Assured Guaranty has filed a lawsuit against Puerto Rico for the second time. The bond insurance company, which insures about $5 billion of Puerto Rico bonds, wants a federal court to decide that the U.S. territory’s latest fiscal plan to revive it from financial bankruptcy “invalid.”
Also named a defendant in the lawsuit is the fiscal oversight board that was federally appointed to help the island recover from the over $70 billion of debt that it owes. Assured had filed a similar complaint against Puerto Rico prior to Hurricane Maria’s arrival in September, but it withdrew the lawsuit after the storm.
Now, however, the bond insurer is contending that the fiscal plan, which establishes future economic projections for the U.S. territory, was developed without consulting creditors. The plan estimates about $6.05 billion of debt service capacity over six years, which is a sign that creditors should expect significant reductions to their repayments.
The fiscal plan at issue in the lawsuit is an updated version of the one that the board developed prior to Maria. Assured, however, contends that this most current plan is just as remiss as the old one when it comes to not properly honoring creditor liens.
The bond insurer pointed out that under Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), the law Congress passed in response to Puerto Rico’s financial problems, the oversight board has to honor these liens. Assured believes the current plan takes away bondholder’s property rights while violating the U.S. Constitution. News of the lawsuit comes after the financial oversight board turned down an offer by the territory’s largest bondholder groups, including COFINA holders and general obligation bondholders, that could have resolved a dispute related to more than half the $70 billion in bond debt that Puerto Rico owes. The bondholders had offered to provide the island with $9.7 billion of debt relief.
Puerto Rico Debt
This month, the U.S. government unveiled a report with details on how Puerto Rico ended up with $70 billion of debt. It made recommendations for how such a crisis could be avoided in the future, including the removal of the triple-tax exemption given to the territory’s bonds and the mandate that local investment companies reveal the risks involved with those bonds.
The report was conducted by the Government Accountability Office (GAO), which examined 20 of the biggest bond issuances by Puerto Rico in nearly 20 years. The GAO determined that 16 of the bond issuance were purely for paying back or refinancing debt and to cover operating costs.
The GAO report found that Puerto Rico’s government officials had spent too much, overestimated revenue, borrowed funds to balance budgets, and failed to tackle shortfalls related to public pension funding. Other issues noted in the GAO’s report include that there had been too many accounting systems, which made it impossible to track government agency expenses, as well as a failure to keep track of agreements made between the island and certain corporations to lower the latter’s tax rates. The triple tax exemption granted to Puerto Rico’s bonds, which were given investment grade ratings, had allowed Puerto Rico to continue borrowing money.
Additionally, Puerto Rico has yet to issue audited statements for the last three fiscal years. The GAO is recommending that the SEC be granted permission to mandate that such statements be disclosed in a timely manner to help investors make informed choices.
Puerto Rico Bond Fraud Cases
On the U.S. mainland and on the island, our Puerto Rico bond fraud lawyers have been working with investors over the last five years to help them recover the money they lost while investing in Puerto Rico bonds and closed-end bond funds. Unfortunately, a number of brokerage firms, including UBS Puerto Rico (UBS-PR), Santander Securities (SAN), Merrill Lynch, Banco Popular, and others inappropriately recommended these investments to tens of thousands of investors, many of whom were not apprised of the risks involved. There were also investors who lost money from investing in funds holding these securities.
Shepherd Smith Edwards and Kantas LLP would like to offer you a free case consultation so that we can help you explore your legal options. Contact our Puerto Rico bond fraud attorneys so that we can help you determine whether you have grounds for a securities claim.
Assured Again Sues Puerto Rico, board over fiscal plan, Reuters, May 23, 2018
The GAO Report (PDF)
Related Blog Posts from SSEK Law Firm:
Investors Continue to Pursue Puerto Rico Bond Fraud Recovery From Santander Securities, Stockbroker Fraud Blog, May 22, 2017
FINRA Panel Orders UBS to Pay $204K in Puerto Rico Bond Fraud Claim, Stockbroker Fraud Blog, March 22, 2018
Hedge Funds Get Rid of Puerto Rico General Obligation Bonds After Hurricane Maria, Stockbroker Fraud Blog, November 22, 2017