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Puerto Rico gov’t objects to creditor request for probe into debt

By on August 1, 2017

SAN JUAN – The Puerto Rico government objected to a request made by a group of creditors that the causes of the island’s financial crisis be investigated, arguing that such an undertaking should be carried out by the commonwealth’s Financial Oversight & Management Board.

The committee—which represents unsecured creditors in Puerto Rico’s bankruptcy cases—recently asked federal Judge Laura Taylor Swain to authorize discovery to determine the role played by Banco Popular, Banco Santander and the Government Development Bank (GDB) in relation to debt obligations burdening Puerto Rico.

Last week, Judge Swain issued an order referring the unsecured creditor committee’s request to Magistrate Judge Judith Dein. The matter will be addressed Aug. 9 as part of the omnibus hearing that will be held in San Juan on the commonwealth’s Title III bankruptcy proceedings.

“While [Puerto Rico Fiscal Agency & Financial Advisory Authority, or Fafaa] recognizes that there will be a time and place for such an investigation, the time is not now, and the Committee is not the party to conduct it,” the government’s response adds, noting that the federal Promesa law already empowers the fiscal board to investigate.

Order for discovery into causes of Puerto Rico’s fiscal crisis to be discussed

The commonwealth government also notes Section 104 of Promesa, which says that the board “may investigate the disclosure and selling practices in connection with the purchase of bonds issued by the Government of Puerto Rico for or on behalf of any retail investors including any underrepresentation of risk for such investors and any relationships or conflicts of interest maintained by such broker, dealer, or investment adviser is as provided in applicable laws and regulations.”

Fafaa also states in the objection filed July 31 that the committee’s request was “overly broad and burdensome, distracting and unnecessary.” 

“The requests would result in the incurrence of millions of dollars of unnecessary professional fees and divert resources of [Fafaa], GDB, and other Commonwealth instrumentalities during this critical time,” the government adds.

In reference to the dispute among general obligation (GO) and Sales Tax Financing Corp. (Cofina) creditors, the motion adds that the committee’s attempt to obtain extensive discovery regarding the substance underlying the Commonwealth-Cofina dispute was improper. The government says the GO-Cofina conflict—who gets paid first and who is entitled to certain sales tax revenue pledged to Cofina debt repayment—”will be litigated imminently,” pursuant to a stipulation recently reached among the government and certain major creditor groups.

If approved by Judge Swain, the parties would litigate the issue in a bid to reach a court-ordered resolution by Dec. 15.  The agreement still lacks who will act as agent representing Cofina creditors.

The government argues it “must be evenhanded in providing information to the parties who will litigate the Commonwealth-Cofina dispute.” It adds it would be “unfair” to allow discovery to the unsecured creditor committee without a Cofina agent in place.

“When he or she is appointed, [Fafaa] will work with that person and the Committee to establish a fair, efficient, and streamlined discovery process rather than respond to piecemeal requests,” the commonwealth states.

The investigation petition filed July 21 by the committee states that the group seeks “to learn the role of public and private financial institutions in the structuring, underwriting, repackaging, and selling of the debt obligations that are now burdening Puerto Rico.”

—Luis J. Valentín Ortiz contributed to this report. 

Aafaf Objection to Motion for Discovery (Text)

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