Articles Posted in Puerto Rico Bond Funds

In the wake of Puerto Rico’s bankruptcy filing, hedge funds are competing with the U.S. territory’s workers to get paid. The island has guaranteed retirees and workers $49 Billion in benefits. However, the federally appointed oversight board expects that it will have to cut pension costs by 10%.

Even worse for bondholders, they could get less than 25% of what bondholders are owed. This is true even for bondholders with General Obligation debt, which was supposed to have been constitutionally guaranteed. Creditors that own COFINAs, Puerto Rico sales tax bonds, are being offered up to 58 cents on the dollar should the territory’s finances get better. Both sides will appear in federal court in San Juan Puerto Rico in an attempt to try to work out a deal.

It was just recently that Puerto Rico’s oversight board submitted for Title III bankruptcy protection to help lower Puerto Rico’s $74 Billion of debt and deal with the Commonwealth’s pension crisis. Under Title III, the island can make pension recipients accept reduced benefits.

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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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A Financial Industry Regulatory Authority (FINRA) panel said that Stifel, Nicolaus & Co. (“Stifel”) must pay June and Perry Burns over $100K for losses they sustained from Puerto Rico bonds and oil and gas investments. The Burns are in their eighties and they invested a “substantial” amount of their life savings with Stifel.

In their Puerto Rico bond fraud arbitration claim, the couple accused Stifel of negligence, unauthorized trading, and unsuitable investments, among other violations. For that portion of their case, the FINRA panel awarded the Burns $79,709, which was everything they lost, and also fees and interest. Despite the ruling, Stifel, in its own filings, continues to deny the couple’s allegations. The broker-dealer tried to have the case thrown out and removed from its FINRA records.

Senior Investors Sustained Losses From Investing in Puerto Rico Bonds
Unfortunately, the Burns are not the only senior investors whose retirement savings were seriously harmed because brokerage firms and their brokers recommended that retirees invest in Puerto Rico bonds and Puerto Rico bond funds even though these securities were too risky for their portfolios and/or not aligned with their investment objectives. For the past few years, our senior financial fraud lawyers at Shepherd Smith Edwards and Kantas have been working with older investors in the US mainland and the island of Puerto Rico to help them get their lost investments back. Aside from Stifel, other brokerage firms are accused of inappropriately recommending Puerto Rico bonds and close-end bond funds to investors, including UBS Puerto Rico (UBS-PR), Santander Securities (SAN), Banco Popular, Merrill Lynch, Morgan Stanley (MS) and others.

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FINRA Bars Registered Rep For $15M In Unauthorized Trades
The Financial Industry Regulatory Authority has barred Craig David Dima, a former registered representative with KC Ward Financial, for making about $15M in unsuitable and unauthorized trades in the account of a 73-year-old retiree. According to the self-regulatory organization, there were 11 times when Dima sold nearly all of the customer’s stock in Colgate-Palmolive that she’d accrued from working with the company for nearly thirty years and he did that without permission.

After the elderly client told Dima not to sell the stock, he proceeded to sell them anyways. When the customer confronted Dima, he purportedly misrepresented that a computer or technical mistake had caused the sale. Meantime, the client was “deprived” of the “substantial dividends” from the Colgate shares she used to own. Dima charged the customer over $375K in fees, mark-downs, and mark-ups.

By settling, Dima is not denying or admitting to FINRA’s charges.

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A federal judge has ruled that general obligation bondholders in Puerto Rico may go ahead with a securities fraud lawsuit arguing that the U.S. territory’s government has to pay them what they are owed even as it pays off other bondholders and workers and restructures its nearly $70 billion of debt. U.S. District Court Judge Francisco Besosa said the bondholders’ case could proceed despite a new law that has placed a stay on the majority of creditors’ legal actions brought against Puerto Rico.

Owners of general obligation bonds which includes individuals and hedge funds such as Monarch and Aurelius, are arguing that Puerto Rico general obligation bonds are supposed to be constitutionally guaranteed, therefore other Puerto Rico obligations cannot be paid before general obligation bondholders. Judge Besosa said that because the general obligation bondholders’ debt lawsuit does not seek to get any kind of payment from the territory or confiscate commonwealth property, the case should be exempted from the stay.

Following Judge Besosa’s ruling, creditors of COFINA bonds, Puerto Rico’s sales tax authority, are now asking a federal court to keep the island’s government from being told to redirect bond payments to the general bond holders. The COFINA plaintiff group, which includes funds holding more than $2 billion in debt and also hedge funds such as Canyon Capital and Goldentree, contend that the general obligation bondholders’ claims are “self-serving” and without merit.

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Shepherd Smith Edwards and Kantas, LLP (“SSEK”) is pleased to announce that a Financial Industry Regulatory Authority (“FINRA”) arbitration panel has awarded an SSEK client a net of almost $9 million for his losses in Puerto Rico bonds and Puerto Rico Bond Funds. SSEK client, Dr. Luiz Romero Lopez, won his securities arbitration claim against UBS Puerto Rico with the FINRA panel awarding him a net of almost $8 million in compensatory damages and an additional $1 million in punitive damages.

According to the FINRA arbitration panel, UBS exhibited “extreme recklessness and indifference” to the consequences of abuses in its “non-purpose” loan program in Puerto Rico. The panel accused UBS of either purposely using a “non-purpose” loan to be “recycled” in a manner that violates Regulation U or doing so with “reckless” indifference to the consequences that could arise from such abusive loans.

The FINRA arbitration panel found that the loan created “additional excessive leverage.” Because of this, when the market dropped in 2013, the Claimant lost more money than if his funds had been more suitably invested with “less leverage.”

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