Hedge Funds Sue Puerto Rico and Its Governor

A group of hedge funds that are holding Puerto Rico debt are suing the U.S. territory and Governor Alejandro García Padilla. Monarch Alternative Capital, Aurelius Capital Management, Stone Lion Capital Partners, Covalent Capital Partner, Aurelius Capital Management, Fundamental Credit Opportunities, and a number of other funds claim that Puerto Rico and Governor García violated PROMESA, which stands for the Puerto Rico Oversight, Management and Economic Stability Act. President Barack Obama signed the new debt restructuring law on June 30, which is when García issued a debt moratorium on the nearly $800 million in general obligation debt that was due on July 1 (along with other Puerto Rico debt for a collective total of about $2 billion). The hedge funds say that Governor García had no legal right to call a debt moratorium in the wake of PROMESA.

The bondholders want the court to stop the island from “unlawfully dissipating” assets before a federal oversight board is appointed. PROMESA places the U.S. territory under the supervision of the board, which is tasked with pressing for fiscal reform and supervising spending. However, the board won’t be in place for at least two months.

In their complaint, filed in United States District Court for the District of Puerto Rico, the creditors claimed that Governor García took advantage of this time gap in implementation and is spending hundreds of million dollars in ways that garner “political favor.” The hedge funds argued that certain expenditures would have been challenged by the board if it were already in place.

The plaintiffs, as holders of general obligation bonds, say they are entitled to some of the money being spent because Puerto Rico still owes them the debt payments. They want the district court to freeze the payments that have been issued and mark them as invalid until the board can take a look at them.

The payments the hedge funds are disputing include:
· $800 million that was moved from the island’s pension system for public employee.
· $250 million that went toward helping the insolvent Government Development Bank for Puerto Rico.
· $2.5 million that was purportedly improperly spent by the Office of the First lady.
· $1.2 million to help in the development of Puerto Rico athletes.
· $800 million designated for the University of Puerto Rico.

Under PROEMSA, creditors are not allowed to file lawsuits against Puerto Rico to enforce their legal claims. Because of this, since July 1, potential creditor lawsuits have been stayed.

However, PROMESA includes a provision that prohibits the moving of any assets or money beyond the “ordinary course of business” or in ways that are not in line with the territory’s laws or Constitution. The hedge funds are not demanding payment but they want the court to rule that Puerto Rico violated this provision of PROMESA.

At Shepherd Smith Edwards and Kantas, our Puerto Rico municipal bond fraud law firm represents investors that have sustained losses because financial representatives from brokerage firms such Banco Popular, UBS Puerto Rico (UBS-PR), Banco Santander, and others recommended that customers purchase Puerto Rico bonds or bond funds. Many investors were not apprised of the degree of risk involved nor were they equipped to handle them.

If you have questions about your rights, please contact our Puerto Rico bond and bond fund lawyers today. Hablamos Espanol. We are representing Puerto Rico residents and US citizens on the mainland in FINRA arbitration.

Hedge Funds Sue Puerto Rico’s Governor, Claiming Money Grab, New York Times, July 20, 2016

Hedge Funds Sue Puerto Rico, NBC News, July 21, 2016