Articles Posted in Municipal Bonds

Barclays (BARC) and Morgan Stanley (MS) were underwriters when the island sold $3.5 billion of bonds in 2014. According to Bloomberg, brokerage firm records submitted to the Financial Industry Regulatory Authority (“FINRA”) indicate that the U.S. Securities & Exchange Commission’s (“SEC”) staff is recommending that the SEC file an enforcement case against Barclays bankers James Henn and Luis Alfaro. The two men are under investigation for allegedly violating fair dealing in selling Puerto Rico bonds. They are also under investigation for alleged violations of securities rules and municipal bond rules as they pertain to misrepresentation, deception and fraud related to the securities.

Additionally, Bloomberg reports the SEC’s staff wants to issue a sanction against Morgan Stanley Managing Director Charles Visconsi and his ex-colleague Jorge Irizarry over disclosures that Puerto Rico made in documents that were sent to investors. The staff is interested in whether the broker-dealer adequately examined representations that were made by the island’s government. Visconsi and Irizarry reportedly have not been accused of any intentional misconduct.

In other Puerto Rico bond fraud news, the Puerto Rico Electric Power Authority (“PREPA”) has joined the island in filing bankruptcy protection. PREPA is currently overburdened with $9 billion of debt.

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A Financial Industry Regulatory Authority (“FINRA”) arbitration panel has awarded two investors $793,000 in their Puerto Rico municipal bond fraud case against UBS Financial Services (UBS) and UBS Financial Services of Puerto Rico (UBS-PR). The claimants, Madeleine Carrero (as an in individual and as the trustee of Ulises Barros Carrero and Fideicomiso Ulises Barros), accused UBS of negligence, misrepresentation, breach of fiduciary duty, unauthorized trading, unsuitability, and breach of contract.

This is the latest ruling in which UBS and its Puerto Rico-based brokerage firm have been ordered to pay investors for the losses they suffered from investing in Puerto Rico bonds and closed-end bonds.

On the island and the U.S. mainland, our Puerto Rico UBS bond attorneys are continuing to work with investors seeking to recover their losses from investing in Puerto Rico securities. Many investors lost everything, with some even borrowing funds at the inappropriate recommendation of their advisor so that they could invest even more in the island’s bonds.

If you think that you may have grounds for a Puerto Rico bond fraud claim against UBS Puerto Rico, Santander Securities (SAN), Banco Popular or another brokerage firm, it’s not too late to file your claim. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

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According to Bloomberg, trading in Puerto Rico securities has gone up even after the U.S. territory filed for Title III bankruptcy protection last month. Over the last 50 days, $267.4 million of Commonwealth debt was the daily average that traded, which is more than the $195.9 million daily average from the last 200 days. Analyzing the increase, Matt Fabian of Municipal Market Analytics speculated to Bloomberg that investors who purchased the bonds might have assumed that the federally appointed financial control board tasked with fixing the island’s financial problems would succeed.

Puerto Rico owes more than $70 billion of bond debt and, additionally, has over $40 billion in unfunded pension liabilities. After talks with creditors went nowhere, Puerto Rico sought bankruptcy protection. Now, creditors will have to go to court to try to get back their losses.

However, those legal cases are being led by institutional investors, such as hedge funds and mutual funds. Nevertheless, retail investors and others continue to try to get back their investment losses starting from when Puerto Rico bonds and closed-end bond funds began plummeting almost four years ago. What seemed like a good investment—tax-exempt and allegedly low-risk—ended up proving catastrophic for many who were told, falsely, that investments were safe and appropriate for their portfolios. Hundreds were encouraged by brokers to borrow so they could invest even more money in these securities.

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In Manhattan federal court, U.S. District Judge Laura Taylor Swain has blocked a $16.3 million interest payment that is due to COFINA bondholders on June 1 (COFINA bonds are those issued by the Puerto Rico local taxing authority and that are supposed to be supported by Puerto Rico sales taxes). Judge Swain said that future payments also have been suspended until a number of disagreements over who should receive the funds are settled. This marks the first time a payment on COFINA bonds will not be made.

Judge Swain is tasked with presiding over Puerto Rico’s Title III bankruptcy case, which is meant to restructure the over $70 billion of debt that the U.S. territory owes. In addition to this latest halt, Swain has decided to wait to resolve two other disputes, including whether COFINA is in default on the $17 billion of debt that is its responsibility and if general obligation bondholders are entitled to receive sales-tax receipts that are backing COFINAs as payment.

Although general obligation bondholders and COFINA holders have been in disagreement over bond payments for some time, fighting also has now erupted among senior COFINA holders and junior COFINA holders regarding how interest should be distributed, with the senior contingency claiming that they should receive full payment before the junior COFINA holders receive anything. Junior COFINA holders want $5 million of the interest on subordinated bonds. They also want their claim on COFINA funds preserved.

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Although many of the thousands of cases investors in Puerto Rico bonds and closed-end funds have brought over the last three 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 FINRA arbitrations and other lawsuits is Santander Securities, LLC (“Santander”), a division of Banco Santander Puerto Rico.

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 getting rid of its own holdings of these same securities. In 2015, 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 customers over $7 million for their losses from reverse convertible securities.

In other Puerto Rico news, the office of the U.S. Trustee announced that it will appoint a committee of retired persons to negotiate for pensioners in the wake of the Commonwealth’s recent bankruptcy filing. The island is carrying about $50 Billion in unfunded pension liabilities, in addition to the more than $70 Billion in bond debt it still owes. At the first bankruptcy hearing for Puerto Rico, the island’s main creditors expressed interest in continuing mediation talks to figure out how to deal with these debts. Among those seeking repayment of the debts owed to them are general obligation bondholders and Cofina bondholders.

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Puerto Rico, a U.S. territory, is now under bankruptcy protection. Since the island is not a municipality, it could not file for Chapter 9 bankruptcy protection as did the city of Detroit. It is, however, availing itself of a Title III process that resembles Chapter 9 bankruptcy.

The process will allow Puerto Rico to use the court to restructure part of the more than $70 Billion in debt the island owes. According to The Wall Street Journal (WSJ), mutual funds hold about $10 Billion of the territory’s outstanding bonds.

Title III, under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), includes bankruptcy provisions that will be applied for the first time ever and it deals with insolvent territorial governments. Puerto Governor Ricardo Rosselló sent his petition for Title III protection today and the federal board tasked with overseeing the island’s finances approved his request soon after. Now, Supreme Court Chief Justice John G. Roberts Jr. will have to appoint a bankruptcy judge to Puerto Rico’s case.

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Hours after a May 1 deadline passed, unfreezing any creditor litigation against Puerto Rico, a number of creditors sued the U.S. territory over its outstanding bonds. Plaintiffs of these Puerto Rico bond lawsuits include general obligation bondholders, COFINA bondholders, and bond insurer Ambac.

The May 1 deadline was supposed to have given the island and its federal financial oversight board time to come up with a debt-reduction agreement with creditors as Puerto Rico owes more than $70 Billion of debt. No deals were made by the deadline.

Following the failure of the island to reach any debt reduction deals, Fitch Ratings downgraded $3.5 Billion of PRASA-issued debt from a “CC” rating to a “C.” PRASA is Puerto Rico’s water authority.

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Hedge fund Whitebox Advisors has filed a lawsuit against Bank of New York Mellon (BNY Mellon) over revenues from Puerto Rico’s sales tax bonds, which are commonly called COFINAs, that support $17 Billion of the island’s debt. Currently, the US territory is continuing to struggle to pay back the $70 Billion of debt it owes to creditors and BNY Mellon is a trustee for the island. (A number of hedge funds aside from the plaintiff, hold about $2.5 Billion in senior COFINA bonds, but they are not part of this case.)

In its lawsuit, brought in state court in New York, Whitebox Advisors accused BNY Mellon of breaching its duties to senior COFINA bondholders by continuing to make payments to junior creditors even after the US territory indicated that it wants to make concessions related to different kinds of debts. The hedge fund wants a court order stopping further payments to junior creditors, as well as a statement declaring that BNY Mellon has a conflict of interest. The plaintiff is also seeking monetary damages.

This week, the island is set to begin confidential talks with COFINA creditors as well as holders of competing general obligation debt. Creditors have until May 1 to arrive at mutually agreed upon settlements. The deadline was put into place, temporarily halting creditor lawsuits, to give the federally appointed oversight board a chance to work out a debt restructuring deal outside of court. At this moment, an extension to the freeze is unlikely.  After that, the board is allowed to try to place Puerto Rico into quasi-bankruptcy proceedings.

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A new restructuring agreement has been reached between the Power Utility Company of Puerto Rico, referred to locally as PREPA, and its creditors on how to restructure $8.9 billion in Puerto Rico debt.The deal, which must still be approved by the federally appointed oversight board, comes before the May 1 deadline that the US territory must meet to arrive at such settlements with creditors. After May 1, members of the US-government appointed federal oversight board would have the authority to effect a quasi-bankruptcy process and make creditors agree to deals that likely would not favor creditors.

Of the about $70 billion of municipal debt that Puerto Rico owes, roughly $9 billion involves PREPA. Puerto Rico Governor Ricardo Rossello issued a statement noting that if approved, the agreement between PREPA and bondholders could save $2.2 billion in debt servicing expenses for five years while lowering customer electric bills by $90/year during the same period.

Under the original agreement, PREPA bondholders were to trade their bonds for new securities while receiving a 15% discount. With this new agreement, creditors would take the same reduction but maturities would be extended to 2047. Additionally, under the new deals, the requirement of an investment grade rating to close the deal would be eliminated. Insurers, such as Assured Guaranty and MBIA Inc., also consented to another $300 million in deferral of principal during the first six years.

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Once again, a Financial Industry Regulatory Authority (FINRA) panel has ordered UBS Financial Services (UBS) to pay a large arbitration award to an investor. Dr. Luis E. Cummings claimed losses related to his investing in Puerto Rico bonds and Puerto Rico closed-end funds. Cummings also said sustained losses from loans made against these securities.

In his Puerto Rico bond fraud case, Cummings accused UBS of negligence, recklessness, deceit, fraud, and fault. Meantime, the brokerage firm is once again claiming that this is yet another investor who was experienced enough to make a “fully informed decision” about whether to leverage investments and invest a healthy portion of his portfolio in Puerto Rico closed-end funds and bonds.

But as Shepherd Smith Edwards & Kantas Partner Sam Edwards said when commenting on a previous case in which UBS also was ordered to pay an investor over their similar losses, “even customers who are business savvy can be abused.” The FINRA Panel ultimately awarded Dr. Cummings more than $5 million in compensation as well as forgiveness of a similar amount of debt.

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