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US Supreme Court Strikes Down Law That Would Have Let Puerto Rico Public Utilities Restructure Their Debt

The U.S. Supreme Court struck down a Puerto Rico law that would have let its public utilities restructure $20 billion of debt. The territory’s officials enacted the Recovery Act in 2014 in an attempt to help it deal with its $70 billion of debt. Puerto Rico’s large public utilities owe about $26 billion to bondholders and banks. It was their creditors that challenged the law in federal court.

Puerto Rico is not allowed to file for bankruptcy protection. The Commonwealth is excluded from Chapter 9, which is the section of the bankruptcy code that usually applies to local governments, including cities, public utilities, counties, and other branches that have become insolvent and need help. (Puerto Rico has tried to convince the U.S. congress to get rid of the 1984 rule that excluded it from Chapter 9. No reason has been provided for why it was deliberately left out.)

Writing for the majority in the Supreme Court ruling, Justice Clarence Thomas reminded us that the federal bankruptcy code does not let lower government units and states enact their own bankruptcy laws. However, U.S. legislators are looking for ways to potentially help Puerto Rico.

A bill passed by the U.S. House of Representatives to help the territory deal with its debt crisis has gone to the Senate for consideration. If passed into law, the bill would establish a board to manage the restructuring of Puerto Rico’s debt and oversee the territory’s finances. The Commonwealth sure could use the help.

Puerto Rico recently defaulted on almost $400 million of debt that was due and another $2 billion is due on July 1. The island is facing a lot of pressure in the wake of its financial crisis, as well as pressure from creditors, including institutional investors and retail investors, to pay back the debt it owes.

It was roughly three years ago when Puerto Rico municipal bonds and closed-end bond funds dropped in value, causing many investors to sustain huge losses. Firms such as UBS Puerto Rico (UBS-PR), Banco Popular and Banco Santander (SAN) are, along with other firms, accused of persuading investors to back these Puerto Rico bonds even when the bonds or associated bond funds may not have been the right fit for customers’ portfolios, as many investors could not handle the degree of risk involved. Brokers at UBS are accused of encouraging investors to borrow money while knowing that the investments were too risky. Many investors lost everything.

Now, according to Financial Advisor, a number of Democratic senators want the U.S. Securities and Exchange Commission to look into possible misconduct involving Puerto Rico bonds. In a letter sent to the SEC by New Jersey Senator Robert Menendez, lawmakers asked the SEC to look into possible conflicts of interest, market manipulation, and fraud related to the sale, underwriting, trading, and distribution of municipal securities from Puerto Rico, as well as into other potentially fraudulent or illegal behavior that may have transpired. The senators said that the island’s residents are entitled to know whether illegal conduct played a part in the current debt problem. Other lawmaker who signed Menendez’s letter include Senators Elizabeth Warren, Bernie Sanders, Kirsten Gillibrand, Charles Schumer, Richard Blumenthal, and Jeff Merkley.

The legislators’ request comes in the wake of a report put out by a Puerto Rico Commission. Among the findings is that the island may have violated its own constitution when selling $3.5 billion of general obligation bonds more than two years ago. In May, the AFL-CIO asked the regulator to look into Puerto Rico bonds and whether Franklin Templeton Resources and OppenheimerFunds Inc. (OPY) properly valued their bond holdings even as the island’s financial problems their grew.

At Shepherd Smith Edwards and Kantas, our Puerto Rico municipal bond fraud attorneys have been working with investors to recoup their losses. Please contact our team of attorneys so that we can help you explore your legal options.

Supreme Court Strikes Down Puerto Rico Debt-Restructuring Law, The Wall Street Journal, June 13, 2016

Menendez, Senators Want SEC Investigation into Potential Illegal Activity Leading to Puerto Rico Debt Crisis, Menendez.Senate.Gov, June 14, 2016

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