Warrants are long term loans but differ from bonds in that they are not general obligations of the issuing County, and may be repaid only from a specific stream of existing, "on hand" revenues which, in this case, would be the fees and taxes paid for the use of the County's sewer system. The lawsuit seeks to void the Series 2002C, 2003B and 2003C refinancing swap/warrants, issued in 2002 and 2003, as auction/variable rate warrants in order to facilitate interest rate swaps with the Responding Creditors and others which amounted to an aggregate of $5 billion. The remedy requested is to enable the County to roll back to the $2.75 billion fixed rate warrant obligations which existed prior to the unlawful issuance of the $3.2 billion refinancing swap/warrants.
The refinancing swap/warrants not only increased the principal due on the warrants by $1 billion but also as a result of subjecting the warrants to interest rate swaps and auction rates, a fixed interest rate of 5.5% was substituted with variable rates potentially between 12% and 18% resulting in enormous additional liabilities to the County and hence to the ratepayers. These additional liabilities amount to an estimated $1.67 billion.
It has been alleged that the prime motivation to refinance the 1997 warrants was the desire of JP Morgan Securities, the underwriter of the swap/warrants, to make quick and easy money since not one penny of the over $1 billion in the increased principal amount went toward the capital improvements or maintenance of the sewer system but rather to pay bankers markups, fees, as well as other legal, professional and insurer's fees.
The Series 2002C, 2003B and 2003C swap/warrants are the same series of warrants which were the subject of a Cease and Desist Order of the SEC in November 2009 where JP Morgan neither admitted nor denied the SEC's findings. The Order, which was based on an offer of settlement by JP Morgan, referred to $8.2 million in payoffs by JP Morgan Securities made to senior County officials and others, and set out other details of corruption and fraud in connection with the 2002 and 2003 refinancing warrants. A former County Commissioner, Larry Langford, was later convicted for bribery. JP Morgan Securities was ordered by the SEC to pay $25 million in fines and $50 million in restitution to the County, and its affiliated bank, JP Morgan Chase, was ordered to forfeit $647 million.
(http://www.sec.gov/litigation/admin/2009/33-9078.pdf )
The County has had three sewer rate hearings where representatives of the Responding Creditors and experts brought by the County have argued for significant rate increases to pay the unlawful issuance increase in debt costs. The Sewer Ratepayers had no experts or other representatives at any of these hearings who asked for a rebate based on the unlawful issuance of refinancing swap warrants resulting from criminal activities of JPMorgan and others, as described in the SEC's Cease and Desist order.
The ratepayers, who also pay a sewer tax, are obligated to pay increased rates to the County to enable it to repay the increased principal and interest of over $1.6 billion cause by the unlawful issuance of the refinancing swap warrants. Sixty five percent of Jefferson County Ratepayers groups live or conduct businesses in census tracts which are near or at the poverty level. Fixed rate warrants were originally issued between 1997 and 2002 to upgrade the County's sewer system. In November 2011, the County filed for bankruptcy protection, largely due to the burden of its refinanced swap warrants. The County's filing made its petition the largest municipal bankruptcy filing in the United States.
The lead counsel representing the ratepayers, Calvin Grigsby, Esq. said, "Some of the most elite financial institutions in the country promoted and participated in shockingly unconscionable and unlawful financial transactions, confident in their belief that the sheer complexity of interest rate swaps and auction rates, and the related documentation, would deter further scrutiny."
For further information, please contact: Calvin B. Grigsby, Esq. President & CEO Grigsby & Associates, Inc. 311 California Street, Suite 320 San Francisco, CA 94104 tel: 415-392-4800 ext. 311 mobile: 415-860-6446 fax: 415-676-2445 cgrigsby@grigsbyinc.com ###