J.P. Morgan Chase agreed to pay Florida $25 million to settle allegations it sold unregistered securities to a state-run municipal money market fund that suffered a run on deposits because it held defaulted debt.
Participants in Florida’s $6.9 billion Local Government Investment Pool, now known as Florida Prime, will get $23 million of the settlement to reimburse them for losses in 2007 on asset-backed securities, some of which were sold by J.P. Morgan to the fund’s overseer, the $147 billion Florida State Board of Administration, Tallahassee, said Attorney General Bill McCollum in a statement on Wednesday. The rest will pay fines and related costs, he said.
Mr. McCollum said the bank’s J.P. Morgan Securities unit had violated Florida law by selling unregistered bonds to the fund.
Assets in what was once the largest U.S. manager of municipal cash plunged from $27 billion in November 2007 after it said that it held defaulted mortgage-backed bonds. A rush by municipalities to pull out money forced the fund to freeze withdrawals, leaving some communities without cash to pay workers and other costs.
Florida Prime was reorganized to segregate the defaulted securities under a plan from BlackRock. The best-quality securities were set aside as Fund A and resumed paying withdrawals.
About $2 billion of illiquid and defaulted debt was put into Fund B and closed to transactions. As Fund B securities paid interest and matured, proceeds were deposited into Fund A. About $1.65 billion has been distributed from Fund B, or about 82% of the original principal, the state board said in a statement about the proceeds of the J.P. Morgan agreement.
“The settlement is a fair, reasonable and a responsible result for the participants,” Ashbel C. Williams, executive director of the state board, said in the statement from Mr. McCollum.
J.P. Morgan “desires to resolve this matter to avoid the burden and cost of any litigation, and accordingly does not admit or deny” the findings of Florida’s investigation, the company said in the settlement agreement.