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Articles Tagged with Puerto Rico bond fraud

Doraine Refused To Cooperate In FINRA’s Investigation 

The Financial Industry Regulatory Authority (FINRA) has barred former Next Financial broker, Charles Doraine after he refused to give testimony in the self-regulatory organization’s (SRO’s) probe into allegations that he unsuitably recommended Puerto Rico bonds to customers. 

Already, Doraine has been the subject of investor claims accusing him of overconcentrating customer accounts with these municipal bonds and engaging in short-term trading. 

According to The Wall Street Journal, three hedge funds that own Puerto Rico general obligation (GO) bonds have set up their own committee in an effort to get paid back the money they are owed. Court records indicate that GoldenTree Asset Management, Monarch Alternative Capital, and Whitebox Advisers, which collectively own about $800 million of GO debt, want to distinguish themselves from the other bondholders whose claims have recently come under question.

Their committee formation comes just weeks after Puerto Rico’s fiscal oversight board,known as the Financial Oversight and Management Board (the “Board”), raised questions about whether $6 billion in general obligations are valid. The bonds at issue were sold after March 2012, including $3.5 billion of high yield general obligations that the island sold in 2014. Monarch, Whitebox, and GoldenTree purchased their GO bonds prior to March 2012.

Puerto Rico Continues to Owe Over $70 billion in Debt.

In the U.S. House of Representatives, lawmakers have introduced a bipartisan bill that would require advisers and others contracted to help with the debt restructuring proceedings in Puerto Rico to abide by stronger reporting requirements. The move comes in the wake of an article in The New York Times reporting that McKinsey & Company, one of the advisers to the island’s federal oversight board, had bought millions of dollars of Puerto Rico bonds at a huge discount but did not disclose the purchases.

McKinsey, claims that it has satisfied all disclosure requirements. The company contends that it was MIO Partners, its investment division, that purchased about $20 million of Puerto Rico bonds. The consulting firm maintains that MIO Partners is separate from the consulting arm and McKinsey consultants having no control over MIO Partners or involvement in any of its investments.

Under the proposed bill, called the Puerto Rico Recovery Accuracy in Disclosures Act, consultants and others hired by the fiscal oversight board must submit verified disclosures noting any connections they might have before they can receive payment for their services. These disclosure requirements already apply to other bankruptcies, but they have not been part of the island’s bankruptcy proceedings so far. Because the U.S. territory is not a municipality, it was unable to file for Chapter 9 bankruptcy protection and instead sought relief under the 2016 Puerto Rico Oversight Management and Economic Stability Act (PROMESA).

According to Bloomberg, the retirement system of Puerto Rico has joined a lawsuit against UBS Financial Services, Inc. (UBS) for poor returns that the retirement system received on $3 billion the it borrowed on UBS’s recommendation. Six beneficiaries originally brought this Puerto Rico bond fraud case in 2011 against UBS and two smaller broker-dealers.UBS was the underwriter of bonds sold by the judiciary retirement systems and employees eight years ago.  UBS also served as investment consultant, adviser, and bond fund manager. The bond proceeds were supposed to earn a positive return as compared to the interest paid on the bonds.  According to UBS, this would help Puerto Rico resolve some of its pension shortfall.  However, UBS, according to the complaint, put too much of the bond proceeds toward low-yielding accounts that made “negative income.”

Now, Puerto Rico’s pension funds are in financial trouble and could go broke as early as 2018.  System administrator Pedro R. Ortiz said that the system’s board is looking to obtain a  “significant recovery” for pensioners and participants.

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