According to Bloomberg, the retirement system of Puerto Rico has joined a lawsuit against UBS Financial Services, Inc. (UBS) for poor returns that the retirement system received on $3 billion the it borrowed on UBS’s recommendation. Six beneficiaries originally brought this Puerto Rico bond fraud case in 2011 against UBS and two smaller broker-dealers.UBS was the underwriter of bonds sold by the judiciary retirement systems and employees eight years ago. UBS also served as investment consultant, adviser, and bond fund manager. The bond proceeds were supposed to earn a positive return as compared to the interest paid on the bonds. According to UBS, this would help Puerto Rico resolve some of its pension shortfall. However, UBS, according to the complaint, put too much of the bond proceeds toward low-yielding accounts that made “negative income.”
Now, Puerto Rico’s pension funds are in financial trouble and could go broke as early as 2018. System administrator Pedro R. Ortiz said that the system’s board is looking to obtain a “significant recovery” for pensioners and participants.
Additionally, Caribbean Business is reporting that 31 investment funds are suing the government of Puerto Rico. The funds hold Puerto Rico Employees Retirement System-issued bonds. While the plaintiffs plan to cooperate with the newly appointed federal oversight board to renegotiate what is owed to them, they want limited relief for now.
The retirement system, also referred to ERS, is among three public systems in the U.S. territory. It put out pension funding bonds in 2008 and fortified them by promising the funds security interest plus lien over future contributions by employers. Last April, however, the island put into effect the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act. This granted the territory’s governor full authority to declare a total moratorium on debt payments by ERS and a number of other government entities.
In June, Puerto Rico Governor Alejandro García Padilla issued an executive order stating that ERS was in a state of emergency. He suspended its obligation to move employer contributions to the fiscal agent of the system for payments on outstanding bonds, as well as employer contribution to the retirement system for up to how much in debt service was payable by ERS during the 2017 fiscal year. However, ERS kept getting employer contributions from those that were not commonwealth employers. These contributions remain subject to the security interest and lien the ERS had granted.
Now, the plaintiffs want relief from the stay put in place by the Puerto Rico Oversight, Management and Economic Stability Act (Promesa). The Act includes the provision that the court shall provide relief from the legislation when there is “cause.” According to the plaintiffs, they asked Puerto Rico’s government for proper protection as compensation for their liens and security interest being impaired but their request was denied. The plaintiffs see this as cause for this promised relief under Promesa. A federal judge is expected to rule on whether to grant relief from a Promesa stay in another lawsuit in October.
Also suing the Puerto Rico government is Scotiabank. In a separate lawsuit, the bank is seeking repayment of a nearly $38 million loan it lent to the territory’s Metropolitan Bus Authority four years ago. Scotiabank says that the agency has not made payments since November of last year. This is the first time that the Puerto Rico government is being sued for a loan since Governor García declared that its $70B public debt was not payable.
Please contact our Puerto Rico bond fraud lawyers if you have suffered significant losses from investing in the island’s closed-end bond funds and individual Puerto Rico bonds. Shepherd Smith Edwards and Kantas, LLP represents investors on the mainland and the island in recouping their money. Many of our clients invested through UBS Puerto Rico, Banco Santander, and Banco Popular.
Puerto Rico Pension Fund Joins Suit Against UBS Over Muni Bonds, Bloomberg, September 27, 2016
Investment funds sue Puerto Rico for payment of bonds, Caribbean Business, September 26, 2016
Scotiabank Sues Puerto Rico Over Loan Repayment, The Wall Street Journal, September 29, 2016