As General Obligation Bondholders Get Go Ahead on Their Bond Fraud Case Against Puerto Rico, COFINA Creditors Seek to Intervene

A federal judge has ruled that general obligation bondholders in Puerto Rico may go ahead with a securities fraud lawsuit arguing that the U.S. territory’s government has to pay them what they are owed even as it pays off other bondholders and workers and restructures its nearly $70 billion of debt. U.S. District Court Judge Francisco Besosa said the bondholders’ case could proceed despite a new law that has placed a stay on the majority of creditors’ legal actions brought against Puerto Rico.

Owners of general obligation bonds which includes individuals and hedge funds such as Monarch and Aurelius, are arguing that Puerto Rico general obligation bonds are supposed to be constitutionally guaranteed, therefore other Puerto Rico obligations cannot be paid before general obligation bondholders. Judge Besosa said that because the general obligation bondholders’ debt lawsuit does not seek to get any kind of payment from the territory or confiscate commonwealth property, the case should be exempted from the stay.

Following Judge Besosa’s ruling, creditors of COFINA bonds, Puerto Rico’s sales tax authority, are now asking a federal court to keep the island’s government from being told to redirect bond payments to the general bond holders. The COFINA plaintiff group, which includes funds holding more than $2 billion in debt and also hedge funds such as Canyon Capital and Goldentree, contend that the general obligation bondholders’ claims are “self-serving” and without merit.

These two groups are the two largest debt classes in Puerto Rico: $17 billion in COFINA debt, which is backed by sales tax revenue, and the $18 billion in general obligation bonds, which were supposed to be constitutionally guaranteed.

Meantime, Reuters is reporting that Puerto Rico’s Employee Retirement System (ERS), which is the island’s biggest public pension that covers almost 100,000 retirees, is expected to run out of money in the next year. The retirement system owes $3.1 billion to bond holders for debt that it issued in 2008. Meantime, credit rating agency Moody’s reports that ERS’s debt services reserves will be spent by May. This could result in retirees and pension bondholders going up against each other for the same assets. Both groups have reportedly hired attorneys.

A group of ERS bondholders led by hedge funds Altair and Claren Road previously brought a lawsuit against the Puerto Rico government after there was a cessation of pension contributions. A settlement was reached in which the contributions would be kept frozen in a trust during the duration of the debt restructuring talks.

In the latest major development for Puerto Rico bond fraud cases brought by individual claimants, a Financial Industry Regulatory Authority (FINRA) panel has awarded one of our clients nearly $9 million in his municipal bond fraud lawsuit against UBS Puerto Rico (UBS-PR). Dr. Luiz Romero Lopez will receive almost $8 million in compensation and $1 million in punitive damages.

The FINRA arbitration panel found that UBS showed “recklessness and indifference” to what could have resulted through the abuse of its “non-purpose” loan program in the U.S. territory. The arbitration panel said that Dr. Romero Lopez would have lost less money if only UBS had invested his funds in investments that were more suitable for him and had less leverage.

Our Puerto Rico muni bond fraud attorneys at Shepherd Smith Edwards and Kantas, LLP were pleased to help Dr. Romero Lopez win his arbitration award against UBS. Our law firm has been working with investors in Puerto Rico and on the U.S. mainland in pursuing their Puerto Rico bond fraud and closed-end bond fraud claims against UBS, Santander Securities, Popular Securities, Morgan Stanley (MS), Merrill Lynch, and other brokerage firms. Contact us today to request your free case consultation. Hablamos Español.

Besosa declines to stay GO bondholders’ suit, Caribbean News, February 17, 2017

Puerto Rico sales tax creditors circle wagons in fight with GO bondholders, Reuters, February 22, 2017

FINRA Orders UBS to Pay Shepherd, Smith, Edwards & Kantas client $9 Million Over Puerto Rico Municipal Bond and Fund Investment Losses, StockbrokerFraudBlog, February 24, 2017