Puerto Rico’s non-bondholding creditors call for independent bond probe

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Puerto Rico’s non-bondholding creditors are asking the Title III bankruptcy court to let them conduct an independent and wide-ranging investigation of the territory's debt history.

The request, made by the Official Committee of Unsecured Creditors, is scheduled to be the most time-consuming topic at Wednesday’s Title III bankruptcy Omnibus hearing in New York.

The committee says that the Puerto Rico Oversight Board’s existing investigation, which has been delayed more than once, is undermined by the potential bias of three members of the board who have present or past connections to Puerto Rico’s municipal finance industry, and fails to look into “identifying bad actors or potential causes of action” against existing debt.

Since the committee filed its brief on May 15, the board, Puerto Rico’s Fiscal Agency and Financial Advisory Authority, and two Puerto Rico financial institutions involved in issuing bonds have filed objections to the committee’s arguments.

For example, Popular Inc., Popular Securities LLC, and Banco Popular de Puerto Rico told the court on May 23, “It is the Popular Entities’ understanding that the [Oversight Board’s] independent investigator is diligently and thoroughly conducting its investigation.”

Attorney John Mudd in his Control Board Watch blog said the committee may have a point. “It is never a good sign when the investigated say the investigator is doing a good job, especially when there are substantial financial ties between three board members [José Carríon, Carlos García, José Ramón González] and two of the institutions being investigated (Banco Popular, Santander).”

The committee, which represents suppliers that Puerto Rico owes money to, filed an initial motion to conduct an investigation on July 21, 2017.

On September 1, 2017 the board hired Kobre & Kim to conduct an investigation into a wide range of debt topics as well as factors leading to the Puerto Rico government’s fiscal crisis.

In the fall of 2017 the committee petitioned the court to be allowed to do its own investigation. The court rejected the petition, saying that such a petition would be inefficient and would add to costs.

In its May 15 brief, the committee said circumstances have changed. The board’s investigator, Kobre & Kim, has already failed to make a March 20 deadline, the committee said. The board said that Kobre & Kim now promises to submit its report by July 31.

The committee asked the Title III court for the right to start its own discovery process under existing bankruptcy law at the earlier of either the submission of Kobre & Kim’s report or Aug. 15.

The committee complained that it may never have access to much of the evidence that Kobre & Kim discovers.

The committee also said the board has deliberately charged Kobre & Kim to avoid looking at illegitimately created debt or “bad actors” in the underwriting community. By doing this, it avoids potentially subordinating or disallowing hundreds of millions or billions of dollars of claims, the committee said.

In its response, the board's attorney Martin Bienenstock said that the committee has had the rights to see many of the documents uncovered by Kobre & Kim and to participate in the investigation.

In their replies, FAFAA and the Popular entities said that allowing the committee to start its own investigation would add to Puerto Rico’s expenses because it would have to pay for the additional document production.

In the committee’s reply to these responses, the committee reiterated some of its earlier arguments and said “the risk of ‘duplication’ is minimal… The [evidence] producing parties can simply reproduce their previous productions and give those materials to the committee, along with lists of search terms or custodians.”

Duplication could only occur if Kobre & Kim were to not complete its work by Aug. 15, which the board says will not occur.

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