Puerto Rico Oversight Board exploring legal action on debt

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The Puerto Rico Oversight Board is exploring taking legal action connected to Puerto Rico’s sale of bonds and notes over the years.

The board released a request for proposals for law firms and lawyers to look into the possibility of legal actions on the debt of Puerto Rico and its instrumentalities.

“I am confident that several law firms will put in proposals to pursue claims against the Wall Street banks and others who helped fuel Puerto Rico’s debt crisis,” said Scott Silver, attorney and managing partner at Silver Law Group in Florida.

Silver said the five year statute of limitations on most claims would be a real hurdle, but that creative arguments could be made as to when fraudulent actions were discovered and that this discovery date would be important in determining the timing of the statute of limitations.

Because of the nature of the damages and liability, Silver said he was confident that several firms will express interest in the board’s RFP.

In August the board released a Kobre & Kim report on the origins of Puerto Rico’s debt problem. The Kobre & Kim report said there were many possible illegalities in the issuing of the debt but that the five years statute of limitations had passed for most possible prosecutions stemming from debt deals. The one exception was the 2014 GO sale and the United States Securities and Exchange Commission has said it won’t be pursuing actions about this.

With the RFP the board is seeking a “claims counsel” to read the Kobre & Kim report, do legal research on potential causes of action, initiate legal action if this makes sense and/or refer it to prosecutorial or regulatory bodies.

“While Puerto Rico bears a lot of responsibility, governments and municipalities rely on Wall Street professionals to guide them in fiscally responsible practices,” Silver said. “In Puerto Rico, the government was consistently advised to issue more debt allowing the banks to earn millions in fees.

"...As to the rating agencies, this is reminiscent of the 2008 crisis; the rating agencies again put their rubber stamp of approval on multiple ratings allowing billions in debt to be issued and satisfy their Wall Street clients. It remains to be seen if any lawyers propose suing the rating agencies this time.”

Fitch Ratings said the timing of its Puerto Rico actions “reflected Fitch’s opinion of the issuers’ ongoing credit deterioration.”

Silver noted that Puerto Rico’s breach of contract statute of limitation is 15 years and this may be used.

Municipal bankruptcy expert James Spiotto said hiring a claim counsel was a “double check” on Kobre & Kim’s report. He said there might be two firms hired so as to assure adequate knowledge of all the relevant laws. As well as federal and commonwealth laws, New York State laws are relevant because some bond sales were done under these laws.

If the board takes an action on behalf of Puerto Rico’s local government, it is likely to be as an adversary proceeding in the Title III bankruptcy, said Spiotto, who is managing director at Chapman Strategic Advisors.

The board is seeking submission of the RFPs by 4 p.m. Eastern Standard Time, which is 5 p.m. Atlantic Standard Time, on Nov. 12.

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