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Investigation, audit of Puerto Rico debt due by summer

By on May 31, 2018

Editor’s note: The following article first appeared in the May 31-June 6, 2018, issue of Caribbean Business.

The independent investigator has anticipated its final report on the validity of the island’s debt will be published by August and is slated to include potential claims against third parties, the Financial Oversight & Management Board (FOMB) said.

The report will contain an assessment of the implications of an alleged “revolving door” among the Government Development Bank, Banco Popular and Banco Santander. It will also contain a review of retail selling practices and matters for regulatory attention, the FOMB said in a court document, adding that the probe will answer questions for all concerned about the debt.

It is the first time the FOMB will provide a glimpse into its investigation of the island’s debt. The investigator allegedly has interviewed hundreds of witnesses and examined numerous documents.

The FOMB’s remarks appear to contradict a recent Government Accountability Office (GAO) report on the debt, which blamed Puerto Rico for its fiscal problems. One factor contributing to Puerto Rico’s debt levels is [the island] government’s persistent annual deficits, where expenses exceeded revenues. Puerto Rico’s government has borrowed money to finance its operations, rather than cutting spending, raising taxes or both,” the GAO report reads.

The FOMB’s remarks came after the Committee of Unsecured Creditors reiterated its motion about the slowness in taking any steps to investigate or audit the validity of Puerto Rico’s public debt. The motion outlined a proposed discovery program targeting the most significant “potential bad actors,” based on publicly available information, that were identified as profiting from the financial transactions that led to Puerto Rico’s financial crisis.

After groups said they wanted to investigate the causes of the debt, the oversight board argued that because it had been granted some limited authority to investigate retail bond-selling practices under the P.R. Oversight, Management & Economic Stability Act (Promesa), the entire discovery process should be led by its newly hired investigator, John Couriel, and the law firm of Kobre & Kim.

The investigator represented, in an Oct. 30, 2017, “Interim Report,” that his work had begun immediately after being hired by the oversight board on Sept. 1, 2017, and that the review could be completed within 200 days of retention—meaning the investigation would conclude at the latest by March 20, 2018. The final report was not issued.

Instead, the investigator issued a “Second Interim Report” report on April 5, 2018, stating only that it continued to receive “rolling productions” and a “realistic timeframe for the preparation and delivery of a final investigation report is during the summer of 2018.” The investigator did not provide initial findings or recommendations for the parties in the Title III bankruptcy cases, and instead offered only a number of potential areas of inquiry.

“There is no guarantee for the stakeholders in the Title III cases that the investigator’s new deadline to issue his final report by summer of 2018 will be met. Indeed, the April 5 Report offers little explanation for failure to meet the original March 20, 2018 deadline, stating only that “[g]iven the scope of the investigation, the ongoing effects of hurricanes Irma and Maria, the volume of data collected and number of potential witnesses, it is taking significant time to assemble, review and analyze the documents and related information,” the committee said in a document in which it is insisting on completing its own probe.

While one reason for conducting its own probe is to investigate claims against causes of action, the FOMB and P.R. Fiscal Agency & Financial Advisory Authority (Fafaa) both say Promesa only authorizes the debtors to levy such claims.

Fafaa, on the other hand, has denied it has any confidential agreements with entities to disclose documents related to the debt. It says non-Fafaa entities must consult with their own governing boards to disclose documents.

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