The White House has appointed seven people to the Fiscal Control Board tasked with helping Puerto Rico deal with its $70B of debt. The appointees, named by President Obama, include: Jose Ramon Gonzalez (Federal Home Loan Bank of NY CEO/President), Arthur Gonzalez (Ex-bankruptcy Judge), Ana Matosantos (Ex-California Dept. of Finance Director), Carlos Garcia (Ex-Puerto Rico Government Development Bank president and CEO/Founder of BayBoston Managers LLC), Jose Carrion III (Puerto Rico insurance executive), Andrew Biggs (Scholar) and David Skeel (University of Pennsylvania Law Professor). Three of these board member are Democrats, four are Republicans. The eighth member of the board is Puerto Rico’s governor Alejandro Garcia Padilla. He is an automatic member because of his position but does not have a vote.
The creation of the federal control board was part of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). The legislation was passed by the U.S. Congress to help the U.S. territory with its financial woes. Puerto Rico has been defaulting on its debt payments that have been due. Just last week, the Government Development Bank of Puerto did not pay almost $10 million of interest that was due on it outstanding bonds. According to a recent report by the ReFund America Project, which has been investigating the U.S. territory’s debt, approximately $1.6 billion of the island’s debt are the fees earned by Wall Street firms, such as Citigroup (C), UBS (UBS), Barclays Capital (BARC), and Goldman Sachs (GS). Even worse, the ReFund America Project said that about $323 million of the money paid to Wall Street firms was for “scoop and toss” deals involving UBS as the main underwriter.
The report also stated that close to half of the $134 million in debt Puerto Rico and its public corporations have issued over the last 16 years is refunding debt. Puerto Rico’s financials purportedly show that the territory had been putting out new refunding bonds to pay back bonds that had been issued earlier. The use of refunding bonds to delay current debt payments for later is what is involved in “scoop and toss” financing.
The Refund America Project claims that a substantial amount of the refunding bonds were issued so interest payments on other debt could be made. Referred to as capitalizing interest, this turns older debt’s interest into principal. As a result of this type of financing, taxpayers end up paying interest on the interest. The ReFund America Project said that $1.6 billion of what Puerto Rico has remarketed or issued since its economic meltdown paid for capitalized interest.
At Shepherd Smith Edwards and Kantas, LTD LLP, our securities fraud law firm has been working with investors to recoup their losses sustained from investing in Puerto Rico closed-end funds and Puerto Rico bonds. Investors have been attracted to the island’s bonds because they are exempt from federal, state, and local taxes. Unfortunately, many investors were not told of the risks involved, causing a substantial number of them to lose everything when the Puerto Rico bond market began its drop in 2013. Many investors were encouraged by firms such as UBS Puerto Rico, Banco Popular, and Banco Santander (SAN) to put their money in these securities even though these investments were clearly unsuitable for them. Some were encouraged to borrow funds so they could invest more than what they could afford.
For a free, no obligation consultation, contact our Puerto Rico bond fraud lawyers today.