swap agreements. Early in his administration, Langford made it clear to

- the County's financial advisor that he wanted William Blount, head of the Montgomery broker­
dealer Blount Parrish & Co., involved in every County financing transaction. Langford and Blount
were long-time friends and political colleagues.

- 22. Prior to Langford involving Blount in County bond and swap deals, Blount Parrish
had not received any County business from 1997 through 2002. However, Langford was able to

- ensure Blount's selection because his positions as commission president and head of the finance
committee effectively allowed him to control the selection process for underwriters and swap
providers.

- 23. From January until May 1,2003, J.P. Morgan Securities solicited the County, and
Langford in particular, to hire the firm as underwriter on a new sewer bond offering and to enter

- into another swap agreement. During that period, LeCroy met several times with Langford and/or
Blount regarding this deal, which became the 2003-B transaction. Because Blount Parrish could
not serve as a swap provider under Alabama law, Blount solicited Langford to select Goldman
Sachs Capital Markets Inc. to participate in the 2003-B swap transaction because Blount Parrish
had a consulting agreement with Goldman Sachs.

- 24. Goldman Sachs and another New York-based broker-dealer were also pitching
swap deals to the County. To prevent Goldman Sachs and the other firm from executing their own
swap transactions with the County and ensure the County selected J.P. Morgan Securities instead,

-
LeCroy and MacFaddin agreed to Langford's request that J.P. Morgan Securities make payments
to Goldman Sachs and the other firm.

25. On February 25, 2003, Langford and the County commission approved a resolution

- authorizing the $1.1 billion 2003-B bond offering. J.P. Morgan Securities would serve as lead
underwriter, and its affiliated commercial bank would serve as swap provider for the

-
corresponding $1.1 billion swap agreement. The swap agreement was executed on March 28,
2003, with an effective date of May 1,2003 to coincide with the bond offering.

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26. In connection with the bond deal and swap agreement, LeCroy and MacFaddin
agreed in their negotiations with Langford to pay Goldman Sachs $3 million, and the other firm

- $1.4 million. In tum, Goldman Sachs agreed to pay Blount-Parrish, its consultant, $300,000.

27. Neither Goldman Sachs nor the other firm entered into a swap agreement with the
County, or served as an advisor to the County on this transaction. J.P. Morgan Securities
- ultimately negotiated a separate swap agreement between its affiliated bank and Goldman Sachs as
a mechanism to make the $3 million payment.

- 28. The official documents related to the bond offering and the swap agreement did not
disclose the payments from J.P. Morgan Securities to Goldman Sachs and the other firm, or the
payment from Goldman Sachs to Blount Parrish. For example, the February 25 County resolution

- listed the bond underwriter, swap provider, County financial advisor, bond counsel, and
underwriter's counsel selected to serve on the 2003-B transaction. It did not mention Goldman
Sachs, Blount Parrish, or the other firm.

- 29. In its role as managing underwriter, J.P. Morgan Securities offered and sold the
2003-B bonds to investors, and in doing so, transmitted the official statement to investors. The

- official statement listed and defined the identities and roles of numerous deal participants,
including the underwriters, bond counsel, underwriters' counsel, and the County's financial
advisor. But it did not mention the three firms receiving payments.

- 30. The swap agreement confirmation contained an itemized fee section that listed three
fees J.P. Morgan Securities was paying at the County's direction. However, J.P. Morgan

- Securities omitted from the confirmation the $3 million payment to Goldman Sachs and the $1.4
million payment to the other firm.

- 31. MacFaddin did set forth the latter two payments in a separate letter he sent only to
Langford on March 28, 2003 - after the swap agreement had been executed. The letter did not
describe any services Goldman Sachs or the other firm performed on the 2003-B deal.

- 32. MacFaddin's letter did not disclose Goldman Sachs' payment to Blount Parrish.
Goldman Sachs wrote separately to Langford about Blount Parrish's payment in a letter also dated
March 28, 2003. The letter recommended that the payment to Blount Parrish be disclosed to the

- County's bond counsel. Such a disclosure was not made.

D. The 2003-C Bonds And Swap Agreement

- 33. On May 1,2003, the day the 2003-B bond transaction closed, LeCroy began
proposing a new bond offering and swap transaction to Langford. The next day, LeCroy told

- MacFaddin in a telephone call that Langford was in favor of the transaction, but suggested that J.P.
Morgan Securities pay Blount directly to avoid a competing firm enlisting Blount's support.
According to LeCroy, Langford told him J.P. Morgan Securities might have to pay other local
firms as well. LeCroy agreed the firm should pay Blount to avoid having him represent a
competing firm.

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34. Over the next two months, LeCroy met several times with Langford and Blount
concerning the $1.05 billion 2003-C sewer bond offering and the corresponding $789 million swap

- agreement. As the negotiations progressed during the first two weeks of June, LeCroy had several
telephone conversations with a J.P. Morgan Securities associate about the payments to Blount
Parrish and other finns. In one conversation, he referred to the payments as "free money." In

- another, he referred to having to "payoff' finns. And he described Blount's role in the transaction
as "not messing with us" and "keeping every other finn out of this deal." Later, in July, he
described the payments as "the price of doing business."

- 35. Ultimately, the County commission approved a resolution on July 1,2003 that
authorized the issuance of $1.05 billion in bonds, with J.P. Morgan Securities serving as lead
underwriter. The bond offering closed on August 7, 2003. The resolution also authorized a swap

- transaction in connection with the offering, which turned into the $789 million swap agreement.
The parties executed that agreement on July 14,2003, with the effective date also being August 7.

- 36. J.P. Morgan Securities paid Blount Parrish $2.6 million - more than any other
participant in the deal made except J.P. Morgan Securities itself. The firm also paid $250,000 each
to Gardnyr Michael and ABI Capital at the direction of another commissioner. Both finns had

- hired as a "consultant" a long-time friend of that commissioner.

37. The official documents related to this transaction did not disclose the payments to

- Blount Parrish, Gardnyr Michael, and ABI Capital. For example, the July 1 County resolution
specifically listed the underwriters, swap providers, County advisors, legal counsel and
remarketing agents selected to serve on the 2003-C bond offering and swap agreement, but did not

- mention the three finns J.P. Morgan Securities was paying.

38. In its role as managing underwriter, J.P. Morgan Securities offered and sold the
2003-C bonds to investors, and in doing so, transmitted the official statement to investors. The
- official statement listed the roles of all participants the County had selected, including the
underwriters, bond counsel, the underwriters' counsel and the County's financial advisor. But the
official statement omitted mentioning payments to Blount Parrish and the other two firms.

39. The swap agreement confinnation, dated July 14,2003, also did not disclose the

- fees or the fact that J.P. Morgan Securities was incorporating them into the pricing of the swap. It
contained an itemized fee section listing payments J.P. Morgan Securities was making to the
County's swap advisor, legal counsel, and financial advisor, but omitted the Blount Parrish,

- Gardnyr Michael and ABI Capital payments. Furthennore, LeCroy was specifically asked about
fees J.P. Morgan Securities was paying at the July 14 swap closing, but did not mention the
payments to the three finns.

- 40. Two weeks after the 2003-C swap transaction closed, J.P. Morgan Securities sent a
letter signed by LeCroy only to Langford, listing the payments to Blount Parrish, Gardnyr Michael
and ABI Capital. The letter noted J.P. Morgan Securities was making the payments even though

- the finns could not act as an underwriter or swap provider on this transaction. The letter also said

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- JP. Morgan Securities was incorporating the payments to the three finns into the pricing of the

swap, thus reducing the amount of money the County would receive from the swap.

- E. The November 2003 Swap Agreement

-
41. Even before the 2003-C transaction closed, LeCroy solicited Langford for another
swap deal. LeCroy told MacFaddin in a July 30, 2003 telephone call that Langford had told him
JP. Morgan Securities might have to pay some local finns.

- 42. On November 7, 2003, J.P. Morgan Securities' affiliated commercial bank and the
County executed a $111 million swap agreement with an effective date of May 1,2004. In
connection with this transaction, J.P. Morgan Securities agreed to pay Blount Parrish $225,000 and
$75,000 to Gardnyr Michael.

43. During the November 7,2003 closing, LeCroy was asked specifically about fees

- JP. Morgan Securities was paying. Although fees to the County's swap, legal, and financial
advisors were discussed, LeCroy did not disclose the payments to Blount Parrish and Gardnyr
Michael. The swap confinnation also did not mention those payments, or the fact that J.P. Morgan

- Securities was incorporating them into the pricing of the swap.

44. More than two weeks after the transaction closed, J.P. Morgan Securities sent a

- letter dated November 24,2003, addressed only to Langford, describing the payments to Blount
Parrish and Gardnyr Michael. The letter represented that the County required the payments as a
condition for approving the transaction.

- F. Status of County Sewer Bonds

- 45. In January 2008, ratings agencies downgraded the County's sewer bond insurers,
and shortly thereafter, also downgraded the County's approximately $3.2 billion of sewer bonds.
In February 2008, the auction market failed for the County's auction-rate sewer bonds. J.P.
Morgan Securities' affiliated commercial bank and other sewer debt-related creditors entered
into a series of forbearance agreements with the County starting in March 2008 to defer the
County's principal and certain other payments on its variable-rate demand sewer bonds and swap

-
agreements.

46. On March 3,2009, the interest rate swap agreements with the County bearing

- reference numbers 470385,470392, 700404,8958034, 700157, and 7001880 (collectively, the

"Swap Agreements") were tenninated. On March 6, 2009, J.P. Morgan Securities' affiliated
commercial bank notified the County that it owed $647,804,118.00 as the result of the

- tennination of the Swap Agreements. Since then, J.P. Morgan Securities' affiliated commercial
bank has continued to forbear from taking action in respect of its claim for payments due as a
result oftennination of the Swap Agreements.

- 47. Since March 2008, the County has engaged in negotiations with JP. Morgan
Securities and other sewer debt-related creditors and third parties, seeking a refinancing or other

-
8

-
- restructuring of the sewer debt in an effort to achieve such a refinancing or other restructuring
and avoid the County filing for bankruptcy. The Commission understands that JP. Morgan

- Securities intends to continue to pursue discussions with the County and such other creditors and
third parties in an attempt to resolve these issues.

VIOLATIONS

48. As a result of the conduct described above, JP. Morgan Securities willfully

- violated Section 17(a)(2) and 17(a)(3) of the Securities Act, which prohibit any person from
obtaining money "by means of any untrue statement of a material fact or any omission to state a
material fact necessary in order to make the statements made, in light of the circumstances under
which they were made, not misleading" or engaging "in any transaction, practice, or course of

- business which operates or would operate as a fraud or deceit upon the purchaser" in the offer or
sale of securities or security-based swap agreements.

- 49. Also as a result of the conduct described above, J.P. Morgan Securities willfully
violated Section 15B(c)(1) of the Exchange Act, which makes it unlawful for any broker, dealer or
municipal securities dealer to "make use of the mails or any means or instrumentality of interstate

- commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any
municipal security in contravention of any rule of' the Municipal Securities Rulemaking Board
("MSRB").

- 50. Pursuant to Section 15B(b)(2) of the Exchange Act, the MSRB proposes and adopts
rules governing the conduct of brokers and dealers and municipal securities dealers in connection

- with municipal securities. Pursuant to Section 21 (d)(I) of the Exchange Act, the Commission is
charged with enforcing the MSRB rules.

51. As a result of the conduct described above, JP. Morgan Securities willfully violated
MSRB Rule G-17, which states that in the conduct of its municipal securities business, every
"broker, dealer, and municipal securities dealer shall deal fairly with all persons and shall not

- engage in any deceptive, dishonest, or unfair practice."

UNDERTAKINGS

- JP. Morgan Securities has undertaken to do the following within five business days of the
entry of this Order:

- 52. Make a $50,000,000.00 payment to and for the benefit of Jefferson County,
Alabama, for the purpose of assisting displaced County employees, residents, and sewer
ratepayers.

2 A willful violation of the securities laws means merely '''that the person charged with the duty knows
what he is doing.'" Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969,
977 (D.C. Cir. 1949)). There is no requirement that the actor '''also be aware that he is violating one of the Rules or
Acts.''' /d. (quoting Gearhart & Otis, Inc. v. SEC, 348 F.2d 798, 803 (D.C. Cir. 1965)).

- 9

-
-

- 53. Terminate any and all obligations of the County to make any payments to

JPMorgan Chase Bank, N.A. under the Swap Agreements.

- In determining whether to accept the Offer, the Commission has considered these
undertakings. Respondent agrees that if the Division of Enforcement believes that Respondent has

-
not satisfied these undertakings, it may petition the Commission to reopen this matter to determine
whether additional sanctions are appropriate.

IV.
- In view of the foregoing, the Commission deems it appropriate and in the public interest to
impose the sanctions agreed to in J.P. Morgan Securities' Offer.

- Accordingly, pursuant to Section 8A ofthe Securities Act, and Sections 15(b), 21B and
21C of the Exchange Act, it is hereby ORDERED that:

A. J.P. Morgan Securities cease and desist from committing or causing any violations

and any future violations of Sections 17(a)(2) and 17(a)(3) ofthe Securities Act, Section 15B(c)(1)

-
of the Exchange Act and MSRB Rule G-17.

B. J.P. Morgan Securities is censured.

- C. J.P. Morgan Securities shall,.within five business days of the entry of this Order,
pay disgorgement of$1.00 and a civil money penalty in the amount of $25,000,000.00 to the
Securities and Exchange Commission. If timely payment is not made, additional interest shall
accrue pursuant to 31 U.S.c. 3717. Such payment shall be: (A) made by United States postal
money order, certified check, bank cashier's check or bank money order; (B) made payable to the
Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial
Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way,
Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies J.P. Morgan

- Securities as a Respondent in these proceedings, the file number of these proceedings, a copy of
which cover letter and money order or check shall be sent to Teresa J. Verges, Division of
Enforcement, Securities and Exchange Commission, Miami Regional Office, 801 Brickell Avenue,

- Suite 1800, Miami, FL 33131.

D. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of2002, a Fair Fund is

- created for the disgorgement and penalties referenced in paragraph C above. Regardless of whether
any such Fair Fund distribution is made, amounts ordered to be paid as civil money penalties
pursuant to this Order shall be treated as penalties paid to the government for all purposes,
including all tax purposes. To preserve the deterrent effect of the civil penalty, J.P. Morgan

- Securities agrees that it shall not, after offset or reduction in any Related Investor Action based on
Respondent's payment of disgorgement in this action, argue that it is entitled to, nor shall it further
benefit by offset or reduction of any part of J.P. Morgan Securities' payment of a civil penalty in
this action ("Penalty Offset"). If the court in any Related Investor Action grants such a Penalty
Offset, J.P. Morgan Securities agrees that it shall, within 30 days after entry of a final order

-
10

granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of
the Penalty Offset to the United States Treasury or to a Fair Fund, as the Commission directs.

-
Such a payment shaH not be deemed an additional civil penalty and shall not be deemed to change

the amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a

-
"Related Investor Action" means a private damages action brought against Respondent by or on
behalf of one or more investors based on substantiaIIy the same facts as alleged in the Order
instituted by the Commission in this proceeding.

-
By the Commission.

-
Elizabeth M. Murphy
Secretary

-
11
-
[2J

- 'D~
Fbi hIE NbRTHERN DISTRICT OF ALABAMA
LJIW ". A q• 5bSouthern Oivision .

-
t~, r..... , -...

U.S. DISTRrClCOUHT CASE NO.:

N.D. OF ALABAMA
- CV-09-~-2238-5

- SECUlUTIES AND EXCHANGE

CO.MMISSION,

-
v.
Plaintiff,

- CHARLES E. LECROY AND

- DOUGLAS W. MACFADDl.N,

Defendants.

-
- COMPLAINT

Plaintiff Securities and Exchange Commission alleges as fol1ows~

- I. ·INTRODUCTION

- 1. 'This case involvl;s payments arranged by two managing directors of a

national· broker-dealer to friends of Jefferson County, Alabama public officials so

- the broker-dealer and its affiliated commercial bank could obtain $5 billion in

- County bond underwriting ani interest rate swap agreement business.

- 2. Charles LeCroy and Douglas MacFaddin, the two former managing

- directors, privately agreed with certain County conunissioners to pay more than

$8.2 million in 2002 and 20)3 to close friends of the commissioners who either

- owned or worked at local broker-dealers.

- 3. Although labeled as payments for work on the transactions, their true

purpose was to ensure that County officials selected the broker-dealer, J.P. Morgan

- Securities Inc., as County bond underwriter, and the bank, JPMorgan Chase Bank,

- N.A., as County swap provider. The broker-dealers whom LeCroy and MacFaddin

- arranged to pay had no official role in the transactions and performed few, if any

services, despite receiving hefty fees that in many cases dwarfed those paid to

- other third parties such as lawyers and bankers who advised the County and

worked extensively on the deals.

4. In taped telephone conversations, LeCroy and MacFaddin

- demonstrated they knew these payments were sham transactions designed to get

- the broker-dealer and the bank (together "JPMorgan") business, referring to them

- as "payoffs," "giving away free money," and "the price of doing business."

- 5. Despite this knowledge, LeCroy and MacFaddin did not disclose any

of the payments or the conflicts of interest the agreements with individual

- commissioners raised, either to the County or investors in the bond offerings, or to

- the County in the swap agreements.

- 6. In connection with these payments, the County selected lPMorgan to

serve as managing underwriter and swap provider for the largest municipal auction

rate securities and swap agreement transactions in JPMorgan's history. lPMorgan

- 2

- incorporated the costs of these payments into higher swap interest rates it charged

the County, directly increasing the swap transaction costs to the County and its

taxpayers.

- 7. This course of conduct operated as a fraud and deceit on the County

- and investors by depriving them of an objective and impartial bond underwriting

- process and swap agreement negotiations. By engaging in this conduct, LeCroy

and MacFaddin violated Section 17(a) of the Securities Act of 1933 ("Securities

- Act"); Section I O(b) of the Securities Exchange Act of 1934 ("Exchange Act") and

- Exchange Act Rule lOb-5; and Section 15B(c)(l) of the Exchange Act and Mutricipal

- Securities Rulemaking Board ("MSRB") Rules G-17 and G-20. Unless the Court

enjoins them, they are reasonably likely to continue to violate the federal securities

- laws.

- II. DEFENDANTS AND RELATED ENTITIES

A. Defendants
- 8. LeCroy, 55, of Winter Park, Florida, joined J.P. Morgan Securities as

- a vice president in March 1999. He was subsequently promoted to managing

- director of J.P. Morgan Securities' Southeast Regional office in Orlando. As such,

- he was responsible for J.P. Morgan Securities' entire municipal bond business in

the firm's Southeast Region. LeCroy left the finn in March 2004. He held Series

- 7, 24, 53 and 63 securities licenses. In January 2005, LeCroy pled guilty to two

- 3

-
counts of wire fraud for engagmg m a scheme to make payments to obtain

- municipal bond business from the city of Philadelphia, Pennsylvania on behalf of

JPMorgan, and was sentenced to six months in prison.

- 9. MacFaddin, 48, of Cos Cob, Connecticut, served as managing director

- and head of J.P. Morgan Securities' Municipal Derivatives Department from 2001

- until March 2008. As such, he supervised the firm's entire municipal derivatives

operations, including those people responsible for negotiating all swap agreements
- JPMorgan Chase Bank entered into with governmental agencies. MacFaddin holds

- Series 7, 24, 53 and 63 securities licenses.

- 10.
B. Related Entities

J.P. Morgan Securities is a Delaware corporation with its principal

- place of business in New York, New York. J.P. Morgan Securities has been

- registered with the Commission as a broker-dealer since 1985 and is also a

- registered municipal securities broker-dealer. From 2001 to 2003, J.P. Morgan

Securities managed or co-managed seven County sewer bond underwritings, of

- which three are at issue in this complaint.

- 11. JPMorgan Chase Bank is a national banking association with U.S.

branches in 17 states. From 2001 to 2003, JPMorgan Chase Bank entered into
-
eight interest rate swap agreements with the County, of which three are at issue in
- this complaint.

- 4

-
III. JURISDICTION AND VENUE

- 12. This complaint concerns conduct, fees, and payments in connection

with three County bond offerings and three security-based swap agreements
- between October 2002 and November 2003.

- 13. The three bond offerings, with a total value of about $3 billion, are:

- (1) an $839 million sewer bond offering that closed on October 24, 2002 ("the

2002-C bonds"); (2) a $1.1 billion sewer bond offering that closed on May 1, 2003

- ("the 2003-B bonds"); and (3) a $1.05 billion sewer bond offering that closed on

- August 7,2003 ("the 2003-C bonds").

14. The three County swap agreements, with a total value of about $2

billion, are: (1) a $1.1 billion swap agreement with JPMorgan Chase Bank
.. executed in connection with the 2003-B bonds ("the 2003-B swap agreement"); (2)

- a $789 million· swap agreement with JPMorgan Chase Bank executed in

- connection with the 2003-C bonds ("the 2003-C swap agreement"); and (3) a $111

million swap agreement with JPMorgan Chase Bank executed on Novembe~ 7,

- 2003 with an effective date of May 1, 2004 ("the November 2003 swap

- agreement").

- 15. The Court has jurisdiction over conduct involving these transactions

and this action pursuant to Sections 2(a)(l), 17(a), 20(b), 20(d) and 22(a) of the

- Securities Act, 15 U.S.C. §§ 77b(a)(1), 77q(a), 77t(b), 77t(d), and 77v(a); and

-
5

-
Sections 3(a)(10), lO(b) l5B(c), 2l(d), 2l(e), and 27 of the Exchange Act, 15

- U.S.c. §§ 78c(a)(l0), 78j(l0), 780-4(c), 78u(d), 78u(e), and 78aa.

16. More specifically, the Court has jurisdiction over the three bond

- offerings and fraudulent conduct in connection with them because bonds are

- included in the definition of the term "security" in Section 2(a)(1) ofthe Securities

- Act and Section 3(a) (1 0) of the Exchange Act.

17. The Court also has jurisdiction over the fraudulent conduct in

- connection with the three swap agreements because they were security-based swap

agreements. Security-based swap agreements are defined in Section 206B of the

- Gramm-Leach-Bliley Act, as amended by the Commodity Futures Modernization

Act of 2000, as agreements "of which a material term is based on the price, yield,

- value, or volatility of any security or any group or index of securities, or any

- interest therein."

- 18. The terms of the 2003-B and 2003-C swap agreements stated the

County was entitled to receive floating interest rate payments from JPMorgan

- Chase Bank based in part on the value of the Bond Market Association's ("BMA")

- Municipal Swap Index, an index of securities used to establish the floating rate

- yield (the Bond Market Association is now known as the Securities Industry and

Financial Markets Association).

- 19. Furthermore, the November 2003 swap agreement specified the

- County had to make interest rate payments to lPMorgan Chase Bank based on the

- floating value of the BMA's Municipal Swap Index. Thus, all three transactions

constituted security-based swap agreements because a material term. in each

- agreement was based on "the price, yield, value, or volatility of any security or any

- group or index of securities, or any interest therein."

- 20. The express terms of Section 17(a) of the Securities Act, Section

10(b) of the Exchange Act, and Rule 10b-5 (among other statutes and rules) give

- the Commission the authority to prosecute anti-fraud violations of those sections in

- connection with security-based swap agreements.

21. An additional basis for the Court's jurisdiction over fraudulent

- conduct in connection with the 2003-B and 2003-C swap agreements is that the
.. County negotiated, executed, and entered into these two swap agreements

- simultaneously with and as part of the 2003-B and 2003-C bond offerings. The

- fraudulent conduct involving the swap agreements was therefore part of the bond

offerings over which the Court already has jurisdiction.

- 22. The Court has personal jurisdiction over the Defendants and venue is

- proper in the Northern District of Alabama because: (1) LeCroy and MacFaddin

negotiated the terms of the bond offering documents and swap agreements at issue
- with or in the County, which is located in the Northern District of Alabama; and

- (2) they solicited business from and transacted business with the County, both in

- 7

-
-
- person and through numerous telephone calls, letters, and e-mails to and from

- County commissioners and employees, as well as to and from private law firms,

investment banks, and broker-dealers located in the County.

- 23. For example, MacFaddin and LeCroy were members of the working

- group on all of the bond offerings and swap agreements, meaning they sent and

received, at a minimum, dozens of e-mails on each transaction, all of which also

- included County officials as well as advisors to the County located in the Northern

- District. The two also participated in conference calls regarding each transaction

- that included County officials and advisors. As discussed in more detail below,

LeCroy made numerous trips to the County in connection with the transactions.
- 24. The Defendants, directly and indirectly, made use of the means and
.. instrumentalities of interstate commerce, the means and instruments of

- transportation and communication in interstate commerce, and the mails, III

- connection with the acts, practices, and courses of business set forth

complaint.

III this

- IV. FACTS

- 25.
A. County Sewer Bond Offerings And Swap Agreements

Jefferson County's sewer revenue bond offerings began in the 1990s

- pursuant to a consent decree with the U.S. Environmental Protection Agency and

- the U.S. Department of Justice to renovate the County's sewer system. To help

- 8

-
-
- fund the improvements, the County commission approved issuing more than $3

billion in auction, variable and fixed interest rate bonds between 2001 and 2003.
- J.P. Morgan Securities served as lead underwriter for the majority of the auction

- and variable rate debt.

- 26. In connection with the bond offerings, the County entered into 18

swap agreements, with a notional amount of $5.6 billion. A swap agreement is an

,..
agreement between two parties to exchange interest payments on a specified

- principal amount (referred to as the notional amount) for a specified period of time.

- IPMorgan Chase Bank served as the largest provider for swap agreements

conducted in 2002 and 2003.

- B. The Undisclosed Payments Begin

- 27. The plan to pay for County business started in 2002, when LeCroy,

- JPMorgan's lead investment banker for the County's public finance projects,

- approached his superiors in March 2002 with a new strategy to earn the County's

sewer bond business.

- 28. In a series of e-mails, LeCroy discussed a rival firm's purportedly

- successful tactic to win municipal finance business of paying small local firms in

unrelated transactions to enlist those finns' "political support" for the County
- hiring the rival firm on bond and swap transactions.

- 29. To help IPMorgan win the County's business, LeCroy in the e-mails

- 9

-
- suggested paying two small local broker-dealers, Gardnyr Michael Capital and

- ABI Capital Management. LeCroy wrote his bosses that "each have a close

relationship with a commissioner in Jefferson County" and can be "helpful to us in

- Jefferson." LeCroy estimated the typical payments would be $5,000 to $25,000

- per deal. One of LeCroy's superiors reacted favorably, and suggested following up

- to "know which firms [LeCroy] wants us to target." At the same time, JPMorgan's

Tax-Exempt Derivatives group was also soliciting interest rate swap deals with the

County.

- 30. As discussed in more detail throughout the rest of this Complaint,

- LeCroy and MacFaddin embarked on a strategy to pay local firms whose principals

or employees were close friends of certain County commissioners, but that were

unable to participate as auction rate underwriters, or as swap providers under

- Alabama law. The payments, which LeCroy, MacFaddin and JPMorgan never

disclosed to the County or investors, were to help win County bond underwriting
- and swap agreement business. Far from the $5,000 to $25,000 originally
"..
discussed, the payments wound.up running into the millions of dollars and cost the

- County because JPMorgan incorporated many of them into the cost of the swap

- transactions, even though LeCroy and MacFaddin knew these firms performed

virtually no services for the County.

3 I. The scheme began in earnest III July 2002, when LeCroy and

- 10

-
-
- MacFaddin solicited the County on behalf of J.P. Morgan Securities for a $1.4

- billion sewer bond deal. LeCroy and MacFaddin knew several County

commissioners wanted to complete the transaction before November, when two

- commissioners would leave office and would lose their ability to funnel payments

- to their supporters' firms. As a result, LeCroy and MacFaddin targeted their

- solicitations to Commissioner Jeff Gennany and another commissioner, both of

whom had lost their primary elections and would leave office in November.

32. On July 11, 2002, Germany and the County commission voted to

- approve a $1.4 billion financing plan and selected J.P. Morgan Securities to serve

- as lead underwriter. A few days later, on July 15, LeCroy told MacFaddin in a

taped telephone conversation about his efforts to persuade the two commissioners

- to select J.P. Morgan Securities for the deal. He boasted of beating out a rival firm

- with the new strategy:

- And we kind of co-opted their - the minority firms they teamed up

with because, the two black commissioners [Commissioner Germany
and another commissioner] said, "Look if we support the synthetic
refunding, you guys have to take care of our two firms [Gardnyr
Michael and ABI Capital]." And I said, "Whatever you want - if
that's what you need, that's what you get - just tell us how much." ...
- And I've been told by the other four [commission] members now that
if I don't get it done by November 1 they're gonna fire [me] because
they want it done before they lose control, because they want to help
all their friends.

- 33. The County later increased the total sewer bond deal to $1.8 billion,

but broke it up into three smaller transactions - the 2002-B, 2002-C, and 2002-D
- 11

-
f­
-

deals - all of which closed within a five-week period ending on November 1,2002.

34. The largest of the three transactions, the $839 million 2002-C deal,
- used a combination of auction rate bonds and interest rate swap agreements.

- Although the County selected Gardnyr Michael and ABI Capital to serve as co­

- underwriters with J.P. Morgan Securities on the 2002-B and 2002-D sewer bond

offerings, neither finn had the ability to underwrite the 2002-C auction rate bonds
- or serve as an interest rate swap provider under Alabama law. That law requires

- swap agreement counterparties to either (1) have a net worth of at least $100

million, or (2) arrange for a person or entity with a net worth of at least $100

million to guarantee their obligations.

- 35. Nevertheless LeCroy and MacFaddin made sure JPMorgan paid

- Gardnyr Michael and ABI Capital on this transaction. On October 28, 2002, five

- days after the 2002-C bond offering closed and lPMorgan Chase Bank had

executed a swap agreement with the County, LeCroy and MacFaddin discussed in
- tape recorded telephone conversations that they had agreed with Gennany to pay

- $250,000 each to Gardnyr Michael and ABI Capital for the 2002-C transaction.

- 36. MacFaddin expressed concern that if someone discovered the

payments "they could have a field day with it" because the payments were "fairly
- large." LeCroy allayed MacFaddin 's fears by stating that other County

- commissioners "didn't have a clue" about the payments.

12
-
-
- 37. Five days earlier, on October 23, 2002, Gennany and the rest of the

commission had approved a resolution authorizing issuance of the 2002-C bonds,

- with J.P. Morgan Securities serving as lead underwriter. The County resolution

- further authorized the underwriters to prepare and distribute an official statement

- for the 2002-C bonds. The bond offering closed the following day.

38. While the resolution specifically listed the underwriters, swap

- providers, swap advisor and remarketing agents selected to serve on the 2002-C

- bond offering and simultaneous swap agreement, it made no mention of Gardnyr

- Michael or ABI Capital.

39. Furthermore, the official statement for the 2002-C bonds disclosed the
- roles of numerous deal participants, including the underwriters, underwriters'

- counsel, bond counsel, structuring agent, and the County's financial and swap

- advisors. The official statement also discussed the terms of JPMorgan Chase

- Bank's swap agreement with the County (which MacFaddin subsequently executed

on behalf of the bank). In addition, it listed underwriting fees paid to J.P. Morgan

- Securities ($1.5 million) and its two co-underwriters ($644,370 and $774,484).

- However, the official statement did not disclose the payments to ABI Capital and

Gardnyr Michael.
- 40. In its role as managing underwriter, J.P. Morgan Securities offered

- and sold the 2002-C bonds to investors. In doing so, J.P. Morgan Securities

- 13

-
-
- transmitted the official statement to investors. The official statement did not

- disclose to bond investors the material information concerning the payments to

ABI Capital and Gardnyr Michael, or the conflict of interest raised by the

- agreement to make the payments to secure JPMorgan's selection as managing

- underwriter and swap provider.

41. On October 30, 2002, to receIve its payment, Gardnyr Michael

- submitted a one-line, $250,000 invoice to JPMorgan describing its role as "Co-

Manager on Jefferson County, Alabama Swap." In a taped telephone call, LeCroy

- and MacFaddin discussed their mutual concern over the way Gardnyr Michael had

worded the invoice because it made it sound like the firm had done work on the
- swap transaction.

- 42. The two agreed to re-draft the invoice because, as MacFaddin said, it

- contained "fairly flawed language." But they struggled for several minutes over

- how to characterize the $250,000 payment because Gardnyr Michael had not done

any work on the transaction. MacFaddin indicated Gardnyr Michel was not

- "rmilling much risk" on the deal. The following conversation ensued:

- MacFaddin: Now we have, what was termed a swap adviser.

LeCroy: Yeah, we had a swap adviser.

- MacFaddin: And we had a structuring agent.

LeCroy: And we had a structuring agent.

- MacFaddin: Right. So we've got to be careful there because he was

neither of those.

- 14

LeCroy: Right, exactly.

MacFaddin: He was a broker dealer that did not participate in an

- underwriting because it went from fixed rate to floating

rate.
LeCroy: Can we put - I mean would swap advisory, I mean an
- advisor to us, swap advisory services? Urn swap -

- MacFaddin: Well, I want to be careful about describing him as a swap

advisor. I'd rather just, you know, term something
related or associated with the swap versus advisor -

- LeCroy: Advisor.
MacFaddin: Because in the end, he really didn't advise us on the
swap.

LeCroy: Right.

- MacFaddin: Or the structure.

LeCroy: Right.

- MacFaddin: Or anything like that.

- 43. Finally, MacFaddin concluded that "what we're saying is, it's really

Jeff Germany who is directing us to pay these guys. It's not, we're not paying
- them because they were our advisor." MacFaddin then asked LeCroy if the firm

- actually advised Germany, to which LeCroy responded, "I have no idea."

- 44. LeCroy and MacFaddin re-crafted Gardnyr Michael's invoice to

conceal the firm's lack of participation in the transaction by using the language
- "Directed Fee Payment Pursuant to Instructions from Commissioner Jeff Germany

- related to the Interest Rate Swap executed between JP Morgan and Jefferson

- County as part of the Series 2002-C Revenue Refimding Warrants." Gardnyr

Michael and ABI Capital immediately submitted new invoices, each using this
- 15

 exact language. Other invoices would later use this same "Directed Fee Payment"

- language to describe subsequent undisclosed payments.

45. During the first week of November 2002, JPMorgan sent WIfe
- transfers to Gardnyr Michael and ABI Capital totaling $500,000, an amount equal

- to one-third of the $1.5 million underwriting fee J.P. Morgan Securities received

for the transaction. The $250,000 payments to Gardnyr Michael and ABI Capital

were larger than the underwriting fees either firm earned on the 2002-B or 2002-D
- transactions. Shortly thereafter, Gardnyr Michael wired $200,000 to a firm

- consultant who was a longtime fuend of Germany's and a contributor to his failed

- re-election campaign. ABI Capital paid $111,750 to one of its consultants, also a

long-time friend of Germany and a campaign contributor.

- C. The 2003-B Bonds And Swap Agreement

- 46. In November 2002, Larry Langford became president of the County

- commission and head of the commission's finance committee that had significant

authority over approval of County bond deals and swap agreements. Early in his

- administration, Langford made it clear to the County's financial advisor that he

- wanted William Blount, head of the Montgomery broker-dealer Blount Parrish &

- Co., involved in every County financing transaction. Langford and Blount were

long-time friends and political colleagues.

... 47. Prior to Langford involving Blount in County bond and swap deals,

- 16

 Blount Parrish had not received any County business from 1997 through 2002.

However, Langford was able to ensure Blount's selection because his positions as
-
commission president and head of the finance committee effectively allowed him

to control the selection process for underwriters and swap providers.

- 48. From January until May I, 2003, LeCroy and MacFaddin actively

- solicited the County, and Langford in particular, to hire lPMorgan as underwriter

on a new a sewer bond offering and to enter into another swap agreement. During
- that period, LeCroy met several times in the County with Langford and/or Blount

- regarding a potential bond offering and swap agreement that became the 2003-B

transaction. Because Blount Parrish could not serve as a swap provider under

Alabama's net capital requirements, Blount solicited Langford to select Goldman

- Sachs Capital Markets Inc. to ·participate in the 2003-B swap transaction because

Blount Parrish had a consulting agreement with Goldman Sachs.

49. Goldman Sachs and another firm, Rice Financial Products Co., a New

York-based broker-dealer, were also pitching swap deals to the County. Rice
- Financial had recently hired a local consultant who was close to Langford. To

prevent Goldman Sachs or Rice Financial from executing their own swap

transactions with the County and ensure the County selected lPMorgan Chase

Bank as the swap provider, LeCroy and MacFaddin negotiated with Langford for
- lPMorgan to make payments to those two firms.

17
-

- 50. On February 25, 2003, Langford and the County cornnnSSlOn

- approved a resolution authorizing the $1.1 billion 2003-B bond offering, with J.P.

Morgan Securities serving as lead underwriter and JPMorgan Chase Bank serving

- as swap provider for the corresponding $1.1 billion swap agreement. The County

- approved a second resolution with more details on March 27, 2003. That swap

agreement was executed on March 28, 2003, with an effective date of May I, 2003
-
to coincide with the bond offering.
- 51. In presentations and reports sent to the County and bond ratings

- agencies, JPMorgan represented the bond offering and swap agreement as one

- "finance plan" with a combined auction rate bond offering and swap agreement.

Furthermore, the 2003-B bond offering official statement described the details of
- both the offering and the swap agreement, and stated the County entered into the

- swap agreement "in connection with the issuance of the 2003-B" bonds. .It also

- stated that JPMorgan Chase Bank's variable interest rate payments to the County

under the swap agreement were intended to approximate the interest rate the

- County paid to bond investors in the auction market.

- 52. In connection with the bond deal and swap agreement, LeCroy and

MacFaddin agreed in negotiations with Langford to pay Goldman Sachs $3

-
million, and Rice Financial $1.4 million. In tum, Goldman Sachs agreed to pay
- Blount Parrish, its consultant, $300,000.

- 18

-
-
- 53. To justify these payments, MacFaddin and LeCroy attempted to create

a role for both Goldman Sachs and Rice Financial in the 2003-B swap transaction.
- Yet neither firm entered into a swap agreement with the County, or served as an

- advisor to the County on this transaction. JPMorgan wired a $1.4 million payment

- to Rice Financial and paid $3 million to Goldman Sachs through a separate swap

agreement between Goldman Sachs and JPMorgan Chase Bank created solely as a

mechanism to make this payment. LeCroy later joked with MacFaddin in another

- call about JPMorgan's "philanthropic work" by "giving a charitable donation to

- Goldman" for "taking no risk."

54. None of the official documents related to the bond offering or the
- swap agreement disclosed the payments from JPMorgan to Goldman Sachs and

- Rice Financial, or the payment from Goldman Sachs to Blount Parrish. For

- example, the February 25 County resolution listed the bond underwriter, swap

provider, County financial advisor, bond counsel, and underwriter's counsel

- selected to serve on the 2003-B transaction. It did not mention Goldman Sachs,

- Rice Financial or Blount Parrish, all of whom Langford had directed lPMorgan to

-
pay. Similarly, neither did the March 27 resolution.

55. The bond offering official statement listed and defined the identities

and roles of numerous deal participants, including the underwriters, bond counsel,

- underwriters' counsel, and the County's financial advisor. It further disclosed

19
-

- underwriting fees of $4.5 million to J.P. Morgan Securities and $681,401 to a co­

underwriter. But it did not mention the three firms receiving payments.
- 56. In its role as managing underwriter, J.P. Morgan Securities offered

- and sold the 2003-B bonds to investors. In doing so, J.P. Morgan Securities

- transmitted the official statement to investors. The official statement did not

- disclose to bond investors the material information concerning the payment

scheme or the conflict of interest raised by the agreement with Langford to pay

- $4.4 million to firms on Langford's behalf to secure County business.

- 57. JPMorgan created and finalized the swap agreement confirmation,

which Langford signed on behalf of the County. The agreement stated the CouJ:?ty
- was to receive floating interest rate payments from IPMorgan Chase Bank based in

- part on the BMA Municipal Swap Index. The County was to make fixed rate

- payments to IPMorgan Chase Bank. The confirmation contained an itemized fee

- section that listed three fees IPMorgan Chase Bank was paying at the County's

direction: (1) $165,000 to the County's swap advisor; (2) $250,000 to the County's

legal advisor; and (3) $50,000 to the County's financial advisor. However, omitted

from the confirmation was the $3 million payment to Goldman Sachs and the $1.4

million payment to Rice Financial.

- 58. Instead, MacFaddin set forth the payments only in a separate "side

- letter" he sent solely to Langford (that Langford countersigned) on March 28, 2003

20

-
- - after the swap agreement had been executed. In the letter, MacFaddin stated that

- "the County has requested, as a condition to entering into the Transaction with

JPMorgan" that JPMorgan include Goldman Sachs and Rice Financial "in the

Transaction, directly or indirectly, such that Goldman and Rice Financial receive a

- specified percentage of JPMorgan's net economic benefit from the Transaction."

- 59. The letter did not describe any services that Goldman Sachs or Rice

Financial perfonned on the 2003-B deal, and went on to note thatneither Goldman

- Sachs nor Rice Financial had entered into a specified type of swap agreement with

- the County "that would permit their direct participation in the Transaction."

60. While LeCroy and MacFaddin knew the only reason Langford had

required JPMorgan to pay Goldman Sachs was so Blount Parrish could receive a

- fee, MacFaddin omitted any reference in this side letter to that fee or Blount

- Parrish's fee.

61. Goldman Sachs, however, wrote separately to Langford about Blount

- Parrish's payment. In a letter also dated March 28, 2003, Goldman Sachs wrote

- that it was paying "consulting fees" to Blount Parrish, as well as another broker­

- dealer. Goldman Sachs went on to "recommend that such payment of fees be

made known to bond counsel for the refunding bonds to be issued so that counsel

can determine whether such payments should be included in the refunding bond

offering documents."

- 21
-
- 62. However, neither Langford nor LeCroy, MacFaddin or anyone else at

- JPMorgan ever made such a disclosure to bond counselor any other county

officials working on the bond offering.

- D. The 2003-C Bonds And Swap Agreement

- 63. The day the 2003-B bond transaction closed, LeCroy had dinner with

Langford in Binningham, during which he solicited a new bond and swap

transaction. The next day, May 2, 2003, LeCroy called MacFaddin and told him
- Langford responded "Let's go for it." However, LeCroy told MacFaddin that

- Langford had specific requirements for JPMorgan to win the County's business:

- LeCroy: This time the advice we're getting is to get with Bill
Blount early, bring him in by bringing him on our team,
so he doesn't go to a competitor. So, "Larry," I said­
- MacFaddin: That sounds fine.
LeCroy: - I said, "Commissioner Langford, I'll do that because

- that's your suggestion, but you gotta help us keep him

under control. Because when you give that guy a hand,
he takes your arm." You know?
- MacFaddin: [Laughing] Yeah, you end up in the wood-chipper.
LeCroy: Yeah, that's right. So he said, "Don't worry, I can
- control him. Just get him on board." And he says he
might have a couple of other little local minority firms to
.... take care of, but he said, "Let's see if we can get it done."

64. Later the same day in a conversation with a J.P. Morgan Securities

associate ("the Associate"), LeCroy again discussed how he would ensure

- JPMorgan's participation: "You know, Goldman is out, but I'll have to deal with

- 22

- Bill Blount somehow. I think what we're going to do is approach him and try to

- get him on our team and get him to agree to some kind of monetary compensation

up front, so he doesn't go out and represent one of our competitors."

- 65. MacFaddin was also instrumental in carrying out the strategy on this

deal. On April 22, 2003, MacFaddin called Blount and invited him to a dinner

- meeting in New York City, at which they discussed the strategy to pay Blount

Parrish to influence Langford to award County bond and swap business to

- JPMorgan. In a taped telephone call a month later with a derivatives marketer

- working on the deal, MacFaddin said that Blount's specific role in the transaction

- was to get JPMorgan "to the table through Langford."

66. Blount quickly produced results for LeCroy and MacFaddin.

- Numerous tape recorded conversations, e-mails and even entries in Langford's

business calendar show multiple meetings in the County in May and June 2003

- between Langford, LeCroy and Blount concerning the $1.05 billion 2003-C sewer

bond offering and the corresponding $789 million swap agreement. This included
- a meeting in Langford's office to discuss the 2003-C deal on June 11,2003.

- 67. A week before the meeting, LeCroy had a telling conversation with

the Associate about his plans for securing the deal:

LeCroy: I got to get the politics lined up. And, of course, we have
... to pick the partners who are going to get free money from
us this time.

-
23

-
- Associate:
LeCroy:
Yes, exactly, because we like to do that.

That's right [laughing].

- Associate: We like to give money away.

LeCroy: That's right, that's right. Oh yeah. Who's in line for the

- freebies this time?

- 68. The day of the June 11 meeting, LeCroy told the Associate that he

- was "pretty sure" Langford would approve of JPMorgan handling the 2003-C

transaction. He then went on to add that "at some point, we'll have to figure out

- who we have to payoff. I think instead of Goldman we'll have, we'll probably

- have someone like Bill Blount ... who gets a percentage ofthe swap."

- 69. In the same conversation, LeCroy described a meeting he had with

Blount in Birrnjngham on the evening of June 10, in which Blount was insisting on

being paid 15 percent of JPMorgan's fees on the 2003-C swap. The Associate

expressed disbelief:

- Associate:
LeCroy:
How does he get 15%? For doing what?
For, basically, his role in this deal-

- Associate:
LeCroy:
For not messing with us?
- not messing wjth us and, I said [to Blount], look the
only way I'm willing to even entertain this is if you're
- successful in keeping every other firm out of this deal.
That's right. I said, so, because you know, we've got a

- lot more latitude dealing with him than Goldman Sachs.

And I've got to pay him some on the bonds. But, it's a
lot of money, but in the end it's worth it on a billion­

- dollar deal.

-
24

- 70. A week after the meeting, on June 18, 2003, LeCroy called the

- Associate to confirm that JPMorgan would pay the firms Langford wanted to

secure the County's 2003-C deal:

- LeCroy: We've cut our deals with the locals as the County has

- directed us to, that's all done. I got that done up front this
time, to avoid Goldman Sachs and anybody like that
coming in. B of A made a run at it yesterday, and I was

- able to get the Commissioner [Langford] to cancel the

meeting. So I think we can hold them off. But that's
gonna cost us, from the swap side about, oh - it's gonna

- cost us- all in about $3.5 million, but part of that's coming
out of the bonds ...

- Associate: You mean in fees that we're going to have to pay people?
LeCroy: That's right, yeah. Now, compared to last time, it's a lot
less when you add Goldman and Rice together ... I just
- want you to be aware that when you're in there negotiating,
that we've got deals cut, pursuant to the Comrrrissioner's

- direction with, you know, the Bill Blounts of the world, and
so we've got to honor them.

- 71. Ultimately, as discussed in more detail below, LeCroy and MacFaddin

- arranged for JPMorgan to pay Blount Parrish $2.6 million - more than any other

participant in the transaction made except lPMorgan itself - for ensuring

- lPMorgan was selected as underwriter and swap provider. But Langford was not

the only County commissioner whose support LeCroy and MacFaddin sought.

- They also arranged for lPMorgan to pay $250,000 each to Gardnyr Michael and

ABI Capital to influence the vote of Commissioner Sheila Smoot. Both firms had

hired as a "consultant" a long-time friend of Smoot.

- 25

- 72. Furthennore, on July 26, 2003, LeCroy and MacFaddin arranged for

- JPMorgan to spend $1,122 for a spa trip in New York City for Commissioner Mary

Buckelew, who sat on the commission's finance committee with Langford. Two

- taped telephone conversations in July 2003, each with the Associate, show both

- MacFaddin and LeCroy approved JPMorgan paying for the full spa cost, which

- was charged to the Associate's credit card. LeCroy told the Associate to conceal

the charge by not itemizing it as a County expense on JPMorgan's expense reports,

- in case a reporter asked for JPMorgan's records.

73. The strategy worked again. The County commission voted to approve

- a resolution on July 1, 2003 that authorized the issuance of $1.05 billion in bonds,

with J.P. Morgan Securities serving as lead underwriter. The bond offering closed

- on August 7, 2003. The resolution also authorized a swap transaction "in

connection with" the offering, which turned into a $789 million swap agreement

with JPMorgan Chase Bank that the parties executed on July 14, 2003. The
- effective date of the swap agreement coincided with the 2003-C bond offering

- closing date.

- 74. The 2003-C bond offering and swap agreement were one deal. The

- 2003-C official statement J.P. Morgan Securities sent to investors described both

the bond offering and the swap agreement as part of the financing plan. It stated

- that "In connection with the issuance of the 2003-C Warrants, the County has

- 26

-
-
- entered into an interest rate swap agreement with lP Morgan." The official

- statement also stated that lPMorgan Chase Bank's variable interest rate payments

to the County under the swap agreement were intended to approximate the interest
- rate the County paid to bond investors in the auction market.

75. Once again, the official documents or conversations related to this

- transaction did not disclose the payments to Blount Parrish, Gardnyr Michael, and

ABI Capital. For example, the July 1 County resolution specifically listed the

- underwriters, swap providers, County advisors, legal counsel and remarketing

- agents selected to serve on the 2003-C bond offering and swap agreement, but did

not mention the three finns LeCroy and MacFaddin had arranged for IPMorgan to
- pay to win commission votes. Other commissioners did not know Blount Parrish

- was participating in the transaction before they voted on the resolution.

... 76. The bond offering official statement also listed the roles of all

participants the County had selected, including the underwriters, bond counsel, the

underwriters' counsel and the County's financial advisor. It disclosed J.P. Morgan

Securities' $3.9 million underwriting fee, a $1.3 million co-underwriting fee to

- Bank of America, and Bank of America's payment to a third-party broker-dealer

- acting as a remarketing agent. But the official statement omitted Blount Parrish's

$2.6 million payment and the $250,000 payments to the other two firms.

- 77. In its role as managing underwriter, J.P. Morgan Securities offered

-
27

-
-
- and sold the 2003-C bonds to investors. In doing so, it transmitted the official

- statement to investors. The official statement did not disclose to bond investors the

material information concerning the payment scheme and the conflict of interest

raised by the agreements with Langford and Smoot to pay $3.1 million to firms on

their behalf to influence JPMorgan's selection as managing underwriter and swap

- provider.

78. The 2003-C swap agreement stated the County was to receive floating

- interest rate payments from IPMorgan Chase Bank based in part on the value of

- the BMA Municipal Swap Index, while the County was to make fixed interest rate

- payments to JPMorgan Chase Bank. The swap agreement confirmation, dated July

14, 2003, did not disclose the fees. It contained an itemized fee section listing

payments IPMorgan was making to the County's swap advisor ($363,750), legal

- counsel ($187,500), and financial advisor ($37,500), but omitted the Blount

Parrish, Gardnyr Michael and ABI Capital payments.

....
79. Furthermore, tape-recorded telephone conversations of the July 14

swap agreement closing show LeCroy was explicitly asked about fees, but did not

disclose the payments to· the three firms. LeCroy attended the closing in
--
- Birmingham, along with numerous County managers and advisors. Appearing by

telephone from New York, the Associate reviewed the material terms of the swap

- confirmation and concluded by listing the swap advisor, legal counsel, and

- 28

 financial advisor fees. She then said, "Is that correct? Do we have any additional

fees that I'm not taking into account that I need to be aware of?" After a brief

. silence, LeCroy responded: "No. No one is nodding 'yes' so I think we're done."

80. Yet just two hours after that call, LeCroy called the Associate while '

boarding a plane to tell her he met with Langford outside the swap closing, at

which time both confirmed JPMorgan would pay Blount Parrish $2.6 million in

connection with the 2003-C transaction. LeCroy told the Associate that at the

same private meeting with Langford, the two had confirmed paYments of $150,000

apiece to Gardnyr Michael and ABI Capital. LeCroy told the Associate "I haven't

talked to them - that's just what we're sending them [laughing]. I hope they're

. happy. I guess if they're not we'll find out."

81. Around the same time, the Associate called MacFaddin to tell him

,.. how much JPMorgan was going to pay Blount Parrish. MacFaddin responded it

was "understandable," because Blount had a lot more "stroke" than others whom

JPMorgan was paying.

-
,
82. One week later, on July 21, 2003, LeCroy again called the Associate,

this time to tell her that Smoot had demanded that Gardnyr Michael and ABI

Capital get more money. Although LeCroy said he attempted to dissuade Smoot

because it was very difficult to change the amounts "after the fact," he agreed to

increase JPMorgan's payments to the two firms to $250,000 each.

29
-

- the three finns performed.

- 87. Based on identical, one-line "Directed Fee Payment" invoices all three

firms submitted, JPMorgan wired the payments to the three firms in late July 2003.

E. The November 2003 Swap Agreement

- 88. Even before the 2003-C transaction closed, LeCroy solicited Langford

for another JPMorgan Chase Bank swap deal with the County. LeCroy told
,..
MacFaddin in a July 30, 2003 telephone call that Langford had told him JPMorgan

- may "have to help out" some local firms.

- 89. Again, these efforts proved successful, as on November 7, 2003, JP

Morgan Chase Bank and the County executed a $111 million swap agreement with
- an effective date of May 1, 2004. Pursuant to the agreement, the County was
,.. required to make interest rate payments based on the floating rate of the BMA

- Index and the bank was required to make payments to the County at a fixed interest

- rate.

90. One day before the County and JPMorgan Chase Bank executed this

- swap agreement, LeCroy told the Associate about his payment negotiations

involving Blount and "how much Blount is going to cost" the firm, which he

estimated at $150,000 to $200,000.

- 91. During the November 7, 2003 closing, which LeCroy attended in

- Birmingham in person (and which Langford and several County managers and

- 31

-
- advisors also attended}, the Associate on the phone in New York read through the

- material terms of the swap confirmation. She included the three specific fees

lPMorgan was paying at the County's direction listed in the confinnation ­

- $225,000 to the County's swap advisor, $40,000 to its legal advisor, and $40,000

- to its financial advisor.

- 92. The Associate then asked, "Is everyone in agreement with the terms?"

All attendees, including Langford, announced they agreed with the terms of the

- swap agreement. Neither LeCroy nor Langford mentioned that lPMorgan had

- agreed at Langford's direction to pay $225,000 to Blount Parrish and $75,000 to

Gardnyr Michael. The swap confirmation also did not mention those payments, or

the fact that lPMorgan was incorporating those fees into the pricing of the

- transaction.

- 93. More than two weeks after the transaction closed, LeCroy sent a letter

dated November 24, 2003 only to Langford, describing the payments to Blount
- Parrish and Gardnyr Michael. The letter represented that the County required the

- payments as a condition for approving the transaction. Moreover, although

- LeCroy and MacFaddin negotiated these payments with Langford, the letter asserts

that "JPMorgan had no involvement in the decision to make such payments [or] the
- determination of the amounts of such payments." Finally, the letter aclmowledges

- that lPMorgan incorporated these fees into its pricing of the swap transaction.

- 32

-
-
- V. CLAIMS FOR RELIEF

COUNT I
- Fraud In Violation Of Section 17(a)(1) Of The Securities Act

94. The Commission repeats and realleges Paragraphs 1 through 93 of this

- Complaint as if fully restated herein.

95. From at least 2002 through 2003, the Defendants directly and
- indirectly, by use of the means or instruments of transportation or conununication

- in interstate commerce and by use of themails.intheofferorsaleofsecurities.as

- described in this complaint, knowingly, willfully or recklessly employed devices,

schemes or artifices to defraud.

96. By reason of the foregoing, the Defendants directly or indirectly

- violated and, unless enjoined, are reasonably likely to continue to violate, Section

- 17(a)(1) of the Securities Act, 15 U.S.C. §77q(a)(l).

- COUNT II

Fraud In Violation Of Sections 17(a)(2) And 17(a)(3) Of The Securities Act

- 97. The Commission repeats and realleges Paragraphs 1 through 93 of the

- Complaint as if fully restated herein.

98. From at least 2002 through 2003, the Defendants, directly and

indirectly, by use of the means or instruments of transportation or conununication

- in interstate commerce and by the use of the mails, in the offer or sale of securities,

- 33

-
- as described in this complaint: (a) obtained money or property by means of untrue

statements of material facts and omissions to state material facts necessary to make
- the statements made, in the light of the circumstances under which they were

- made, not misleading; and/or (b) engaged in transactions, practices and courses of

- business which are now operating and will operate as a fraud or deceit upon

- purchasers and prospective purchasers of such securities.

99. By reason of the foregoing, the Defendants directly or indirectly

- violated and, unless enjoined, are reasonably likely to continue to violate, Sections

- 17(a)(2) and 17(a)(3) of the Securities Act, 15 U.S.C. §§77q(a)(2) and 77q(a)(3).

COUNT III

Fraud In Violation Of Section lO(b) OfTbe Exchange Act And Rule lOb-S
... 100. The Commission repeats and realleges Paragraphs 1 through 96 of the

- Complaint as if fully restated herein.

- 101. From at least 2002 through 2003, the Defendants directly and

indirectly, by use of the means and instrumentality of interstate commerce, and of

- the mails in connection with the purchase or sale of the securities, as described in

- this complaint, knowingly, willfully or recklessly: (a) employed devices, schemes

or artifices to defraud; (b) made untrue statements of material facts and omitted to
- state material facts necessary in order to make the statements made, in the light of

- the circumstances under which they were made, not misleading; and/or (c) engaged

- 34

-
-
- in acts; practices and courses of business which have operated as a fraud upon the

purchasers of such securities.

- 102. By reason of the foregoing, the Defendants directly or indirectly

- violated and, unless enjoined, are reasonably likely to continue to violate, Section

- lOeb) of the Exchange Act, 15 U.S.c. §78j(b), and Rule lOb-5, 17 C.F.R.

- §240.l0b-5.

COUNT IV
- Violation Of Sections 15B(c)(l) Of The Exchange Act And MSRB Rule G-17

- 103. The Commission repeats and realleges Paragraphs I through 87 of the

Complaint as if fully restated herein.

- 104. Section l5B(c)(1) of the Exchange Act, 15 U.S.C. §780-4(c)(1),

- makes it unlawful for any broker, dealer or municipal securities dealer to make use

- of the mails or any means or instrumentality of interstate commerce to effect any

transaction in, or to induce or to attempt to induce the purchase or sale of any

- municipal security in contravention of any rule of the MSRB.

- 105. Pursuant to Section 15B(b)(2) of the Exchange Act, 15 U.S.C. §780­

..... 4(b)(2), the MSRB proposes and adopts rules governing the conduct of brokers and

dealers and municipal securities dealers in connection with municipal securities.

- Pursuant to Section 21(d)(1) of the Exchange Act, 15 U.S.C. §78u(d)(1), the

- Commission is charged with enforcing the MSRB rules.

- 35

-
-
- 106. MSRB Rule G-17 reqUlres every broker, dealer and municipal

securities dealer, and their associated persons, in the conduct of their municipal
- securities business, to deal fairly with all persons and not to engage in any

- deceptive, dishonest or unfair practice.

- 107. From at least 2002 ~ough 2003, through the actions set forth in this

complaint and in the conduct of J.P. Morgan Securities' municip.al securities

business, LeCroy and MacFaddin engaged in deceptive, dishonest or unfair

practices, and failed to deal fairly with all persons in connection with the 2002-C

- bonds, the 2003-B bonds and the 2003-C bonds.

108. From at least 2002 through at least 2003, LeCroy and MacFaddin

made use of the mails or means or instrumentality of interstate commerce to effect

- transactions in, or to induce or attempt to induce the purchase or sale of, municipal

securities in contravention of MSRB Rule G-17.

109. By reason of the foregoing, LeCroy and MacFaddin directly or

- indirectly violated and, unless enjoined, are reasonably likely to continue to

- violate, Section l5B(c)(l) of the Exchange Act, 15 U.S.C. §780-4(c)(1), and

MSRB Rule G-17.

-
-
- 36

- COUNT V

Violation Of Section 15b{c)(l) Of The Exchange Act and MSRB Rule G-20
- 110. The Commission repeats and real1eges Paragraphs 1 through 87 of the

- Complaint as if fully restated herein.

- 111. Section 15B(c)(1) of the Exchange Act, 15 U.S.c. §780-4(c)(1),

- makes it unlawful for any broker, dealer or municipal securities dealer to make use

of the mails or any means or instrumentality of interstate commerce to effect any

transaction in, or to induce or to attempt to induce the purchase or sale of any

- municipal security in contravention of any rule of the MSRB.

112. Pursuant to Section l5B(b)(2) of the Exchange Act, 15 U.S.c. §780­

- 4(b)(2), the MSRB proposes and adopts rules governing the conduct of brokers and

- dealers and municipal securities dealers in connection' with municipal securities.

- Pursuant to Section 2l(d)(1) of the Exchange Act, 15 U.S.c. §78u(d)(l), the

- Commission is charged with enforcing the MSRB rules.

113. MSRB Rule G-20 makes it unlawful for any municipal securities

- broker or dealer, and their associated persons, to give or pennit to be given,

- directly or indirectly, any thing or service of value, including gratuities, in excess

of $100 per year to a person other than an employee or partner of the municipal

securities broker or dealer, where such payments or services relate to the municipal

- securities activities of the employer of the recipient of the payment or service.

- 37

-
.
114. From at least 2002 through 2003, in relation to the municipal

-
securities activities of Jefferson County, LeCroy and MacFaddin directly or

indirectly, gave or permitted to be given to County Commissioner Mary Buckelew,

.­ things or services of value in excess of $100 per year in connection with the 2003­

- C bonds.

115. From at least 2002 through 2003, LeCroy and MacFaddin made use of
- the mails or means or instrumentality of interstate commerce to effect transactions

- in, or to induce or attempt to induce the purchase or sale of, municipal securities in

- contravention of MSRB Rule G-20.

- 116. By reason of the foregoing, LeCroy and MacFaddin directly or

indirectly violated and, unless enjoined, are reasonably likely to continue to

- violate, Section l5B(c)(l) of the Exchange Act, 15 U.S.C. §78o-4(c)(1), and

- MSRB Rule G-20.

VI. RELIEF REQUESTED

WHEREFORE, the Commission respectfully requests that the Court:

-
I. Declaratory Relief

-
Declare, determine and find the Defendants have committed the violations of

the federal securities laws alleged herein.

-
38

- II. Permanent Injunction

Issue a Pennanent Injunction, enjoining the Defendants, their officers,

- agents, servants, employees, attorneys, and representatives, and all persons in

- active concert or participation with them, and each of them, from violating Section

- l7(a) ofthe Securities Act, 15 U.S.C. §77q(a); Section lO(b) and Rule lOb-5 of the

Exchange Act, 15 U.S.C. §78j(b) and 17 C.F.R. §240.l0b-5; and Section l5B(c)(I)
- of the Exchange Act, 15 U.S.c. §780-4(c)(1) and MSRB Rules G-17 and G-20.

III. Disgorgement

Issue an Order directing the Defendants to disgorge all profits or proceeds

they received as a result of the acts and/or courses of conduct complained of

- herein, with prejudgment interest.

- IV. Further Relief

- Grant such other and further relief as may be necessary and appropriate.

V. Retention Of Jurisdiction

Further, the Commission respectfully requests that the Court retain

jurisdiction over this action in order to implement and carry out the tenns of all

- orders and decrees that may hereby be entered, or to entertain any suitable

application or motion by the Commission for additional relief within the

- jurisdiction of this Court.

-
- 39

-
-
- November 3, 2009 Respectfully submitted,

- 1L:k;zt9J.aR~~
Robert K. Levenson

- Florida Bar No. 0089771

Regional Trial Counsel
U.S. Securities and Exchange Commission
- 801 Brickell Avenue, Suite 1800
Miami, Florida 33131
(305) 982-6341 (direct dial)
(305) 536-4154 (facsimile)
1evensonr@sec.gov

- Lead attorney, trial attorney and attorney

to be noticed
Appearing pursuant to Local Rule 83.l(c)

Jason R. Berkowitz
Pennsylvania Bar No. 87775
- Senior Counsel
U.S. Securities and Exchange Commission
801 Brickell Avenue, Suite 1800
Miami, Florida 33131
(305) 982-6309 (direct dial)
- berkowitzj@sec.gov
Appearing pursuantto Local Rule 83.1 (c)

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Press Release: J.P. Morgan Settles SEC Charges in Jefferson County, Ala. Illegal Paymen... Page 1 of3
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- Home I Previous Page

u.s. Securities and Exchange Commlsslo

-
- J.P. Morgan Settles SEC Charges in Jefferson County,
Ala. Illegal Payments Scheme

- SEC Separately Charges Two Former Managing Directors at Firm

FOR IMMEDIATE RElEASE

2009-232
- Washington, D.C., Nov. 4, 2009 - The Securities and Exchange
Commission today charged J.P. Morgan Securities Inc. and two of its former
managing directors for their roles in an unlawful payment scheme that
enabled them to win business involving municipal bond offerings and swap
agreement transactions with Jefferson County, Ala. This is the SEC's second

- enforcement action arising from Jefferson County's bond offerings and swap
transactions.

- Additional Materials
> Administrative Proceeding Against J.P. Morgan Securities

- > Utlqation Releas~_~ 212JW~

> SEC Complaint Against LeCroy and MacFaddin

- J.P. Morgan Securities settled the SEC's charges and will pay a penalty of
$25 million, make a payment of $50 million to Jefferson County, and forfeit
more than $647 million in claimed termination fees.

- The SEC alleges that J.P. Morgan Securities and former managing directors
Charles LeCroy and Douglas MacFaddin made more than $8 million in

- undisclosed payments to close friends of certain Jefferson County

commissioners. The friends owned or worked at local broker-dealer firms
that performed no known services on the transactions. 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.

- 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.

"The transactions were complex but the scheme was simple. Senior J.P.
Morgan bankers made unlawful payments to win business and earn fees,"
said Robert Khuzami, Director of the SEC's Division of Enforcement.

Glenn S. Gordon, Associate Director of the SEC's Miami Regional Office,

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http://www.sec.gov/news/press/2009/2009-232.htm 4/7/2010
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- Press Release: J.P. Morgan Settles SEC Charges in Jefferson County, Ala. Illegal Paymen... Page 2 of3

- added, "This self-serving strategy of paying hefty secret fees to local firms
with ties to county commissioners assured J.P. Morgan Securities the
largest municipal auction rate securities and swap agreement transactions
in its history."

- The SEC previously charged Birmingham Mayor Larry Langford and two
others for undisclosed payments to Langford related to municipal bond

- offerings and swap agreement transactions that he directed on behalf of

Jefferson County while serving as president of the County Commission. On
Oct. 28, 2009, Langford was found gUilty in a parallel criminal case on 60
counts of bribery, mail fraud, wire fraud and tax evasion. He currently

- awaits sentencing.

According to the SEC's complaint filed against LeCroy and McFaddin in U.S.

- District Court for the Northern District of Alabama, the two former
managing directors demonstrated in taped telephone conversations that
they knew the payments to local firms with ties to county commissioners
were designed to obtain business for J.P. Morgan's broker-dealer and

- affiliated bank. LeCroy and MacFaddin referred to the payments as

"payoffs," "giving away free money," and "the price of doing business."

- The SEC alleges that the scheme began in July 2002, when LeCroy and
MacFaddin solicited Jefferson County on behalf of J.P. Morgan Securities for
a $1.4 billion sewer bond deal. LeCroy and MacFaddin knew several county

- commissioners wanted to complete the transaction before November, when

two commissioners would leave office and lose their ability to funnel
payments to their supporters' firms. LeCroy later boasted to MacFaddin in a
taped telephone conversation about his efforts to persuade the two

- commissioners to select J.P. Morgan Securities for the deal, beating out a
rival firm. LeCroy told MacFaddin that he said to the commissioners,
"Whatever you want - if that's what you need, that's what you get - just

- tell us how much."

J.P. Morgan Securities agreed to settle the SEC's charges without admitting

-
or denying the allegations by paying $50 million to the county for the
purpose of assisting displaced county employees, residents and sewer rate
payers; forfeiting more than $647 million in termination fees it claims the
county owes under the swap transactions; and paying a $25 million penalty

- that will be placed in a Fair Fund to compensate harmed investors and the
county in the municipal bond offerings and the swap transactions. LeCroy
and MacFaddin have not agreed to settle the SEC's charges.

- The SEC's order instituting settled administrative proceedings against J.P.

Morgan Securities finds that it violated Sections 17(a)(2) and 17(a)(3) of
the Securities Act of 1933, Section 15B(c)(1) of the Securities Exchange Act

- of 1934 and Municipal Securities Rulemaking Board (MSRB) Rule G-17. In

addition to the monetary relief described above, the SEC's order censures
J.P. Morgan Securities and directs it to cease-and-desist from committing or

- causing any further violations of the provisions charged.

The SEC charged LeCroy and MacFaddin with violations of Section 17(a) of
the Securities Act, Sections 10(b) and 15B(c)(1) of the Exchange Act, and

- Rule 10b-S thereunder, and violations of IVlSRB Rules G-17 and G-20. The
SEC's complaint seeks judgments against LeCroy and MacFaddin providing
for permanent injunctions and disgorgement with prejudgment interest.

http://www.sec.gov/news/press/2009/2009-232.htm 4/7/2010
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- For more information about this enforcement action, contact:

- Glenn S. Gordon - Associate Regional Director, SEC's Miami Regional Office

(305) 982-6360

Robert Levenson - Regional Trial Counsel, SEC's Miami Regional Office

(305) 982-6341

- http://www.sec.gov/news/press/2009/2009-232.htm

- Home I Previous Page Modified: 11/04/2009

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- Charles E. LeCroy, and Douglas W. MacFaddin: Lit. ReI. No. 212801 November 4,2009 Page 1 of2

- .S. SeCUrities and Exc ange Commlsslo

Home I Previous Page

U.S. SECURITIES AND EXCHANGE COMMISSION

litigation Release No. 21280 j November 4, 2009

- SEC CHARGES TWO FORMER DIRECTORS OF J.P. MORGAN

SECURITIES WITH FRAUD IN CONNECTION WITH UNLAWFUL

PAYMENT SCHEME TO OBTAIN MUNICIPAL BOND AND SWAP

-
BUSINESS

Securities and Exchange Commission v. Charles E. LeCroy, and

-
Douglas W. MacFaddin, Case No. cv-09 UjB 2238-5 (N.D. Ala., filed
November 4, 2009)

The Securities and Exchange Commission today charged Charles E. LeCroy

- and Douglas W. MacFaddin, two former directors of J.P. Morgan Securities

Inc. with fraud in connection with an unlawful payment scheme which
allowed J.P. Morgan Securities to obtain $5 billion in Jefferson County,

- Alabama municipal bond offerings and swap agreement transactions.

The SEC complaint, filed in the U.S. District Court for the Northern District
of Alabama, alleges that between October 2002 and November 2003,

- LeCroy and MacFaddin directed over $8 million in payments from J.P.

Morgan Securities to close friends of Jefferson County commissioners
(County commissioners) who either owned or worked at local broker­

- dealers. These broker-dealers had no official role and performed few, if

any, services on the transactions. In connection with these payments,
according to the SEC's complaint, the County commissioners voted to select

-
J.P. Morgan Securities as managing underwriter and swap provider for the
largest municipal auction rate securities and swap agreement transactions
in J.P. Morgan Securities' history.

- According to the SEC's complaint, although labeled as payments for work

on the transactions, LeCroy and MacFaddin knew that these were sham
transactions designed to ensure that County officials selected J.P. Morgan

- Securities. LeCroy and MacFaddin referred to the payments in taped

telephone conversations as "payoffs," "the price of doing business" or
"giving away free money." J.P. Morgan Securities incorporated the costs of
these unlawful payments by charging Jefferson County higher interest rates

- on the swap transactions.

The SEC further alleges that LeCroy and MacFaddin failed to disclose any of

- these payments, and the inherent conflicts of interest raised by the

payments, either to the County or investors in bond offerings, or to the
County in the swap agreements at issue. This conduct deprived Jefferson
County and its investors of objective and impartial bond underwriting

- processes and swap agreement negotiations.

The SEC's complaint charges LeCroy and MacFaddin with violations of

-
http://www.sec.gov/litigationl1itreleases/2009/1r21280.htm 417/2010
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Charles E. LeCroy, and Douglas W. MacFaddin: Lit. ReI. No. 212801 November 4,2009 Page 2 of2

- Section 17(a) of the Securities Act of 1933, Sections 10(b) and lSB(c)(l) of
the Securities Exchange Act of 1934, and Rule 10b-S thereunder, and
Municipal Securities Rulemaking Board Rules G-17 and G-20. The SEC's
complaint seeks judgments against each defendant providing for permanent

- injunctions and disgorgement with prejudgment interest.

In April 2008, the SEC filed a civil action in the U.S. District Court for the
Northern District of Alabama against Birmingham, Alabama Mayor Larry

- Langford (the former president of the Jefferson County commission);

William B. Blount, chairman of Blount Parrish & Co, Inc., a broker-dealer
based in Montgomery, Alabama; and registered lobbyist Albert LaPierre.

- The SEC's complaint alleged that while Langford served as president of the
County Commission, he accepted more than $156,000 in undisclosed cash
and benefits over the course of two years from Blount in exchange for
Blount Parrish participating in every Jefferson County municipal bond
offering and security-based swap agreement transaction during 2003 and
2004. Securities and Exchange Commission v. Larry P. Langford, William B.
Blount, Blount Parrish & Co., Inc., and Albert W. LaPierre, Case No. Case

- No. cv-08-B-0761-S (N.D. Ala., filed April 30, 2008). This case was the
SEC's first enforcement action involving security-based swap agreements.

- On December I, 2008, the United States Attorney for the Northern District
of Alabama filed criminal charges against Langford, Blount and LaPierre.
The 101-count indictment charged Langford, Blount, and LaPierre with,
among other charges, conspiracy, bribery, and money laundering in an

- alleged long-running bribery scheme related to Jefferson County bond

transactions and swap agreements. United States of America v. Larry P.
Langford, William B. Blount, and Albert W. LaPierre, (United States District

- Court for the Northern District of Alabama, Case No. 2:08-CR-00245-LSC­

PWG). On July 30, 2009, LaPierre pled guilty to the charges of conspiracy
and filing a false tax return, and agreed to forfeit $371,932 and pay back
taxes. On August 18, 2009, Blount pled guilty to conspiracy and bribery and

- agreed to forfeit $1,000,000. On October 28, 2009, Langford was found

gUilty on 60 counts of bribery, mail fraud, wire fraud and tax evasion. All
three currently await sentencing.

- For further information see Litigation Release Nos.ZQ4QQ (December 17,

2007), 20545 (April 30, 2008), 20821 (December 5, 2008).

- http://www.sec.gov/litigation/litreleases/2009/fr21280.htm

Home I Previous Page Modified: 11/04/2009

- http://www.sec.gov/litigation/litreleases/2009/1r21280.htm 4/7/2010
 UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934

Release No. 61132/ December 9, 2009

ADMINISTRATIVE PROCEEDING
File No. 3-13706
ORDER INSTITUTING
ADMINISTRATIVE PROCEEDINGS
In the Matter of PURSUANT TO SECTION 15(b) AND
SECTION 15B(c) OF THE SECURITIES
ROBERT J. BRADBURY and EXCHANGE ACT OF 1934, MAKING
DOLPHIN AND BRADBURY, FINDINGS, AND IMPOSING REMEDIAL
INCORPORATED, SANCTIONS

Respondents.

I.

The Securities and Exchange Commission ("Commission") deems it appropriate

and in the public interest that public administrative proceedings be, and hereby are,
instituted pursuant to Section 15(b) and Section 15B(c) of the Securities Exchange Act of
1934 ("Exchange Act") against Robert 1. Bradbury ("Bradbury") and pursuant to Section
15(b) of the Exchange Act against Dolphin and Bradbury, Incorporated ("D&B"). I

II.

In anticipation of the institution of these proceedings, Respondents have submitted

Offers of Settlement (the "Offers") which the Commission has detennined to accept.
Solely for the purpose of these proceedings and any other proceedings brought by or on
behalfof the Commission, or to which the Commission is a party, and without admitting or
denying the findings herein, except as to the Commission's jurisdiction over them and the
subject matter of these proceedings, and the findings contained in Sections I1I.3 and IlIA
below, which are admitted, Respondents consent to the entry of this Order Instituting
Administrative Proceedings Pursuant to Section 15(b) and Section 15B(c) of the Securities
Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions ("Order"), as
set forth below.

Bradbury and D&B are hereinafter referred to collectively as "Respondents".

-

Securities Act, Sections 10(b) and 15B(c) of the Exchange Act and Rule 1Ob-5 thereunder,
and MSRB Rule G-17, and permanently enjoining him from aiding and abetting violations
of Sections 15(c), 15B(c)(l) and 17(a) of the Exchange Act, and Rules 15c2-12, 17a-3 and

-
17a-4 thereunder, in the civil action entitled Securities and Exchange Commission v.
Robert 1. Bradbury, et aI., Civil Action Number 2:06-cv-3435, in the United States District
Court for the Eastern District of Pennsylvania. Bradbury was also ordered to pay, on a
joint and several basis with D&B and Margaret B. Bradbury, disgorgement in the amount

- of$3,405,000, plus prejudgment interest thereon in the amount of$I,731,628.79, provided

that the total of such disgorgement and prejudgment interest (i.e., $5,136,628.79) shall be
deemed satisfied, at the time the Final Judgment is entered, by the settlement agreement by
and between Bradbury and Margaret B. Bradbury, and Boyertown Area School District,
North Penn School District, Perkiomen Valley School District, and Red Lion Area School
District in the School District Actions. In addition, Bradbury was prohibited from serving

- as an officer or director ofany issuer that has a class of securities registered pursuant to
Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d)
of the Exchange Act.

5. The Commission's complaint alleged, among other things, that D&B and
Bradbury defrauded four Pennsylvania school districts by repeatedly selling them, without

- adequate disclosure, a series of unsuitable, risky, short-term notes issued to finance a

speculative golf course in central Pennsylvania. The complaint also alleged that Bradbury,
on D&B's behalf, also executed numerous false and misleading documents to conceal the
fraud.

IV.

In view of the foregoing, the Commission deems it appropriate and in the public
interest to impose the sanctions agreed to in Respondents' Offers.

- Accordingly, it is hereby ORDERED:

Pursuant to Section 15(bX4) of the Exchange Act, the registration of Respondent

- D&B be, and hereby is, revoked.

Pursuantto Sections I5(b)(6) and Section 15B(c)(4) of the Exchange Act,

- Respondent Bradbury be, and hereby is barred from association with any broker, dealer, or
municipal securities dealer.

- Any reapplication for registration by Bradbury will be subject to the applicable

laws and regulations governing the reentry process, and reentry may be conditioned upon a
number offactors, including, but not limited to, the satisfaction of any or all of the
following: (a) any disgorgement ordered against the Respondent, whether or not the
Commission has fully or partially waived payment of such disgorgement; (b) any
arbitration award related to the conduct that served as the basis for the Commission order;

- (c) any self-regulatory organization arbitration award to a customer, whether or not related

-
3

 -
- to the conduct that setved as the basis for the Commission order; and (d) any restitution
order by a self-regulatory organization, whether or not related to the conduct that setved as
the basis for the Commission order.

By the Commission.

-
Elizabeth M. Murphy

-
Secretary

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-
4

 Federal Bureau of Investigation - The Philadelphia Division: Department r:I Justice Press Release

III"
I

-
Philadelphia Home Department of Justice Press Release

- Contact Us For Immediate Release

December 14, 2009
United States Attorney's Office
Eastern DIstrict of Pennsylvania
Contact: (215) 861-8200

-
Territory/Jurisdiction

About Us West Chester Man Sentenced to One Year and One Day for Defrauding Pennsylvania School Districts

- • Our People & Capabilities

• What We Investigate
• Our Partnerships
PHILADELPHIA-Robert Bradbury, 63. of West Chester, was sentenced today to 366 days in prison for a single
count of securities fraud in connection with a scam involving four Pennsylvania school districts. Bradbury sold the
districts high-risk securilies in the form of bond anticipation notes for the Whitetail golf course project, a speculative
golf course project located in Franklin County, Pennsylvania. These were inappropriate investments for the districts.
• Philadelphia History

- Press Room
Bradbury concealed from the school districts the true nature of and risks associated with the investments. The four
school districts, Boyertown, located in Berks County, Pennsylvania; Red Lion, located in York County,
Pennsylvania; Perkiomen Valley, located in Montgomery County, Pennsylvania; and North Penn, located in
Wanted by the FBI· Montgomery County, Pennsylvania, collectively lost approximately $10.5 million as a result of the fraUd.

- Philadelphia
In Your Community In addition to the prison term, U.S. District Court Judge R. Barclay Surrick ordered Bradbury to pay a $10,000 fine.
BradbUry's date for reporting to prison is February 1, 2010.

- FBI Jobs

Main FBI Website

This case was investigated by the Federal Bureau of Investigation, and was prosecuted by Assistant United States
Attorney Bernadette McKeon. The U.S. Attorney's office also acknowledges assistance from the SEC.

- Search FBI Website Press Releases I Philadelphia Home

- Accessibility I eRulemaking I Freedom of Information Act I legal Notices I Legal Policies and Disclaimers I Links

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FBl.gov is an official site ofthe U.S. Federal Government, U.S. Department of Justice.

-
-
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-
http://phiiadelphia.fbi.gov/dOjpressrel/pressret09/ph12H09.htm [4/7/2010 '1:34: 15 PM]
 Nicos Achilleas Stephanou, Ramesh Chakrapani, Achilleas Stephanou, George Paparrizos... Page 1 of 4

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.5. Secunties and Exchange Commissio

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U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 20884 / February 5, 2009

- Securities and Exchange Commission v. Nicos Achilleas Stephanou,

Ramesh Chakrapani, Achilleas Stephanou, George Paparrizos a/k/a

Georgios Paparrizos, Konstantinos Paparrizos, Michael G.

-
Koulouroudis and Joseph Contorinis, Civil Action No. 09 CV 1043

(S.D.N.Y)

Securities and Exchange Commission v. Ramesh Chakrapani, Civil

- Action No. 09 CV 325 (RJS) (S.D.N.Y.)

SEC CHARGES WALL STREET PROFESSIONALS AND OTHERS WITH

- INSIDER TRADING

The Securities and Exchange Commission announced that it has filed

- complaints in the United States District Court for the Southern District of
New York alleging that seven individuals engaged in insider trading l which
generated a combined total of over $11.6 million in illegal profits and losses
avoided. The Commission's complaint further alleges that two mergers and

- acquisitions professionals l Nicos Achilleas Stephanou at UBS Investment

Bank l and Ramesh Chakrapani at Blackstone Advisory Services l L.P., tipped
five individuals l including Joseph Contorinis; a portfolio manager for a

- Jefferies Groupl Inc. hedge fundI and residents of Greece and Cyprus with
material non public information about three impending corporate
acquisitions.

According to the Commission's complaint l the insider trading ring included:

- Nicos Achilleas Stephanou l a resident of the United Kingdom l was an

Associate Director of Mergers and Acquisitions at UBS Investment Bank;

Ramesh Chakrapani l a resident of the United Kingdom l was a Managing

Director in the Corporate and Mergers and Acquisitions group at Blackstone
Advisory Services, L.P. and a friend and former colleague of Nicos
Stephanou;

Joseph Contorinis l a resident of Florida l was a Managing Director at

Jefferies & CompanYI Inc. and portfolio manager for the Jefferies Paragon
FundI and a friend and former colleague of Nicos Stephanou;

Achilleas Stephanou, a resident of Cyprus, is Nicos Stephanou's father;

- George Paparrizos l a resident of Foster CitYI California, is a former

classmate of Nicos Stephanou;

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http://www.sec.govllitigation/litreleases/2009Ilr20884.htm 4/9/2010
 Nieos Aehilleas Stephanou, Ramesh Chakrapani, Aehilleas Stephanou, George Paparrizos... Page 2 of 4

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Konstantinos Paparrizos, a resident of Greece, is George Paparrizos'
father; and

Michael G. Koulouroudis, a resident of Brooklyn, New York, is a close

family friend of Nicos Stephanou.

- Related criminal charges by the U.s. Attorney's Office for the Southern
District of New York were filed today against Ramesh Chakrapani, Achilleas
Stephanou, George Paparrizos, Konstantinos Paparrizos, Michael

- Koulouroudis and Joseph Contorinis. Simultaneously, criminal charges

against Nlcos Stephanou were unsealed.

- The Commission's complaint alleges that the illicit trading occurred from at
least November 2005 through December 2006 and involved at least the
following acquisitions:

- Albertson's Inc. (ABS)

On Monday, January 23, 2006, prior to the opening of trading, ABS issued a

- press release announcing the acquisition of ABS by a consortium of buyers

dt $26.29 per share.

- Nicos Stephanou had access to material nonpublic information concerning

the acquisition of ASS prior to its public release because one of the

companies that eventually acquired ABS retained USS as its financial

- advisor and Nicos Stephanou was a member of the team at UBS that

advised the company on the acquisition.

Nicos Stephanou tipped George Paparrizos, Michael Koulouroudis and

- Joseph Contorinis with material nonpublic information about the ABS

acquisition, all of whom traded on the basis of that information. Nicos
Stephanou also either tipped his father, Achilleas Stephanou, or in an effort

- to evade detection, Stephanou traded ABS securities in his father's

brokerage account. In addition, Nicos Stephanou either tipped Konstantinos
Paparrizos or, in an effort to evade detection, George Paparrizos traded
ASS securities in his father's account.

Tn particular, after receiving the nonpublic information from Nicos

Stephanou, Joseph Contorinis caused the Jefferies Paragon Fund to

- purchase over 2.6 million shar"es of A.SS at a cost of $59 million.

By virtue of their trading in ASS securities, the defendants made total

profits and avoided losses of aprroximate1v $7.7 million.

ElkCorp. (ELK)

- On December 18, 2006, prior 1.0 the marl-:et open, ELK pUblicly announced
that it had agreed to be acquired by The Carlyle Group for $38.00 per

- share.

ELK hired UBS as its financial advisor. Thmugh working on the deal himself,

- through communications vvith other employees at UBS who advised EL.K on

tt1e acquisition, and/or by virtue of his access to UBS' internal files, Nicos
Stephanou had access to material nonpuhlic information l-egarding EL.K's

- http://www.see.gov/litigation/litreleases/2009!Ir20884.htm 4/912010
- Nicos Achilleas Stephanou, Ramesh Chakrapani, Achilleas Stephanou, George Paparrizos... Page 3 of 4

- impending acquisition.

Nicos Stephanou tipped George Paparrizos and Michael Koulouroudis with

material nonpublic information about the ELK acquisition. George Paparrizos
and Michael Koulouroudis traded on the basis of that information. Nicos
Stephanou also either tipped his father, Achilleas Stephanou or, in an effort

- to evade detection, traded ABS in his father's brokerage account. In

addition, Nicos StephanoLJ either tipped Konstantinos Paparrizos or, in an
effort to avoid detection, George Paparrizos traded ELK securities in his

- father's account.

By virtue of this trading in ELK securities, Achilleas Stephanou, George

- Paparrizos, I<onstantmos Paparrizos and r>1ichael Koulouroudis and his

family members made total profits of approximately $300,000.

- National Health Investors, Inc. (NHI)

On October 10, 2006, NHI publicly announced that its Board of Directors
had formed a Special Committee of independent directors, and had retained
Blackstone as its financial advisor to evaluate strategic alternatives to
enhance shareholder value. NHI also announced that It had received a
buyout offer' from its CEO offering $30.00 per share in cash, but stated that

- the offer was inadequate.

rZamesl) Chokrapani had access to material nonpublic information

- concerning a potential acquisition of NHI as a result of his employment at

Blackstone. Ramesh Cilakrapani was a member of the team at Blackstone
that advised NHl 011 its potential acquisition.

- Ramp.sh Chakr'cqvmi tipped Nicos Stephanou with material nonpublic

information regarding the potential NHI acqUisition, wlw In turn tipped
fv1ichael f<oulouroudis with that information. Koulouroudis traded on the

- basis of this information. Nicos Stephanou also either tipped his father, or
in em effort to p.vade detection, traded NHI in his father's brokerage
account.

By virtue of Ulis trading In NHI securities, Achilleas Stephanou and Michael

Kou!ouroudls and his family members made total profits of $17,000.

- [\lieu':) Sfepllanou. Achilleas Stephanou, George Paparrizos, Konstantinos

PaparriZos cmd j'lichael Koulouroudis are charged 'with violating Section 17

-
n) of \l,e Securities .A.cl or 1933 and Section 10(1J) of the Securities
Fxchanqe Act of 1934 and Rule 10b-5 thereunder. Ramesh Chakrapani and
j')Sf"pr Contnriill'; arc ch'3rged ilvith violating Section lOeb) of the Exchange
Act Clnd Rule 10b-S thereunder. The Commission seeks injunctive relief,
c1isqGrgcment of illicit pr-ofits and losses avoided with prejudgment interest,
and civii monetary penalties.

- On 1anuary 13, 2009, the Commission filed a related complaint against

Rames!l Ulakrapani alleging, among other things, that Ramesh Chakrapani
tiPPf~cJ another friencl, also an industry professional, with mater-ial nonpublic
information al)C!ul the !".55 acqUisition he learned as ,'3 result of his

- employment. The friend, identified in the complaint dS Tippee 1. then

t;'ac!ed in his personal account, was responsible for and/or caused trades on

- http://www.sec.gov/litigation/litreleases/2009Ilr20884.htm 4/9/2010
- Nicos Achilleas Stephanou, Ramesh Chakrapani, Achilleas Stephanou, George Paparrizos... Page 4 of 4

- behalf of two proprietary trading accounts affiliated with his employer, and
tipped or traded on behalf of his parents. The tippees generated a total of
approximately $3.6 million in illegal profits. See SEC v. Chakrapani, 09 CV

- 325 (S.D.N.Y.).

The Commission acknowledges and appreciates the assistance of the U.S.

- Attorney's Office and the Federal Bureau of Investigation in connection with

this matter.

The Commission's investigation is continuing.

- :. SEC Complaint

- http://www.sec.gov//itigation//itre/eases/2009//r20884.htm

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- Press Release: SEC Charges Wall Street Professionals and Others in Insider Trading Ring... Page I of 4

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U.S. Securities and Exchange Commissio

- SEC Charges Wall Street Professionals and Others in

Insider Trading Ring

- FOR IMMEDIATE RELEASE

2009-18

- Washington, D. c., Feb. 5, 2009 - The Securities and Exchange

Commission today charged seven individuals involved in an insider trading

-
ring that generated more than $11.6 million in illegal profits and avoided
losses.

- Additional Materials
> Litigation Release No. 20884
> SEC Complaint
> Spotlight on Insider Trading

- The SEC alleges that two mergers and acquisitions professionals, Nicos
Achilleas Stephanou at UBS Investment Bank and Ramesh Chakrapani at

-
Blackstone Advisory Services, L.P., tipped five individuals including Joseph
Contorinis, a portfolio manager for a Jefferies Group, Inc. hedge fund, with
material non public information about three impending corporate
acquisitions.

- "The Commission and the public expect Wall Street professionals to act with
the highest degree of ethics and integrity. It is unconscionable when these

- highly paid individuals abuse their access to sensitive information and

enrich themselves at the expense of others," said Scott W. Friestad, Deputy
Director of the SEC's Division of Enforcement. "As today's actions

-
demonstrate, we are aggressively working to combat insider trading
wherever it occurs and whoever is involved."

Daniel M. Hawke, Director of the SEC's Philadelphia Regional Office, said,

- "These enforcement actions are the direct result of innovative investigative

techniques that the SEC is using to identify patterns of unlawful trading and
suspicious relationships among traders who, in this case, live around the
world. Market professionals who may have engaged in insider trading, or
may be tempted to, cannot rest comfortably in the belief that their
wrongdoing will go undetected. We will continue to follow leads wherever
necessary to unwind intricate schemes and will seek all available remedies

- against those who engage in unlawful conduct."

According to the SEC's complaint, the insider trading ring included:

- • Nicos Achilleas Stephanou, a resident of the United Kingdom, was

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- Press Release: SEC Charges Wall Street Professionals and Others in Insider Trading Ring... Page 2 of 4

- an Associate Director of Mergers and Acquisitions at UBS Investment

Bank

• Ramesh Chakrapani, a resident of the United Kingdom, was a

Managing Director in the Corporate and Mergers and Acquisitions
group at Blackstone Advisory Services, L. P. and a friend and former
colleague of Nicos Stephanou

- • Joseph Contorinis, a resident of Florida, was a Managing Director at

Jefferies & Company, Inc. and portfolio manager for the Jefferies

- Paragon Fund, and a friend and former colleague of Nicos Stephanou

• Achilleas 5tephanou, a resident of Cyprus, is Nico Stephan au's

father

- • George Paparrizos, a resident of Foster City, Calif., is a former

classmate of Nicos Stephanou

- • Konstantinos Paparrizos, a resident of Greece, is the father of

George Paparrizos

- • Michael G. Koulouroudis, a resident of Brooklyn, N.Y., is a close

family friend of Nicos Stephanou

Related criminal charges by the U.S. Attorney's Office for the Southern
District of New York were unsealed today against Koulouroudis, Contorinis,
Nicos Achilleas Stephanou, and George Paparrizos.

- The SEC's complaint alleges that the illicit trading occurred from at least
November 2005 through December 2006 and involved at least the folloWing

- acqu isitions:

Albertson's Inc. (ABS)

- On Monday, Jan. 23, 2006, prior to the opening of trading, ASS issued a
press release announcing the acquisition of ASS by a consortium of buyers
at $26.29 per share.

Nicos Stephanou had access to material nonpublic information concerning

the acquisition of ABS prior to its public release because one of the

- companies that eventually acqUired ASS retained UBS as its financial

advisor and Stephanou was a member of the team at USS that advised the
company on the acquisition.

- Nicos Stephanou tipped George Paparrizos, Michael Koulouroudis anel

Joseph Contorinis with material nonpublic information about the ABS
acquisition, all of whom traded on the basis of that information. Nicos
Stephanou also either' tipped his father, Achilleas Stephanou, or in an effort
to evade detection, Stephanou traded ASS securities in his father's
brokerage account. In addition, Nicos Stephanou either tipped Konstantinos
Paparrizos or, in an effort to evade detection, George Paparrizos traded
ASS securities in his father's account.

- In particular, dfter receiving the nonpublic information from Nicos

Stephanou, Joseph Contorinis caused the Jefferies Paragon Fund to

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- Press Release: SEC Charges Wall Street Professionals and Others in Insider Trading Ring... Page 3 of 4

- purchase over 2.6 million shares of ASS at a cost of $59 million.

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By virtue of their trading in ABS securities, the defendants made total
profits and avoided losses of approximately $7.7 million.

ElkCorp. (ELK)

- On Dec. 18, 2006, prior to the market open, ELK publicly announced that it
had agreed to be acquired by The Carlyle Group for $38.00 per share.

- ELK hired USS as its financial advisor. Through working on the deal himself,
through communications with other employees at UBS who advised ELK on
the acquisition, and/or by virtue of his access to UBS' internal files, Nicos

- Stephanou had access to material nonpublic information regarding ELK's

impending acquisition.

- Nicos Stephanou tipped George Paparrizos and Michael Koulouroudis with

material non public information about the ELK acquisition. George Paparrizos
and Michael Koulouroudis traded on the basis of that information. Nicos

- Stephanou also either tipped his father, Achilleas Stephanou or, in an effort
to evade detection, traded ABS in his father's brokerage account. In
addition, Nicos Stephanou either tipped Konstantinos Paparrizos or, in an
effort to avoid detection, George Paparrizos traded ELK securities his in

-
father's account.

By virtue of this trading in ELK securities, Achilleas Stephanou, George

- Paparrizos, Konstantinos Paparrizos and Michael Koulouroudis and his

family members made total profits of approximately $300,000.

- National Health Investors, Inc. (NHI)

On Oct. 10, 2006, NHI publicly announced that its Board of Directors had

- formed a Special Committee of independent directors, and had retained

Blackstone as its financial advisor to evaluate strategic alternatives to
enhance shareholder value. NHI also announced that it had received a

.. buyout offer fr-om its CEO offering $30.00 per sllare in cash, but stated that
the offer was inadequate .

Chakrapani had access to material nonpublic information concerning a

- potential acquisition of NHI as a result of his employment at Blackstone.

Chakrapani was a member of the team at Blackstone that advised NHI on
its potential acquisition.

- Chakrapani tipped Nicos Stephanou with m.Jterial nonpublic information

regarding the potential NHI acquisition, who in turn tipped Koulouroudis
with that information. Koulouroudis traded on tl1e basis of this information.
Nicos Stephanou also either tipped his father, or in an effort to evade
detection, traded NHI in his father's brokerage account.

- By virtue of this trading in NHI securities, Acllilleas StephanoLJ and

Koulouroudis and his family members made total profits of $17,000.

- Nicos Stephanou, Achilleas Stephanou, George Paparrizos, Konstantinos

Paparrizos and Koulouroudis are charged with violating Section 17(a) of the

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- Press Release: SEC Charges Wall Street Professionals and Others in Insider Trading Ring... Page 4 of

- Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder. Chakrapani and Contorinis are charged
with violating Section 10(b) of the Exchange Act and Rule 10b-5

- thereunder. The SEC seeks injunctive relief, disgorgement of illicit profits

and losses avoided with prejudgment interest, and financial penalties.

- On Jan. 13, 2009, the SEC filed a related complaint against Chakrapani
alleging, among other things, that he tipped another friend, also an
industry professional, with material nonpublic information about the ABS
acquisition he learned as a result of his employment. The friend, identified

- in the complaint as Tippee 1, then traded in his personal account, was

responsible for and/or caused trades on behalf of two proprietary trading
accounts affiliated with his employer, and tipped or traded on behalf of his

- parents. The tippees generated a total of approximately $3.6 million in

illegal profits. See SEC v. Chakrapani, 09 CV 325 (S.D. N.Y.).

- The Commission acknowledges and appreciates the assistance of the U.S.

Attorney's Office and the Federal Bureau of Investigation in connection with
this matter.

- The Commission's investigation is continuing.

###

For more information, contact:

- Daniel M. Hawke, Regional Director

Elaine C. Greenberg, Associate Regional Director for Enforcement
Tami S. Stark, Assistant Regional Director for Enforcement

- SEC's Philadelphia Regional Office

(215) 597-3100

- http://www.sec.gov/news/press/2009/2009-18.htm

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- U.S. Securities and Exchange Commissio

- u.s. SECURITIES AND EXCHANGE COMMISSION

- Litigation Release No. 21285 / November 6, 2009

Securities and Exchange Commission v. Nicos Achilleas Stephanou

et al., Civil Action No. 09 CV 1043 (S.D.N.Y.)

- SEC SETTLES INSIDER TRADING CHARGES AGAINST WAll STREET

PROFESSIONAL AND TIPPEE

- The Securities and Exchange Commission announced that final judgments

were entered by the United States District Court for the Southern District of

- New York against Nicos Achilleas Stephanou, a former Director of Mergers

and Acquisitions at UBS Investment Bank, and his former classmate,
George Paparrizos, in a previously filed action charging those individuals

- and five other defendants with insider trading. The final judgments, entered
on September 23, 2009, enjoin both Nicos Stephanou and George
Paparrizos from future violations of Section 17(a) of the Securities Act of
1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule lOb­

- S thereunder. In addition, the final judgment against Nicos Stephanou

orders him to pay disgorgement of $461,893, together with prejudgment
interest of $77,175. The final judgment against George Paparrizos orders

- him to pay disgorgement of $24,617, together with prejudgment interest in

the amount of $3,900, and a civil penalty of $24,617. Nicos Stephanou and
George Paparrizos consented to the entry of the final judgments against
them without admitting or denying the allegations in the Commission's

- complaint. In addition, on May 6, 2009, Nicos Stephanou pled gUilty to

seven felony counts, including six counts of conspiracy to commit securities
fraud and one count of securities fra ud and on April 21, 2009, George

- Paparrizos pled gUilty to two felony counts, including one count of

conspiracy to commit securities fraud and one count of securities fraud.

- The Commission's complaint, filed February 5, 2009, alleges that from at

least November 2005 through December 2006, Nicos Stephanou tipped
several individuals with material non public information regarding

- acquisitions of at least three companies, Albertson's Inc. ("ABS"), ElkCorp.

("ELK"), and National Health Investors, Inc. ("NHI"). According to the
complaint, Nicos Stephanou obtained material nonpublic information
concerning the ABS and ELK acquisitions from his employer, UBS, which
had been retained to serve as the financial advisor for ELK and the
acquiring entity of ABS. The complaint further alleges that Nicos Stephanou
obtained material nonpublic information regarding the NHI acquisitions
from his friend, Ramesh Chakrapani, a former Managing Director at
.- Blackstone Advisory Services, L.P. NHI had retained Blackstone as their
financial advisory services firm and Chakrapani was a member of the team
assigned to adVise NHI on the potential acquisition. The complaint alleges
Nicos Stephanou tipped George Paparrizos, Michael Koulouroudis, a close
.... friend of Nicos Stephanou, and Joseph Contorinfs, a portfolio manager for

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- the Jefferies Paragon Fund and friend and former colleague of Nicos
Stephanou, who then traded in the securities of the acquired companies
based on the nonpublic information. The trading generated a combined

- total of over $8 million in illegal profits and losses avoided.

In addition, the Commission also issued today an Order Instituting

- Administrative Proceedings Pursuant to Section 15(b) of the Securities

Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions
against Nicos Stephanou barring him from associating with any broker or
dealer. Nicos Stephanou consented to the issuance of the Order without
admitting or denying any of the findings except as to the Commission's
jurisdiction over him and the subject matter of the proceedings, and the
findings contained in Sections III.2 and IIIA of the Order, which are

- admitted.

For further information, see Litigation Release Number 20884 (February 5,

- 2009) (SEC Charges Wall Street Professionals and Others with Insider
Trading).

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- U.S. Securities and Exchange Commissio

- u.s. SECURITIES AND EXCHANGE COMMISSION

- Litigation Release No. 21154/ July 27, 2009

-
SEC v. Khaled Mohammed Sharif AI Sayed AI Hashemi a.k.a Khaled
AI Hashemi, Civil Action No. 09-CV-6650 (S.D.N. Y.) (HB)

SEC Obtains Emergency Asset Freeze in Connection with Insider

- Trading in the Securities of Nova Chemicals Corporation

The Securities and Exchange Commission ("Commission") today announced

- the filing of an emergency action in the United States District Court for the
Southern District of New York against Khaled AI Hashemi, a citizen and
resident of Abu Dhabi, United Arab Emirates, for engaging in unlawful
insider trading in the securities of Nova Chemicals Corporation ("Nova")

- before a February 23, 2009 merger announcement with International

Petroleum Investment Company ("IPIC"). The Commission's complaint
alleges that Hashemi reaped $458,760 in profits by unlawfully trading in
advance of the merger announcement. The Commission also obtained a
temporary restraining order freezing Hashemi's assets as well as other
emergency relief.

- According to the Commission's complaint, Nova, which had principal

executive offices in Pittsburgh, Pennsylvania and Alberta, Canada, is a

producer of plastics and chemicals. Its common stock was traded on the

- N-ew York Stock Exchange and Toronto Stock Exchange until July 2009,

when the merger with IPIC became effective.

- The complaint alleges that Hashemi purchased 120,000 shares of Nova

common stock through his online brokerage account in the two weeks
leading up to the merger announcement. These purchases began to

... accelerate as the merger date approached, as he made 54 percent of his

total purchases on the last trading day before the announcement. Hashemi
funded these purchases by liqUidating nearly 80 percent of the value of his
stock portfolio, and by Wiring approximately $100,000 into his trading

- account. The complaint also alleges that, immediately prior to the merger
announcement, Hashemi placed pre-market limit orders to sell some of the
Nova stock that he had purchased in the preceding weeks at prices

- significantly higher than the preVious trading day's closing price. On

February 23, after the merger was announced, Nova's stock price increased
289 percent, and Hashemi sold his entire Nova position.

- As a result of the conduct described in the complaint, the Commission

alleges that Hashemi violated Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 thereunder, and seeks a permanent injunction,

- disgorgement of his unlawful trading profits, together with prejudgment

interest, and civil monetary penalties from Hashemi.

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- Khaled Mohammed Sharif Al Sayed Al Hashemi a.k.a Khaled Al Hashemi: Lit. ReI. No. ... Page 2 of 2

- The Commission acknowledges the assistance of New York Stock Exchange

Regulation in this matter.

- :. SEC Complaint in this matter

- http://www.sec.gov/litigation/litreleases/2009/lr21154.htm

- Home I Previous Page Modified: 07/28/2009

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 Igor Poteroba, Aleksey Koval, Alexander Vorobiev, and Relief Defendants Tatiana Voro... Page 1 of2

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Hom~ > Litlgation > Litigation Releases > 2010

- U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 21460/ March 25, 2010

- Securities and Exchange Commission v. Igor Poteroba, Aleksey Koval,

Alexander Vorobiev, and Relief Defendants Tatiana Vorobieva and Anjali

-
Walter, Civil Action No. 10-civ-2667 (AKH) (S.D.N.Y. March 24, 2010)

SEC Charges Wall Street Investment Banker and Securities Industry

Professional with Serial Insider Trading Scheme

- The Securities and Exchange Commission charged Igor Poteroba, an investment banker
at a global financial institution, Aleksey Koval, a securities industry professional, and

- their friend, Alexander Vorobiev, in a serial insider trading scheme that profited from
highly confidential merger and acquisition information. The defendants, all Russian
citizens, repeatedly tipped and/or traded on misappropriated inside information to
obtain approximately $1 million in illicit profits.

According to the SEC's Complaint, filed yesterday in federal district court in Manhattan,
from at least July 2005 through the present, Poteroba, an investment banker in UBS

- Securities LLC's Global Healthcare Group in New York City, misappropriated from UBS
highly confidential inside information about at least eleven impending acquisitions,
tender offers, or other business transactions. UBS had been retained as a financial
adviser in ten of these transactions, and had been confidentially solicited as a source of
- capital in the eleventh. The Complaint alleges that, in advance of each transaction,

Poteroba tipped his friend and financial professional, Koval (a/k/a Alexei Koval), with

inside information concerning the impending transaction. After receiving the inside

- information, Koval traded on all the deals and tipped Vorobiev, a friend of both Koval

and Poteroba, who traded on four of the deals. Based on the information tipped by
Poteroba, Koval and Vorobiev traded in stocks and options of the companies targeted

- for acquisition.

According to the SEC's Complaint, the scheme began in at least july 2005 when Koval
and Vorobiev traded in advance of the acquisition of Guilford Pharmaceuticals Inc. by
- MGI Pharma, Inc. Using, among other means of communication, coded email messages
that referred to securities as "frequent flier miles" and "bonus miles," Poteroba urged
Koval to purchase Guilford securities prior to the public announcement of the Guilford
acquisition.

With respect to subsequent transactions, the SEC's Complaint alleges that Poteroba also

- supplied information to Koval using coded email messages that referred to securities or
money as Macy's wedding registry gifts or "potatoes." For example, in discussing the
need to purchase Molecular Devices Corporation securities prior to the imminent public

- announcement of its merger, Poteroba wrote to Koval, "Let me know if you've started
your wedding registry at Macy's" and "Happy to talk about sales items and etc. ... sale
ends soon ... so hurry up."

- The SEC's Complaint further alleges that, during the course of the scheme, Koval used
his home computer or cell phone to access and to trade in Vorobiev's on-line brokerage
account. Koval also made cash withdrawals from Vorobiev's bank account using

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automated teller machines in Pasadena, California and Chicago, Illinois. In addition,

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- Koval and Vorobiev conducted insider trading through brokerage accounts held in their
own names. The Complaint also alleges that certain of the insider trading was also

- conducted through brokerage accounts held in the names of Tatiana Vorobieva,

Vorobiev's wife, and Anjali Walter, Koval's wife, and portions of the proceeds from the
illicit trading were received by Vorobieva and Walter. Accordingly, Vorobieva and Walter
are named as relief defendants in this action to recover investor assets now in their

- possession.

According to the SEC's Complaint, Poteroba misappropriated material, nonpublic

- information from UBS and illegally tipped Koval regarding: (1) Guilford Pharmaceuticals,
Inc.; (2) 10 Biomedical Corp.; (3) Molecular Devices Corp.; (4) ViaCell, Inc.; (5)
Mindray Medical International Limited (trading was in Datascope Corp.); (6) Millennium

- Pharmaceuticals, Inc.; (7) Sciele Pharma, Inc.; (8) Indevus Pharmaceuticals, Inc.; (9)
Advanced Medical Optics, Inc.; and (10) PharmaNet Development Group, Inc. In
addition, Poteroba misappropriated and illegally tipped inside information that UBS
obtained when it was solicited by Vestar Capital to provide funding for its proposed

-
acquisition of Radiation Therapy Services, Inc.

The SEC's complaint charges the Defendants with Violating Section 10(b) of the

- Securities Exchange Act of 1934 ("Exchange Act") and Rule 10-b5 thereunder, the
general antifraud provisions of the federal securities laws, and Section 14( e) of the
Exchange Act and Rule 14e-3 thereunder, the tender offer fraud provisions. The

- Commission seeks permanent injunctive relief, disgorgement of illicit profits with

prejudgment interest, and the imposition of financial penalties against Poteroba, Koval,
and Vorobiev, and disgorgement of illicit profits with prejudgment interest from the
Relief Defendants. Today, the court issued an emergency order temporarily freezing the
assets of the Defendants and Relief Defendants.

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The SEC thanks the U.s. Attorney's Office for the Southern District of New York, the
Federal Bureau of Investigation, and FINRA for their cooperation and assistance in
connection with this matter. The SEC acknOWledges the assistance of the Ontario
Securities Commission. The SEC also acknOWledges the cooperation of UBS Securities

- LLC.

See Also: SEC Complaint

- http://www.sec.gov/litigation/litreleases/2010/lr21460.htm

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- George Georgiou Page 1 of 1

- Home > Utlqatlon > Utlqatlon Releases > 2010

- U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 21426/ February 25, 2010

- u.s. v. George Georgiou, Criminal Action No. 09-88 (E.D. Pa.)

SEC v. George Georgiou, Civil Action No. 09-CV-616 (E.D. Pa.)

- GEORGE GEORGIOU CONVICTED OF SECURITIES FRAUD AND OTHER CHARGES

RELATING TO MULTIMILLION DOLLAR MARKET MANIPULATION SCHEMES

- The Securities and Exchange Commission ("Commission") announced today that on

February 12, 2010, after a three week jury trial prosecuted by the United States

- Attorney's Office in Philadelphia, Pennsylvania, George Georgiou, of Toronto Ontario,

was convicted of securities fraud, conspiracy, and wire fraud for his role in manipulating
the market in four separate microcap stocks - Avicena Group, Inc., Neutron

- Enterprises, Inc., Hydrogen Hybrid Technologies, Inc., and Northern Ethanol, Inc.
Sentencing is scheduled for May 7, 2010. Georgiou faces a maximum sentence of 165
years in prison and $21.25 million in fines.

- The Commission previously filed a civil injunctive action against Georgiou based on
similar conduct. According to the Commission's complaint, from 2004 through
September 2008, Georgiou, who controlled the publicly-traded stock of each company,

- manipulated the market for the purpose of artificially inflating each company's stock
price or to create the false appearance of an active and liquid market. In order to do so,
Georgiou used many nominee accounts that he either directly or indirectly controlled at

- offshore broker-dealers and banks, and used a variety of manipulative techniques,

including matched orders and wash sales. The Complaint alleges that ultimately,
Georgiou realized at least $20.9 million in ill-gotten gains from his manipulation
schemes through sales of artificially inflated stock and by using the artificially inflated

- stock as collateral to fraudulently obtain "margin" and other cash loans from Bahamian
brokerage firms. The Commission's action, filed in the Eastern District of Pennsylvania
on February 12, 2009 seeks a permanent injunction, disgorgement, prejudgment

- interest, civil penalties, and a penny stock bar against Georgiou. The action has been
stayed pending resolution of the criminal charges.

- The Commission acknowledges the assistance of the Ontario Securities Commission, the
Securities Commission of the Bahamas, and the Turks & Caicos Islands Financial
Services Commission in connection with this matter.

- For further information, please see Litigation Release No. 20899 (February 12, 2009).

http://www.sec.gov/litigation/fitrefeases/2010/fr21426.htm

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- HOme > Utlgation > Utigatlon Releases > 2010

- U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 21465 / March 29, 20io

- SECURITIES AND EXCHANGE COMMISSION v. Oleksandr Dorozhko, Civil Action

No. 07 Civ. 9606 (NRB) (S.D.N.Y.) (filed October 29, 2007)

- SEC OBTAINS SUMMARY JUDGMENT AGAINST COMPUTER HACKER FOR

INSIDER TRADING

- On March 24, 2010, the United States District Court for the Southern District of New
York granted the Securities and Exchange Commission's motion for summary judgment
against Oleksandr Dorozhko, a Ukrainian citizen who traded in the securities of IMS

- Health Incorporated based on information that he unlawfully obtained through

computer hacking. The District Court, among other things, permanently enjoined
Dorozhko from violating the antifraud provisions of the federal securities laws and
ordered the defendant to pay approximately $580,000 in disgorgement, prejudgment
- interest, and a civil penalty.

- On October 29, 2007, the Commission filed a Complaint alleging that just hours before
the close of the market on October 17, 2007, Dorozhko, while in possession of material
non public information regarding the impending announcement of negative earnings by
IMS Health, purchased 630 put options on the common stock of IMS Health. IMS Health

- planned to announce negative earnings via an investor relations service after the
market closed on October 17. Earlier that day, Dorozhko secretly hacked into the
investor relations firm's secure computer network and unlawfully accessed IMS Health's
earnings information. Within minutes of this hack, and just before IMS Health's
- scheduled earnings release, Dorozhko embarked on an aggressive buying campaign and
was able to purchase the IMS Health put options. After the market closed, IMS Health
reported third quarter earnings that were significantly below analysts' consensus

- estimates and the previous year's third quarter earnings. The next day, IMS Health's
stock price fell 28% to an all-time low, and Dorozhko sold all of his IMS Health put
options and realized profits of approximately $287,346.

- The Complaint alleges, among other things, that Dorozhko violated Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder by using "fraudulent
devices, schemes, or artifices, which may include, but are not limited to, hacking into
- computer networks or otherwise improperly obtaining electronic access to systems that
contained information about IMS Health's imminent earnings announcement."

- On January 7, 2008, the District Court denied the Commission's motion for a
preliminary injunction and concluded that "Dorozhko's alleged 'stealing and trading' or
'hacking and trading' does not amount to a violation ... because Dorozhko did not

- breach any fiduciary or similar duty 'in con nection with' the purchase or sale of a
security." SEC v. Dorozhko, 606 F. Supp. 2d 321, 324 (S.D.N.Y. 2008).

- On appeal, the United States Court of Appeals for the Second Circuit reversed the
District Court's decision holding "that nothing in the U.s. Supreme Court's jurisprudence
or prior decisions of our Court expressly imposes a fiduciary-duty requirement on the
ordinary meaning of 'deceptive' where the alleged fraud is an affirmative

- misrepresentation rather than a nondisclosure." SEC v. Dorozhko, 574 F.3d 42, 42 (2d

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- Oleksandr Dorozhko Page 2 of2

- Or. 2009). The Second Circuit further held that "computer hacking may be
'deceptive' [even] where the hacker did not breach a fiduciary duty in fraudulently

- obtaining material, nonpublic information used in connection with the purchase or sale
of securities" and that "misrepresenting one's identity in order to gain access to
information that is otherwise off limits, and then stealing that information is plainly
'deceptive' within the ordinary meaning of the word." [d. at 43,51. The Second Circuit
- remanded the case to the District Court, which granted the Commission's unopposed
motion for summary judgment.

- The Commission acknowledges the assistance of the Options RegUlatory Surveillance

Authority and the Chicago Board Options Exchange.

For further information, see Litigation Release No . .20349 (October 30, 2007).

http://www.sec.gov/litigation/litreleases/2010/lr21465.htm

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