Wednesday, September 18, 2019

Swain’s World: Kobre & Kim Debt-Probe Files Remain Secret

By on November 2, 2018

Editor’s note: The following originally appeared in the Nov. 1-7, 2018, issue of Caribbean Business.

What happened to the documents gathered from agencies by Kobre & Kim, the firm that investigated the causes of Puerto Rico’s massive $70 billion debt? At this writing, their contents remain a mystery.

While the firm initially said the documents compiled from agencies and other sources were going to be made available, court documents showed that a key portion will be kept confidential and will not be placed in a so-called document depository.

In August, the firm, which specializes in financial investigations, issued a report on the causes of the island’s debt. Afterward, the Financial Oversight & Management Board (FOMB) said it would create a special claims committee to oversee the evaluation of the report to determine which claims the government may have. Last week, the FOMB put out an ad seeking a claims counselor.

In an exit plan filed in court, Kobre & Kim said it would transfer the custody of the investigative record to a neutral vendor selected by the special investigation committee. The neutral vendor will be in charge of the document depository. However, the independent investigator said it will return to the P.R. Fiscal Agency & Financial Advisory Authority (Fafaa or Aafaf by its Spanish acronym) all documents identified as “highly confidential” by Fafaa or the Government Development Bank (GDB), unless such documents are included as final report documents with the consent of Fafaa or the GDB.

All parties’ rights to challenge or defend Fafaa’s “highly confidential” designation are reserved, the firm said. Kobre & Kim said documents provided by the Securities & Exchange Commission, the Financial Industry Regulatory Authority and P.R.’s Financial Institutions Commissioner’s Office will not be transferred to the document depository. The documents provided will be returned to each respective entity, but the firm does not say why it is not putting them in the depository.

Even though in Puerto Rico, all documents are public, Kobre & Kim says parties interested in obtaining copies of the documents, “which are not stayed or otherwise prohibited from seeking discovery by order of the court,” will be able to make copies through a document request.

Caribbean Business contacted the Oversight Board to determine the process for seeking access to the documents. The press office merely said all debt documents were public. However, only the report was made public and not the documents Kobre & Kim used. When Caribbean Business made this clarification, it received no response. This newspaper contacted the Oversight Board’s chief of staff, Rosemarie “Mai” Vizcarrondo, who said she will get back with a response but did not do so.

Damaris Suárez, president of the Asociación de Periodistas de P.R. (Journalists Association), questioned the need for a plan to release the documents. “These are government documents that must be made public and they should all be made public for anyone wishing to do an audit. The strategy of hiding documents is to keep things in the shadows,” she said.

The Unsecured Creditors Committee (UCC), which is seeking access to documents to complete its own probe, recently raised concerns about the debt investigator’s probe because it left too many unanswered questions. That is why it is important for the documents to be made public, to allow for further inquiry.

In fact, the debt report expressly acknowledges it does not even address the question of whether any avoidance actions could be maintained by any of the Title III debtors, including against any other government agency. The deadline for avoidance actions is in May. These claims are usually the most lucrative recoveries.

The final report similarly does not directly address questions concerning whether the constitutional debt limit was ever exceeded, nor does it take a position on the matter. It also avoids the question, with a few exceptions, about whether private institutions should be held liable for their actions with debtors or whether advisers should be held liable.

The debt report goes out of its way, the committee says, to challenge the 2010 conclusions issued by the financial and consulting group, Conway MacKenzie, which determined certain officials of the GDB and Employees Retirement System (ERS) may have breached fiduciary duties to the commonwealth and ERS stakeholders in connection with the issuance of, and “arbitrage” or gambling with ERS bonds.

“In fact, the final report takes direct aim at Conway MacKenzie’s findings—spending nearly 15 pages attempting to absolve GDB and ERS officials of any fiduciary claims and explaining why, in the Investigator’s view, the Conway MacKenzie report was wrong,” the UCC said.

“Similarly, the final report spends almost two pages discussing why GDB [financial adviser] 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 the GDB’s role as a fiscal agent for the commonwealth.

The investigator largely ignores the necessary implications of the ‘revolving door’ [flow of talent between GDB and private sector] issues—omitting such discussion from the ‘claims’ chapter seemingly because the Investigator concluded in an earlier chapter that it did not find evidence of ‘bribery, kickbacks or pay-to-play violations’ in connection with any Puerto Rico-related bond issuance,” the committee said.

Among the areas needing further investigation, the committee says, are swap exchanges (through which two parties exchange financial instruments), claims that Prepa may have misused $430 million and the fact the GDB failed to disclose it had hired restructuring advisers before its $3.5 billion bond issue.

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