I did a similar project, where a pushbutton on a HC(S)12 board lit up and LED when pushed. So, my processor isn't the same, but some of the ideas for trouble-shooting ought to carry across.
1) Have you tried setting the LEDs to ON just to see if they light up?
2) Have you confirmed that SW2 is configured as an input, and with the debugger, can you you set the bit change in the register when you depress SW2?
It's not clear to me that you've configured SW2 as an input from this code, but as I said, I'm using a different processor on a different board. HTH.