Puerto Rico board, investment funds reject court investigation of insider trading

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The Puerto Rico Oversight Board and investment funds objected to a bond insurer proposal for a court-directed investigation of the funds’ alleged insider trading.

The board, four investment fund groups and one investment fund filed their positions with the United States District Court for Puerto Rico on Tuesday.

Susheel Kirpalani, partner at Quinn Emanuel Urquhart & Sullivan
Susheel Kirpalani, partner at Quinn Emanuel Urquhart & Sullivan, said the investment funds in the Lawful Constitutional Debt Coalition did nothing wrong.

They filed in opposition to a motion filed by bond insurer National Public Finance Guarantee on Oct. 6 asking the court to have the United States Trustee conduct a 60-day investigation into the alleged trading.

In 2019 and early 2020 the investment funds, as members of bondholder groups, participated in negotiation and mediation sessions with board representatives to arrive at two successive Plan Support Agreements defining how Puerto Rico’s central government debt should be restructured. National alleges the funds illegally increased their holdings of bonds while participating in the sessions, illegally benefiting from non-public knowledge.

On Saturday, the Unsecured Creditors Committee filed a partial joinder to National’s request for an investigation. The committee supported an investigation but said the court didn’t have the legal authority to have the United States Trustee conduct it. Instead, it said the court should have the committee conduct it.

In response to National’s and the committee’s filings, the Oversight Board told the court it “welcomes the opportunity for all [parties to the mediation process] to establish that their respective trading activity was undertaken in accordance with the periods of ‘restriction’ established by the mediation team and always pursuant to applicable securities laws.”

However, the board said National’s motion failed because “there is no provision in Title III [of the Puerto Rico Oversight, Management, and Economic Stability Act] for the appointment of an examiner or trustee.”

The board said it would be inappropriate to have the committee conduct the investigation. Alternately, the court could refer any evidence of insider trading to the United States Department of Justice. The board said that National could conduct “confirmation discovery” under the control of U.S. Magistrate Judge Judith Dein at its own expense.

In its Tuesday objection to National’s motion, the Ad Hoc Group of General Obligation Bondholders told the court none of its members traded bonds while in possession of material non-public information. It pointed out that National compared its holdings from March 6, 2019 to Feb. 18, 2020 even though the group was only in mediation for four and a half months during that period.

For its part, the Lawful Constitutional Debt Coalition said six of its eight member investment funds didn’t make any trades in “constitutional debt” during their mediation participation.

Susheel Kirpalani, partner at Quinn Emanuel Urquhart & Sullivan, leads the coalition’s legal efforts and helped create the objection to National's request.

The coalition’s public court filing is partly redacted so its argument cannot be fully discerned. However, it said the trades by its members GoldenTree Asset Management and Whitebox Advisors “did not breach any duty …, prejudice any party or in any way violate the court’s mediation orders.”

According to LCDC, “The court’s mediation orders spoke only to the duty of confidentiality in mediation and did not speak at all to trading, let alone impose a trading prohibition.”

In its filing, the Ad Hoc Group of Constitutional Debtholders said that of its eight members, six made no trades during the mediation period. Blackrock Financial Management sold a “small amount” to another mediation participant. Silver Point Capital did trade in the mediation period but did so without “possession of confidential information.”

Fir Tree did make a trade but at that point wasn’t yet a member of this group and wasn’t part of the mediation.

For its part, the QTCB Noteholder Group told the court, “At no time did any member of the QTCB Noteholder Group trade securities while in possession of confidential information obtained in mediation or discussions with the Oversight Board before such information was publicly disclosed.”

Finally, Sculptor Capital told the court, “Sculptor scrupulously observed applicable trading restrictions and did not trade at any time it was in possession of material non-public information.”

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