Puerto Rico credit unions filed an adversary complaint in five Title III Puerto Rico bankruptcy cases saying that the court shouldn’t reduce the value of their debt at all.

The credit unions claimed in the Thursday filing that the local government had used false statements, embezzlement while operating in a fiduciary role, and fraud to lure the unions to purchase the bonds.

Puerto Rico Oversight Board chairman José Carrión III (center).
Puerto Rico Oversight Board Members José González, José Carrión, and Ana Matosantos, from left to right, are among the defendants of a credit union suit.

The six credit unions hold $976 million in par value of Puerto Rico government securities.

As a result of purchasing the bonds the credit unions, also known as financial cooperatives, have experienced financial damages and expect to suffer more. The credit unions’ Puerto Rico bond holdings are mainly in Government Development Bank and general obligation bonds.

“Regulatory accounting treatment allows the cooperatives to amortize losses on special investments over a 15-year period,” the court complaint stated. “However, this will only benefit the cooperatives from an accounting standpoint, as they will still suffer reductions in cash flow due to the likely restructuring of government debt.”

Outside of this court action, some accountants have challenged the regulations allowing the amortization of losses. They have said they will seek to have the losses registered in upcoming financial statements.

The credit unions claimed that the Public Corporation for the Supervision and Insurance of Cooperatives of Puerto Rico (known as COSSEC for its Spanish initials) misused its regulatory power and disregarded its statutory and ministerial duties in encouraging and pressuring them to acquire Puerto Rico securities, starting in 2009. The credit unions also complained about the actions of the GDB.

The credit union told Title III Judge Laura Taylor Swain, “this honorable court is also empowered to deny discharge relating to a debt for fraud and/or defalcation while acting in a fiduciary capacity, embezzlement or larceny. Therefore, plaintiffs’ claims against the commonwealth and other Title III debtors named herein are non-dischargeable.”

The plaintiffs ask the court to declare Puerto Rico’s debts and the debts of its authorities to them to be exempt from possible adjustment under the Puerto Rico Oversight, Management, and Economic Stability Act. They also ask for the defendants to pay them monetary damages.

The credit unions took their action against the following parties: Puerto Rico, the Puerto Rico Sales Tax Financing Corp. (COFINA), the Puerto Rico Fiscal Agency and Financial Advisory Authority, COSSEC, the GDB, the Highways and Transportation Authority, the Employees Retirement System of Puerto Rico, the Puerto Rico Electric Power Authority, the Oversight Board and its individual members, and unspecified securities firms, securities firms counsels, bond counsels, external auditors, and insurance companies.

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