Bond insurer asks court to investigate alleged illegal Puerto Rico bond trading

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Bond insurer National Public Finance Guaranty filed a motion Monday in a court seeking an investigation of likely illegal hedge fund trading of Puerto Rico bonds during mediation over those bonds.

National filed the motion Monday afternoon in the United States District Court for the District of Puerto Rico, which is overseeing the Puerto Rico Oversight, Management, and Economic Stability Act’s Title III bankruptcy process.

Attorney Marc Kasowitz
Attorney Marc Kasowitz is leading National Public Finance Guarantee's efforts to get the bankruptcy court to order an investigation of possible illegal trading of Puerto Rico bonds.

In the motion National focuses on the period from May 31, 2019, when parties signed an initial Plan Support Agreement for Puerto Rico’s central government debt, to the present. During the period there is “substantial reason to believe” that some hedge fund mediation participants illegally traded in the bonds, according to National.

Title III Judge Laura Taylor Swain barred participants from trading in the bonds while participating in mediation.

On Feb. 9, 2020 the Puerto Rico Oversight Board announced it had reached a new Plan Support Agreement with hedge fund groups and that the new plan had much more generous terms for late vintage bonds.

In its motion National said that member hedge funds of three negotiating groups — the Lawful Constitutional Debt Coalition, QTCB Noteholder Group, and the Ad Hoc Group of Constitutional Debtholders — had greatly increase their holdings between the first and second PSA and this raised “serious concerns.”

Prices for late vintage GO bonds shot up in the weeks and months prior to the release of the second PSA. This suggests there was “significant trading” of the bonds in this period, National said.

LCDC provided a statement to The Bond Buyer which said: “The LCDC’s members adhered to and respected all elements of the mediation protocol and trading restrictions during the period in which they were negotiating with the Oversight Board. As creditors with long-term investments in Puerto Rico, our members have consistently engaged in a constructive, transparent manner with the Oversight Board to facilitate the commonwealth’s timely emergence from bankruptcy and economic recovery.”

Representatives of the QTCB and Ad Hoc Group of Constitutional Debtholders couldn’t be immediately reached.

National asked Swain to either appoint the United States Trustee or another independent investigator to look into the alleged illegal trading. It said that the creditors and the board are trying to negotiate a revision to the PSA announced in February. “Coupled with the upcoming gubernatorial election and developments regarding the constituency of the [Oversight Board], a confirmation schedule for any resulting plan of adjustment would thus be months away at best. As a result, there is ample time for the investigation by an independent party.”

National said, the court should address the issues of illegal trading now because “delay could result in contentious litigation and motion practice centering on the trading conduct, and threaten the overall restructuring efforts at the crucial confirmation stage.”

The National motion follows five members of the U.S. Congress sending a letter to the New York State Attorney General in August asking her to commence an investigation of hedge fund trading of the bonds. Since then, the New York Attorney General hasn’t taken civil or criminal actions against the hedge funds and doesn’t ongoing confirm or deny investigations.

The law firms representing National are Kasowitz Benson Torres in New York City and Adsuar Muniz Goyco Seda & Perez-Ochoa in San Juan.

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