JPMorgan Chase & Co. and 11 other firms involved in the sale of $3.2 billion in bonds and derivatives were sued by a group alleging that corruption led to transactions that forced Jefferson County, Alabama, to the brink of bankruptcy.
The lawsuit is at least the second filed by Alabama residents since interest rates on the county's sewer debt soared this year, creating a fiscal crisis that may force higher taxes and fees.
Citizens for Sewer Accountability and two county residents filed the action on behalf of the state of Alabama on Aug. 28 in Circuit Court in Birmingham, the Jefferson County seat, according to a press release from Law One Group, representing the plaintiffs. The suit alleges Larry Langford, the former commission president and current Birmingham mayor, received payments to ensure that the bond sales would occur.
Jefferson County commissioners last week voted to prepare a bankruptcy filing should they fail to reach agreement with JPMorgan and other creditors to refinance the debt.
Spiraling interest bills have boosted the cost of running the sewer system to $460 million a year, more than twice the $190 million it collects in revenue, and county officials say they can't raise sewer rates enough to cover the bills.
The crisis arose because more than $3 billion of the obligations, including $2.2 billion of so-called auction-rate debt, have interest rates that reset frequently, a strategy intended to hold down costs. That backfired when fallout from the worldwide credit crisis pushed the county's rates as high as 10 percent. More than $5 billion of interest-rate swaps also prevented the county from refinancing without paying fees to cancel the arrangement.
Creditors on Aug. 29 agreed to give the county a month to develop a plan to avoid bankruptcy.
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