Butler School District officials are making the best of a bad situation by requesting a federal investigation of the swaption contract that cost the district more than $5 million to exit.

It's not clear when Butler officials realized that they had made a mistake by entering into a swaption contract — an option on an interest-rate swap —with JPMorgan Chase, but the evidence only began to surface in recent weeks. Just prior to last week's action to spend $5 million to get out of the bad deal, the district brought in a new bond underwriter, Janney Montgomery Scott, to replace JPMorgan Chase, the investment bank that had arranged the swap deal with the district.JPMorgan Chase had handled multiple bond financings for the district for years.

Just before it dropped JPMorgan Chase, Butler's board replaced the investment adviser who was involved in the bad swaption deal, Investment Management Advisory Group, or IMAGE. The new financial adviser to the district is Public Resources Advisory Group.

Following Butler's costly swaption exit, board solicitor Tom King sent a letter to the federal Securities and Exchange Commission requesting an investigation into the 2003 swap contract involving JPMorgan and IMAGE.

The costly consequences of Butler's financial bet with JPMorgan were repeated at numerous school districts across the state. So, the letter probably will join a stack of similar letters in a very active file at the SEC.

News reports from across Pennsylvania reveal that the SEC, along with the FBI and Internal Revenue Serv-ice, are already looking into swaption deals marketed to school districts and municipalities nationwide.

Bond Trader magazine has reported that at least 38 brokerages and investment advisers have received subpoenas from state attorneys general relating to a coordinated investigation into anti-competitive practices having to do with investment contracts and derivatives, which include swaptions, such as the deal that cost Butler more than $5 million to terminate.

The magazine also noted that the multistate investigation is happening at the same time as the Justice Department and SEC are conducting criminal and civil investigations into the municipal bond markets, bond-related investments and derivatives markets.

The Bloomberg Markets magazine article that brought the swaption mess to the attention of the public early this year noted that IMAGE, the company recently fired by Butler as its financial adviser, had its office raided by the FBI in November 2006 as part of an investigation into bid rigging of investment contracts.

It might offer some comfort to note that Butler was not alone in making a costly mistake with a swaption contract. And, beyond that, it might turn out that the evidence proves that the district got bad advice, or even was the victim of a crime.

Still, the school board appears to have entered into a complex financial bet without fully understanding the risks or all the details of the deal, despite seeking independent advice. And without competitive bids, it was impossible for the district to be confident that it was getting the best terms and payments.

It could be years before the various investigations into swaptions are concluded, but the story will continue to play out in Butler, and in other school districts across Pennsylvania. There also could be news coming from New York City, Washington, D.C., or other locations where investigations are being conducted.

And there might even be news from Harrisburg, if more is revealed about how the 2003 law that allowed swaptions to be sold to school districts was passed — or when state lawmakers vote to repeal or change the law.

Stay tuned.