Puerto Rico unsecured creditors seek to take over bond nullification efforts

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The Puerto Rico Unsecured Creditors Committee filed a motion to allow it to take over from the Puerto Rico Oversight Board the process of filing actions to void bonds and prosecute illegal activity connected to the bonds.

The committee, which represents non-bond holding creditors of Puerto Rico, filed the motion in the Puerto Rico’s Title III bankruptcy on Wednesday morning.

The committee has been an ally of the board for much of the bankruptcy process.

However, the committee said since the board was founded in the summer of 2016, it has been dragging its feet in pursuing actions against bonds and against individuals and companies that supported the issuance of illegal bonds. It said that the board has a “pattern of obstruction” in investigating Puerto Rico’s debt issuances.

Since January the board has said it will declare the island’s GO bonds sold in 2012 and 2014 invalid and not eligible for payment; suggested that it might challenge Public Building Authority and GO bonds issued as early as fiscal year 2009; suggested it might challenge Employees Retirement System bonds; and said that it would seek to claw back fees to professional firms connected with the bonds’ sales and from bondholders who received payments.

On Friday, the unsecured creditors group said it was told by the board’s Special Claims Committee that “it would not be pursuing any claims against individuals." The Special Claims Committee is overseeing the board’s actions on these matters.

"This was followed the next day by an equally sudden about-face with respect to claims against underwriters and other participants in Puerto Rico’s debt offerings,” the Unsecured Creditors Committee said.

Under the U.S. bankruptcy code, the board has only two years from the filing of the bankruptcy to commence actions against the relevant bonds and those that issued them. The committee says this would be May 2.

Referring to the board’s decision not to take actions against either individuals or entities connected with the bond issuances, the lawyers for the Unsecured Creditors Committee wrote: “This last-minute development left the committee and its constituents in an extremely difficult, if not impossible position. With less than three weeks remaining before Causes of Action deadline, the committee had no choice but to file this motion, asking for permission to pursue the valuable Causes of Action against the third parties that bear responsibility for the commonwealth’s fiscal crisis.”

In response the board said it may attempt to recoup underwriting and other bond issuance fees connected with the GO bonds sold in 2012 and 2014. “The only thing the Special Claims Committee declined to pursue is causes of actions based on fraud and other speculative theories,” the board said through a spokesperson.

“There were serious impediments regarding statutes of limitations, defenses, and other issues that brought into question the wisdom of expending estate assets with regard to the speculative claims against individuals,” the spokesperson continued.

Rep. Nydia Velázquez, D-NY, said: “It is inexplicable that the board would not at least attempt to collect some of the fees that were paid out to Wall Street on debt the board itself acknowledges shouldn't have been issued in the first place…. This is an appalling abdication of duty. Congress has an important oversight role to play here and I will be pressing the Board for answers in coming weeks.”

She also said she’d welcome unsecured creditors’ actions on this topic.

The committee, led by Paul Hastings Partner Luc Despins, highlighted 2014 GO bond as a possible transaction that could be prosecuted. It said valid claims probably could be filed against the officer and directors of the Government Development Bank, which controlled the island’s bond issuances, and “Banco Popular, which advised GDB’s officers and directors against the 2014 GO bond issuance but then participated in underwriting the bonds, earning substantial fees in the process."

It said that the 2014 bond sale had “several badges of fraud.” First, $1.6 billion of the GO proceeds were used for the benefit of an inside entity, that is for paying off debts that Puerto Rico and the Public Building Authority had to the GDB.

Second, “the commonwealth did not fully disclose the extent of its financial distress and the retention of bankruptcy counsel by GDB prior to the 2014 GO bond issuance, (iii) the commonwealth was, at a minimum, undercapitalized, if not insolvent at the time, and (iv) the transfer occurred in connection with the incurrence of substantial debt ($3.5 billion of additional GO bonds).”

In its filing the unsecured creditors said that the board showed little interest in pursuing actions to void bonds or prosecute individuals right from the start. It said the committee, “concerned that valuable time was being lost,” filed a motion in July 2017 seeking information about potential misconduct in the sale of Puerto Rico’s bonds.

The day before the board’s response to the committee’s motion was due, it announced that it would conduct its own investigation of the debt. In Wednesday’s filing the committee said, “the Oversight Board announced its own investigation, not because it was committed to the investigation of causes of action, but because it wanted to defeat the committee’s motion by claiming exclusive jurisdiction over any investigation.”

The result of that board investigation was not available until Aug. 20, 2018 – which the committee described as an excessively long period. The committee said the resulting report, from Kobre & Kim, was unsuitable for advancing legal actions against the debt or individuals.

A series of board delays have led the board to the current situation where it has two weeks left to file claims and it is still seeking to gather information about what it might file claims against. It is seeking the permission of the bankruptcy court to extend the deadline for filing claims.

The committee claims that the board has retreated from pursuing certain claims in the last few days.

In response and despite the short deadlines, on Wednesday the committee asked for it to be given the power to prosecute cause of action on behalf of the commonwealth government, “free from the Oversight Board’s continued obstruction and interference.” It also requested the court to order Kobre & Kim to provide the committee with the documents and interview notes that it collected in preparing its report.

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PROMESA Commonwealth of Puerto Rico Puerto Rico Employees Retirement System Puerto Rico Public Buildings Authority Government Development Bank for Puerto Rico Puerto Rico