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Another Hedge Fund Group Sues Puerto Rico Governor

By on July 21, 2016

SAN JUAN––A group of hedge funds sued Puerto Rico Gov. Alejandro García Padilla on Wednesday, alleging he had started violating the Puerto Rico Oversight Management and Economic Stability Act (Promesa) by transferring money away from bondholders.

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Lawsuits continue to mount for Puerto Rico Gov. Alejandro García Padilla.

The hedge funds filing the lawsuit include Monarch, Stone Lion, Aurelius Capital Management, Autonomy, Covalent Capital Partners, and Fundamental Credit Opportunities, among others.

The law, which the U.S. President Barack Obama signed on June 30, would impose a federal oversight board to oversee government spending and promote fiscal reform, has a lag of several months before the board is in place.

The hedge funds contend that García Padilla was exploiting the lag by grabbing hundreds of millions of public dollars and spending them on “purposes that apparently enjoy political favor.”

The bondholders say the 2017 budget “makes huge transfers” to entities “that apparently enjoy political favor but are indisputably junior to” the bondholders, like the island’s woefully underfunded pension system, and its insolvent Government Development Bank, which is its primary fiscal agent.

Andrew Rosenberg of Paul, Weiss, Rifkind, Wharton & Garrison LLP, legal advisor to the general obligation bondholders, commented:

“The government of Puerto Rico has been violating PROMESA from practically the moment of its enactment.  Section 204(c)(3) of PROMESA requires that Puerto Rico ‘shall not enact new laws that either permit the transfer of any funds or assets outside the ordinary course of business or that are inconsistent with the constitution or laws of the territory as of the date of enactment of this Act.’  Just hours after PROMESA took effect, Puerto Rico brazenly violated this provision by enacting extraordinary measures diverting many hundreds of millions of dollars.

“Section 204(c)(3) is designed to preserve the status quo until the Oversight Board is formed.  Puerto Rico’s officials have upended the status quo.  Our clients have sued to restore it,” he added.

It is not clear if the lawsuit will move forward because Promesa imposes a stay on all lawsuits.

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