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Articles Tagged with Puerto Rico

Although many of the thousands of cases investors in Puerto Rico bonds and closed-end funds have brought over the last five years have focused on UBS Financial Services Incorporated of Puerto Rico (“UBS-PR”), other brokerage firms in the Commonwealth engaged in the same wrongful sales practices. One such firm that has also been the subject of many new FINRA arbitrations and other lawsuits is Santander Securities, LLC (“Santander”), a division of Banco Santander Puerto Rico. The large number of cases against Santander are not a surprise given the public information about Santander. For example, Bloomberg reports that between the ends of 2012 and 2013, Santander marketed and sold over $280 million in Puerto Rico municipal bonds and close-end funds while reportedly selling its own holdings of these same securities.

Santander also has a regulatory history that suggests ongoing problems with the Puerto Rico operations for the bank. For example, in 2011, Santander settled allegations from FINRA of deficiencies in Santander’s structured product business, including those involving the sale of reverse-convertible securities to Puerto Rican retail customers when such investments were often unsuitable for them. FINRA also accused the brokerage firm of inadequate supervision of structured product sales. Santander agreed to pay a $2 million fine for these alleged deficiencies. More recently, in 2015, FINRA fined Santander $2 million and ordered restitution to Santander customers of an additional $4.3 million for Santander’s sales practices related to Puerto Rico bonds and closed-end funds. In particular, FINRA found that Santander’s supervisory system did not accurately reflect the risk of Puerto Rico investments in the period leading up to the collapse of the Puerto Rico market in 2013 and 2014. However, Santander was aware of the increased risk, and according to FINRA, instead of informing its clients of these increased risks, used that knowledge to sell its entire inventory of Puerto Rico investments by the end of October 2013, and thus missing much of the losses Santander’s own clients suffered.

In other Puerto Rico news, the 1st Circuit court of invalidated the PROMESA board which provides oversight for restructuring local debt. After the board placed Puerto Rico in a bankruptcy like process, many hedge funds and institutional corporate investors were unhappy as their investments were now in jeopardy. These entities filed a constitutional challenge to the way the board was appointed and eventually won on appeal. The ruling was not much of a win however, as the 1st Circuit refused to invalidate the board’s prior actions, which included placing Puerto Rico in the bankruptcy like proceedings, even though they invalidated the board itself.

U.S. District Judge Laura Taylor Swain has approved a plan to restructure nearly $18 billion of Puerto Rico’s Sales Tax Financing Corp. (COFINA) debt. Judge Swain, who is based in New York but oversees Puerto Rico’s bankruptcy-like proceedings, said the Court believes that the COFINA plan is essential to the island’s financial recovery efforts.

The approval from Judge Swain required a two-step process. First, she had to determine whether the settlement agreement between COFINA bondholders and the Commonwealth was fair and reasonable. The agreement effectively provides a 53.65%/46.35% allocation of Puerto Rico’s Sales and Use Tax (“SUT”) revenue between COFINA and the Commonwealth, respectively. Judge Swain determined that the settlement “was a fair and reasonable settlement and compromise of the Commonwealth-COFINA Dispute given the substantial risks of litigation ….”

In total, Puerto Rico owes over $70 billion to bondholders and other creditors, as well as another $50 billion in unfunded pension obligations. The territory has been attempting to restructure this $120 billion of liabilities since it filed for bankruptcy-like protection in May of 2017.

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.

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