The SEC should have known something was fishy in Jefferson County a whole decade before it formally began its investigation. According to Self-evident:
So how would the SEC have known that LeCroy was a suspicious character a decade before it formally began its investigation of the sewer refinancings – in fact, before the infamous refinancings even took place? In November 1997, Jefferson County Commissioner Bettye Fine Collins wrote the SEC asking for an investigation into the county’s swap transactions. Collins argued that the county had been abused and that the transactions “raised the county’s expense by more than $1 million a year, and raised concern that the arrangement involved cronyism, patronage, excessive fees, and fraud.” (From examining the bond terms and swap confirmations, her numbers may have been accurate at the time.)
Why were these details left out of the SEC’s complaints? Why did the SEC not acknowledge that the county had previous dealings with LeCroy? Why would the SEC wait nine years to begin an investigation into the deals after being tipped off by a public official, of all people? (I cannot imagine public officials are the SEC’s typical whistleblowers.) Collins would have had access to any of the documents that the SEC would have required to determine if the pricing on the transaction was fair (marketing materials, swap confirmations, etc.). If the SEC suspected her request was simply motivated by politics, they could have examined the deal to see if it was fair and moved on. It is certainly not the SEC’s job to lecture governments about using swaps for speculative purposes rather than hedges, but if the SEC would have examined the deals, there would have been red flags immediately, such as the archaic commission structure on the swaps and the bizarre strategy that was being pitched to the county. (The structure could have been appropriate in other sectors of the market, but certainly not for a county government.) The original bond deals involved the same participants and modus operandi as the fraudulent deals that came later.