Tribunal Federal in Puerto Rico (Image: Dennis Rivera – Centro de Periodismo Investigativo)
A significant chain of victories have been achieved by activists and organizations looking to audit the debt in Puerto Rico. The Financial Oversight and Management Board (the oversight board) recently filed over 250 suits against banks, bondholders, and companies that may have violated federal and Puerto Rico’s laws. The suits include the underwriters of allegedly illegal debt that consisted of bond issuances that, since last January, have been challenged by different parties, including the oversight board.
The fate of around $13.5 billion in bonds lies in the hands of judge Laura Taylor Swain, chair of the federal court overseeing the Title III bankruptcy cases. However, when we take into consideration the interest Puerto Rico would still have to pay on this debt, the number rises to over $29 billion.
Suits include transactions related to four public entities: the Commonwealth, the Public Buildings Authority (PBA), the Employees’ Retirement System (ERS), and the Highways and Transportation Authority (HTA). As much as $5.7 billion could be recovered through this legal offensive.
Puerto Rico has a total bonded debt of $74 billion that has kept it in a state of continuous crisis. Wall Street billionaires and big banks have all profited from the creation and maintenance of this debt. On the other hand, Puerto Ricans have faced wave after wave of austerity measures, including the closing of hundreds of public schools and the dismantling of the University of Puerto Rico. The struggle against the debt is a struggle to bring justice to the country and accountability to those responsible for the crisis.
The demand for an integral audit of the debt has been going on for 5 years. Even though this is not a full audit, it represents an important step forward to hold accountable some of the institutions that helped create the debt crisis.
Recent positive developments are:
- Challenges to $13.5 billion in illegal debt. Up to $13.5 billion in bonds are currently being challenged in court by different parties. This includes bonds from the Commonwealth, the PBA, and the ERS. If we add up the interests that the government would still have to pay for this debt, the challenged debt increases to over $29 billion.
- $1.4 billion in claims against the banks and bondholders. A total of 18 banks and one law firm were sued for participating in the underwriting of the challenged bonds. Similarly, individuals who own more than $2.5 million worth of challenged GO and pension bonds were also sued in an effort to recover public funds unlawfully transferred as payments on illegally issued debt.
- Over $4.3 billion in payments to government vendors could be recovered if they did not comply with law. Over 230 vendors of the Commonwealth, HTA and ERS were sued because their contracts are not registered in the Comptroller’s Office, as required by law, or because their payments exceeded what was stipulated in their contracts.
- Under pressure, the Official Committee of Retirees joins effort to declare $3 billion in pension debt illegal. As reported previously by the Public Accountability Initiative (PAI), the Retirees’ Committee had not joined the efforts to declare over $3 billion in pension bonds illegal. However, several hours after the release of ‘The Puerto Rico Pension Heist’ report, which highlighted the conflicts of interest of the Retirees’ lawyer, Héctor Mayol, the Committee filed a motion challenging the legality of the pension bonds.
Billions in debt challenged in court
Things are heating up in court as more debt is challenged. Particularly, three groups of bond issuances are being challenged by different parties, including the oversight board, the Unsecured Creditors Committee (UCC), the Official Committee of Retirees, and several vulture funds:
- Three general obligation (GO’s) bond issuances totaling over $6.2 billion for violating the constitutional debt limit. The motion was filed last January by the oversight board and the UCC. Its core argument is that the PBA is a sham structure created to circumvent the constitutional debt limit and, hence, its debts are also direct obligations of the Commonwealth. Thus, PBA bonds should be included in the calculation of the debt limit. If so, all GO issuances after March 2012 are illegal.
As a consequence of this challenge, in February a group of vulture funds holding pre-2012 GO’s organized as the Lawful Constitutional Group, joining the efforts to declare this debt null and void. This group is composed by hedge funds that were key players in the COFINA debt adjustment plan. Additionally, one bond insurer, Ambac Assurance, also joined the challenge.
A coalition of vulture funds who own several of these bonds, called The Ad Hoc Group of General Obligation Bondholders, are objecting the challenge of these bonds by stating that the oversight board and the UCC were selective in their reasoning. The group says that if the arguments against the PBA structure are true, then the illegal GO issuances are the ones made between 2009 and 2011, not the bonds issued post-2012. By their account, then, nine GO bond issuances are illegal, totaling over $2 billion. The same can be said of PBA bonds, as seen below.
Recently, the UCC filed another motion objecting to the validity of $1 billion GO’s bonds, on the grounds that they also violated the constitutional debt limit. The four GO bond issuances are from 2011 and are all included in the objection raised by the General Obligation Bondholders Group.
Total GO’s challenged are then around $8.2 billion.
Around $2.3 billion in Public Buildings Authority bonds (PBA) because they violated the constitutional debt limit. Again, the mentioned objection by the The Ad Hoc Group of General Obligation Bondholders argues that if the arguments against the PBA structure are true, then seven PBA bond issuances violated the constitutional debt limit (2009, 2011-2012), totaling around $2.3 billion. This group is currently composed of only two vulture funds, Autonomy and Aurelius. The latter is one of the parties that successfully challenged the constitutionality of the appointments of the members of the oversight board.
Over $3 billion in pension bonds, on the grounds that the ERS did not have the legal authority to issue bonds. The motion was filed in March by the UCC. In a interesting and positive step, hours after the release of a PAI report denouncing the conflicts of interest of one of its lawyers, Héctor Mayol, the Official Committee of Retirees joined efforts to invalidate over $3 billion in pension bonds illegal. Mayol, then, is in the awkward position of questioning bonds that he personally underwrote through investment firm Ramirez & Co. (Samuel A. Ramirez & Co.). Ramirez & Co. is one of the banks being sued by the oversight board for, among other things, underwriting the controversial pension bonds.
The government of Puerto Rico stopped paying these debts in 2016, when PROMESA was approved by congress. If we take into consideration the interest that still have to be paid for these bonds in the next 40 years, the challenged debt increases dramatically:
- GO’s: $17 billion
- PBA: $3.9 billion
- ERS: $8.2 billion
- Total: $29.1 billion
These numbers were taken from the offering statements of the bond issuances in question, specifically in the debt service requirements table. All this money could be used to pay for essential services and for the payment of pensions.
A storm of suits
Two years after the commencement of the Title III bankruptcy cases, just as the deadline for claims for fraudulent transactions expired (avoidance actions under the Bankruptcy Code), the oversight board filed over 250 suits to recover money that was spent through payments that conflicted with the US Bankruptcy Code and Puerto Rico’s law.
The suits can be categorized into three groups:
- Government vendors that provided services to the Commonwealth, ERS, and HTA in the last four years. Specifically, over 250 government vendors billing more than $2.5 million, and whose contracts are not registered in the Comptroller’s Office (as mandated by Puerto Rico’s laws) or whose payments exceeded what was stipulated in the contract. The oversight board says that it will ensure that around $4.2 billion in Commonwealth payments were appropriately and fairly spent, and if not, they should be recovered. For ERS and HTA, payments that could be recovered totaled around $190 million. Companies being sued include multinational firms like Bristol-Myers Squibb, Microsoft, and Walmart, as well as firms from Puerto Rico, like CSA Architects & Engineers, Estudios Técnicos, Evertec, José Santiago Inc., MMM Healthcare, St. James Security, Suiza Dairy, and Triple S.
- Underwriters that participated in the questioned bond issuances. The suit is for aiding and abetting the Government Development Bank (GDB) in breaching its fiduciary duties, unjust enrichment, and breach of contract. Along with the suits against GO bondholders, the claims totaled around $1 billion. A total of 18 banks were sued: Barclays, Bank of America, Merrill Lynch, Citigroup, Goldman Sachs, JP Morgan Chase, Jefferies, Mesirow Financial, Morgan Stanley, Ramirez & Co. (Samuel A. Ramirez & Co.), RBC Capital Markets, Santander Securities, UBS Financial Services Inc. of Puerto Rico, VAB Financial, BMO Capital Markets, Raymond James, Scotia MSD, and TCM Capital. UBS, Morgan Stanley, and Merrill Lynch were also sued for conflicted swap termination fees. Sidley Austin is the only law firm being sued.
- Bondholders with more than $2.5 million in holdings of the challenge GO and pension bonds. Since the legality of these bonds is being challenged, the suits (GO bondholders and pension bondholders) argue that every payment of principal and interest on debt illegally issued by the Commonwealth and the ERS is unlawful and the money should be recovered because they are fraudulent transfers under Puerto Rico’s laws and the Bankruptcy Code. The names of the defendants remained confidential as of the release of this article. As mentioned before, GO claims totaled around $1 billion. In the case of ERS, around $392 million in payments could be recovered.
Another group of suits were filed against GO bondholders, whereby the oversight board wants the court to declare that GO bondholders are unsecured creditors, which is a direct attack against hedge funds claiming to have secured general obligation bonds.
A list of all parties sued in the Commonwealth’s case can be found here (excluding bondholders). Court documents show that there are over 1200 defendants holding the challenged GO bonds.
In all, the lawsuit against underwriters looks to recover money from any bonds that might have been issued in violation of the laws or constitution of Puerto Rico as early as 2007, limited only by a 10-year statute of limitations contained in a section of the Bankruptcy Code.
The outcome of these avoidance actions will depend on whether the court ultimately decides the question of their validity, which would weigh heavily on the negotiations for the Commonwealth’s plan of adjustment. If the court agrees that the challenged bonds were illegally issued, the defendants will have to pay back the payments they received.
Some big names are missing from the suits, such as banks and law firms that underwrote and counseled the challenged bonds.
Popular, Inc.’s subsidiary was part of the group of banks that underwrote some of the issuances being questioned. Recently, its CEO confirmed that the bank signed an agreement to delay the suit and possibly reach a deal. The familial ties between José Carrión, chair of the oversight board, and the Carrión family, owners of the banks, are very well known.
Another big name missing is O’Neill & Borges, one of the biggest law firms in Puerto Rico. They were underwriting counsel for the allegedly illegal GO and pension bond issuances. However, they are not included among the defendants. O’Neill & Borges is one of the law firms currently representing the oversight board.
Other banks and law firms still missing include Oriental, First Bank, Wells Fargo, Greenberg Traurig, and Pietrantoni Méndez & Álvarez. It is possible that they also signed agreements to delay the suits.
It seems contradictory that the oversight board is suing the underwriters of the allegedly illegal bonds for aiding the GDB to breach its fiduciary duties while at the same time not taking action against the GDB officials that authorized these transactions. The conflicts of interests some board members have are well known. The most clear example is that of Carlos García, the revolving door banker from Santander who chaired the GDB when it authorized nine of the challenged bond issuances
The struggle against austerity measures in Puerto Rico continues. The oversight board is preparing the way for the next debt adjustment plans, including those of PREPA and the Commonwealth. Retirees are in danger of suffering cuts to their pensions. People can fight back, educating themselves on debt issues, and putting pressure on the legislature when they introduce bills to authorize debt plans that include draconian cuts (for example, pension cuts). All persons that can participate in the creditors’ voting process of the debt plans should cast their vote to repudiate the decisions of the oversight board. Continued pressure, both in the courts and in the streets, will be crucial in helping to push back against the austerity measures coming down from above.