As most investors in Puerto Rican bonds are aware, the territory is billions of dollars of debt and the ratings on many of the bonds the Commonwealth has issued have recently fallen. As a result the value of many Puerto Rican municipal bonds has plummeted over the last few months. Still, even with falling ratings and prices and a looming crisis for the Puerto Rican government, Wall Street firms continue to help the territory borrow money.
Reportedly, Puerto Rico and its public agencies have sold $61 billion of bonds in 87 deals since 2006. With these deals the island paid these US securities firms, their attorneys, and others approximately $1.4 billion. Also, the financial firms were able to charge higher underwriting fees for Puerto Rican municipalities than what they imposed on US cities and states when they were in trouble.
According to the Wall Street Journal the territory has paid approximately $764 million in fees to underwriters, credit raters, attorneys, and insurers in the last seven years while backstopping a lot of the bonds. Citigroup (C) and UBS (UBS) received over half this money for underwriting. And just this August, Morgan Stanley (MS) was a lead underwriter when Puerto Rico’s electric power authority sold $673 million in bonds.
(Underwriters are paid to sell debt to rich investors, mutual funds, or pension funds. The payment is for the risk undertaken. If an underwriter can’t sell the bonds it has to buy them. With Puerto Rico bonds, selling them wasn’t an issue for years since the demand was high and a lot of deals became oversubscribed. Part of the appeal was that these municipal bonds are triple tax exempt-investors don’t have to pay federal, city, or state taxes on interest.)
Furthermore, the territory has paid at least $690 million to the financial firms to cancel interest-rate swaps that were supposed to reduce the island’s lending costs if interest rates went up. Unfortunately, this sometimes ended up being more expensive for the government as interest rates stayed low.
Now, these firms may be in legal trouble. That’s why regulators are looking at how debt deals were put together and if investors were told about the potential risks involved. (Also under scrutiny, says the WSJ, is an invitation only gathering earlier this year involving Puerto Rican officials and approximately two dozen investment firms. Nuveen Asset Management reportedly sold Puerto Rico bonds on the day of the event. )
This is where our Puerto Rico bond fraud lawyers step in. Contact Shepherd Smith Edwards and Kantas, LTD LLP today so that we can help you explore your legal options.
Banks Rack Up Big Fees From Puerto Rico Bond Deals, Wall Street Journal, October 22, 2013
How Wall Street Has Profited From Puerto Rico’s Misery, Forbes, November 13, 2013
More Blog Posts:
Puerto Rico Municipal Bonds, Stockbroker Fraud Blog, October 9, 2013
Why did UBS Financial Advisors Recommend Puerto Rico Muni Bonds to Elderly and Retired Investors?, Stockbroker Fraud Blog, November 6, 2013
Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt, Institutional Investor Securities Blog, November 15, 2013