Puerto Rico Oversight Board Seeks to Invalidate Over $6 Billion of General Obligation Bonds

The Financial Oversight Management Board for Puerto Rico (the Board) is asking a federal district court judge to invalidate over $6 Billion in general obligation (GO) bonds by disallowing any claims brought by the bonds’ holders. The legal action, brought by the Board and the island’s unsecured creditors’ committee, focuses on GO debts that the U.S. territory sold in 2012 and 2014.

The Board and the committee contend that the debt at issue violates Puerto Rico’s Constitution, including the balanced budget clause as well as the debt service limit provision. According to Law360, both parties claim that previous administrations of the island’s government engaged in different “accounting gimmicks” to get around these provisions.

For example, the petitioners maintain that bonds issued through the Puerto Rico Public Buildings Authority were an attempt to get around the 15% debt service limit when, in fact, the bonds should have been factored into that limit. If that had been done, the Board and committee are now arguing, then bonds issued after March 2012 should be rendered invalid and taken off the balance sheet of what the island owes.

The Board and the committee further argue that even if the Buildings Authority bonds were not included in the cap, the bonds the island issued in 2014, most of which were purchased by hedge funds, clearly violated the debt service limits from the Puerto Rico Constitution and, as a result, they should be invalidated.

In addition, according to the balanced budget clause, Puerto Rico is not allowed to issue new debt solely to serve or pay back old debt. The committee and the Board contend that the GO bonds in question were used for such purposes. At the very least, according to the Board and the committee, the $230 million difference between the bonds’ purchase price and their face value price should be nullified.

This request comes a few months after publication of a 600-page report by Kobre & Kim, which the Board commissioned to evaluate the causes of the current fiscal crisis. The report noted that there could be possible causes of actions related to the Puerto Rico debt crisis, including that the island’s debt limit under its constitution might have been violated. In response to the Kobre & Kim report, the Board hired counsel to investigate and bring legal claims related to the current crisis. This legal action is the first one the Board has taken in the wake of the report’s findings.

This request also came only three days before hearings began on the settlement agreement and proposed plan of restructuring over $17 billion in COFINA debt. If successful in the COFINA reorganization as well as the GO challenge, the Commonwealth would save more than $25 billion on outstanding debt and future interest payments.

Puerto Rico Investor Fraud Cases
While all of this is playing out, thousands of investors are still suffering from losses that began in 2013 when Puerto Rico’s closed-end bond funds and bonds dropped in value. Our Puerto Rico investor fraud lawyers have been working with retail investors, small business owners, and institutional investors on the island and the mainland to bring their securities arbitration claims before the Financial Industry Regulatory Authority (FINRA). Unfortunately, too many broker-dealers and their brokers inappropriately misrepresented these Puerto Rico investments and their accompanying risks to investors, as well as recommended them to investors for whom the securities were unsuitable. If you lost money from Puerto Rico bonds or closed-end bond funds sold to you by UBS-Puerto Rico, Oriental Bank, Popular Securities, GMS Securities, Santander Securities (SAN), Merrill Lynch, or another broker-dealer, contact Shepherd, Smith Edwards and Kantas, LLP (SSEK Law Firm) today.