Six Puerto Rico credit unions claim government defrauded them
SAN JUAN – Six Puerto Rico credit unions have accused the island’s government, its Financial Oversight and Management Board and several other entities in a lawsuit of “defalcation and fraud” for selling them unsound Puerto Rican debt in a ploy to obtain their assets.
The plaintiffs–Cooperativa de Ahorro y Crédito Abraham Rosa, Cooperativa de Ahorro y Crédito de Ciales, Cooperativa de Ahorro y Crédito de Rincón, Cooperativa de Ahorro y Crédito Vega Alta, Cooperativa de Ahorro y Crédito Dr. Manuel Zeno Gandía, and Cooperativa de Ahorro y Crédito de Juana Díaz–say they have more than $1.45 billion in assets, nearly 140,000 members, about 35,000 nonmember depositors, 384 full-time employees, and branches in 15 island municipalities.
They argued that the defendants, through “acts, ommission and failure to follow fiduaciary duties,” caused a high amount of debt from government securities, which are a junk-rated, in the cooperative financial system.
“The governmental entities with legal and fiduciary obligations to ensure the financial health of the cooperative system ignored their obligations and induced the offer and sale of the unsound debt securities. These entities incurred in the reckless disregard of the systemic risks to cooperatives and failed to comply with statutory mandates, and ministerial and fiduciary duties,” the lawsuit reads.
It further establishes that, as of 2009, the commonwealth sought access, “for its own benefit, to the liquidity reserves of the credit unions through the issuance of debt by the government of Puerto Rico, in ever-increasing concentrations,” and that the “concerted efforts” were made through the Government Development Bank for Puerto Rico (GDB) and the Cooperatives Supervision & Insurance Corp. (Cossec).
To force the co-ops to purchase the government securities, the credit unions allege, the government issued letters claiming that the securities were good investments but also threatened with permit revocations unless securities were purchased.
The plaintiffs contend that the government enitties are in violation of their duty to protect cooperatives because Cossec’s fiscal plan eliminates a 2015 law that allowed the credit unions to defer or pay government debt for period of 15 years.
They also said that despite warnings, the government and the fiscal board intend to approve a restructuring support agreement for the Government Development Bank that would erode cooperatives’ capital and cause “significant systemic risks.”
The credit unions want a ruling that says the debt owed to them is not dischargeable in the comonwealth’s Title III bankruptcy proceedings underway because the defendants incurred in false representations and “defalcation of their fiduciary duties and responsibilities to maintain a sound financial system.”
Besides the commonwealth of Puerto Rico, the fiscal oversight board and Cossec, the defendants are the GDB and its successors, including its Debt Recovery Authority and trustees, Public Entity Trust and the Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym).
The lawsuit also includes several insurance companies and securities and law firms.
The credit unions said the money obtained from them was used to fund the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym); the Puerto Rico Highways & Transportation Authority (HTA); the Employees Retirement System (ERS) and the Puerto Rico Electric Power Authority (Prepa), which were named codefendants.