Hedge Funds Sue Puerto Rico’s Government Development Bank Over Assets

Problems continue to plague Puerto Rico as its financial situation continues to deteriorate. Just recently, as things have worsened for the U.S. territory, a number of hedge funds have asked the United States District Court in San Juan, Puerto Rico to freeze the assets of the Commonwealth’s Government Development Bank (“GDB”). The hedge funds, who are large owners of Puerto Rican debt, are accusing the bank of insolvency and spending its remaining money to help support other sectors of the island’s beleaguered government.

The plaintiffs in the case include Claren Road Asset Management and Brigade Capital Management. The hedge funds reportedly hold about $3.75 billion of the bank’s debt.

In their lawsuit, the hedge funds said that the GDB has not provided the financial data that creditors have requested. They want the Court to prohibit additional cash transfers except for those that are necessary. The hedge funds do not want public entities, municipalities, and other depositors to be able to take their money out.

The plaintiffs expressed concern that should the GDB run out of funds, a lot of essential services may have to stop and creditors would sustain significant losses. The GDB has a debt payment due on May 1 of about $422 million. In response to the hedge funds’ case, GDB President Melba Acosta-Febo claimed that the accusations made in the complaint are “erroneous” and allegations that the GDB knowingly kept back financial information in order to preference deposits over bondholders are “wholly false.”

The hedge funds believe that GDB kept giving loans even while knowing these loans would likely not be repaid.

Puerto Rico is heavily in debt and currently owes more than $70 billion to bond holders. Aside from institutional investors, many investors are retail customers, including retirees and small business owners. These investors, both institutional and retail, sustained massive losses nearly three years ago when their Puerto Rico bonds and related bond funds dropped significantly in value. Many of these investors were encouraged by brokerage firms such as UBS Puerto Rico (UBS), Banco Santander (SAN), and Banco Popular to back the funds. Now, hundreds of investors are contending they should have never been advised to invest in these municipal bonds to begin with because they were not suitable investments for them.

This week, certain Puerto Rico bond prices hit their lowest point in the wake of Governor Alejandro Garcia Padilla’s signing of a bill that would allow the island to suspend debt payments while waiting on the U.S. government to help with Puerto Rico’s financial woes. The bill lets the governor impose a moratorium on payments so that government cash can be used to cover necessary services, such as firefighters and police. Some of Puerto Rico’s creditors have spoken out against the bill.

At Shepherd Smith Edwards and Kantas, our Puerto Rico bond fraud lawyers are here to help investors recoup their losses. Contact us today.

Hedge Funds Sue to Freeze Puerto Rico Bank’s Assets, NY Times, April 4, 2016