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Puerto Rico group says further inquiry on public debt needed

By on September 6, 2018

SAN JUAN – A group of unsecured Puerto Rico creditors urged the U.S. District Court to be skeptical of claims by the island’s Financial Oversight and Management Board that its final report on the causes of the commonwealth’s public debt uncovered everything and should serve to prevent further inquiry.

The Official Committee of Unsecured Creditors of all Title III Debtors, other than Cofina (Spanish acronym for Sales Tax Financing Corp.), said that additional work is needed in light of the findings and that the report focuses more on exonerating officials and companies for their actions instead of holding them accountable.

Title III refers to the section of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) that covers in-court restructurings of Puerto Rico and its instrumentalities.

(CB file photo)

The group criticized the firm hired to conduct the investigation, Kobre & Kim, for choosing to offer anonymity to the subjects, which it said, “means that the Final Report may turn out to be of very limited utility. None of the Investigator’s interviews were conducted under oath or even transcribed—something that not only allows interviewees to evade crucial issues, but also frustrates any efforts to utilize the statements they gave.”

On Aug. 29, The fiscal oversight board said it intends to create a Special Claims Committee to pursue demands stemming from the report and hold a hearing Sept. 18.

“However, there is no reason to expect the Special Claims Committee’s approach to be any different than the approach undertaken by the Investigator—as three of the four members on that Special Claims Committee were the very three members of the ‘Special Investigative Committee’ that oversaw and directed the Investigator’s work and presumably approved the issuance of the Final Report,” the committee said.

The creditors made a list of observations for further investigation. Among them is that the report identifies that the Government Development Bank (GDB) served as the “epicenter and effectively controlled” all of the government borrowing practices. However, the GDB restructuring deal that will go to court for approval exempts former GDB officials from any possible wrongdoing.

“Given that background regarding the GDB’s central role, the importance of viewing the Final Report with a wary eye is highlighted even more clearly by the government’s recent efforts, with the Oversight Board’s apparent approval, to steamroll any opposition to the GDB’s Title VI restructuring and effectively bury the GDB as quickly as possible. Even though that restructuring process would result in a global release of the Title III Debtors’ claims against the GDB and the GDB’s current or former officers, directors, employees, agents, or representatives,” the committee stressed.

The report spends nearly two pages discussing why GDB officials were “knowledgeable and well-credentialed—an issue entirely irrelevant to whether those individuals breached any fiduciary duties or were negligent in their administration of GDB’s role as a fiscal agent for the Commonwealth.”

The committee pointed out that fiscal board advisers have stated that “it is beyond credulity that the Commonwealth, HTA [Puerto Rico Highways and Transportation Authority], and PREPA [Puerto Rico Electric Power Authority] can have meritorious claims against the governmental entity that loaned them money and kept them afloat at the request of the Puerto Rico government.”

While the report spends 52 pages providing an overview of various types of claims that often arise in bankruptcy cases, it does not “apply the law to the facts nor offers” the possibility that “certain claims may exist in theory without meaningfully linking them to specific individuals or supporting documentation,” the group said.

Nor does the report address, the group said, questions of whether any of the entities currently under bankruptcy could file “avoidance actions,” which are actions dealing with fraudulent transfers or payments that “should not have been made to recuperate the funds, even though the statute of limitations for such actions is next May.”

The debt investigator similarly does not directly address questions concerning whether the constitutional debt limit was ever exceeded, the creditors said, adding the issue is crucial to determining whether certain bonds “are subject to challenge or if a transaction caused the island to exceed its debt limit. Instead it says the island used a robust process” to calculate debt limits.

“Moreover, with very limited exceptions, the Final Report avoids the question of whether private financial institutions should be held liable for their interactions with the Title III Debtors—instead focusing on process-oriented ‘fixes’ or forward-looking prescriptions,” the committee said.

“Likewise, despite characterizing the various derivative swaps that were entered into by the Title III Debtors as highly risky—and even possibly leading to a downgrade in the Commonwealth’s credit rating in 2007—the Final Report does not thoroughly analyze whether private parties, including outside advisors, could be liable for these transactions, and instead discusses whether the swaps were in ‘the best interests of Puerto Rico,'” the committee said.

“Even where the Final Report attempts to address claims, it takes an approach that virtually ensures that responsibility will not be laid at any party’s feet,” the committee reiterated.

‘Piggy bank’

According to the committee, the report “largely ignores” the implications of the “revolving door issue” because it did not find evidence of “bribery, kickbacks, or pay-to-play violations in connection with any Puerto Rico-related bond issuance. Of course, it is not necessary to prove that ‘bribes’ or ‘kickbacks’ were offered in order to establish that fiduciary duties were breached in the selection of financial advisors or underwriters based on potential favoritism (political or financial), and the Investigator’s assumptions on this point preclude an in-depth analysis of potential recoveries. This is particularly troublesome given the government’s efforts to grant global releases and immunity to GDB” officials.

The investigator said swap transactions should be examined because GDB officials were not aware of what swaps had been entered into by the debtors.

“Indeed, in order to inventory its total exposure, GDB had to hire an outside swap advisor in 2009 who literally called swap counterparties on the phone over the course of months to ask…if they had trades with Puerto Rico-Related Entities. And GDB failed to meaningfully consider whether swap termination fees should be counted for the purposes of the constitutional debt limit,” the committee said.

In addition, the creditor group asserted, GDB officials neglected to perform “sufficient due diligence” for the loans it provided, turning the bank into a “piggy bank” for instrumentalities, which led to its eventual restructuring.

Unsecured Puerto Rico creditors may reject GDB restructuring deal

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