New York Lawmakers Seek Probe Of Puerto Rico Bondholders-- 3rd Update
August 05 2020 - 2:23PM
Dow Jones News
By Natalie Andrews and Andrew Scurria
Five New York-based members of Congress are asking their state's
attorney general to probe whether investment firms that own
billions of dollars in Puerto Rico bonds concealed aspects of their
investments to manipulate prices and profit unfairly.
In a letter sent Wednesday, the Democratic lawmakers, led by
Reps. Alexandria Ocasio-Cortez and Nydia Velázquez, asked New York
Attorney General Letitia James to investigate allegations of
insider trading utilizing the Martin Act, a broad antifraud statute
commonly used to pursue financial crime, or other similar laws.
"Although hedge funds have secured generous settlements and made
billions off this crisis, it now appears that their greed may have
driven some New York financial institutions to take illegal
actions," said Ms. Ocasio-Cortez, a critic of the management of
Puerto Rico's debt crisis.
Ms. James' office didn't immediately respond to a request for
comment on the letter.
The letter concerns allegations that a bondholder committee took
public positions that drove down the price of certain debt
securities while its members bought them at discounted prices and
negotiated a restructuring proposal that improved how they would be
repaid.
The lawmakers said those bond trades may have been made without
proper disclosure of the "true economic interests" of bondholders,
including Aristeia Capital LLC and Taconic Capital Advisors LP.
Puerto Rico's financial oversight board, which is steering the
bankruptcy and leading negotiations, declined to comment.
A spokesman for the bondholder committee said its members
"adhered to and respected all elements of the mediation protocol
and trading restrictions during the period in which they were
negotiating."
"As creditors with long-term investments in Puerto Rico, our
members have consistently engaged in a constructive, transparent
manner with the oversight board to facilitate the Commonwealth's
timely emergence from bankruptcy and economic recovery," the
spokesman said.
The New York attorney general recently attempted to use the
Martin Act in a case against Exxon Mobil Corp., alleging that the
oil giant misled investors about how it accounts for the impact of
climate change on its operations by using internal estimates that
differed from its public statements.
New York State Supreme Court Justice Barry Ostrager ruled in
December last year that the attorney general's office didn't prove
that the company had violated the law. Lawyers for Exxon said the
company had done nothing wrong.
Wednesday's letter said the Martin Act could be used to
investigate possible wrongdoing by Puerto Rico bondholders "and
ensure the integrity of the municipal bond markets."
Puerto Rico entered bankruptcy in 2017 under the weight of
crushing government debts, spiraling pension obligations and a
poverty rate over 40%. While the bankruptcy has crushed the value
of many of the U.S. territory's bond debts, some savvy investors
have profited handsomely, buying bonds on the cheap that have
rallied on expectations about how much they will recover.
Since the bankruptcy, some investors have argued that older
government bonds should be treated more favorably in a
restructuring, saying that more recent debt issuances breached debt
limits in Puerto Rico's constitution and should be reduced or
disallowed.
Bondholders generally have to disclose the size of their
investments in court filings, but weren't always required to break
down which securities they owned. That changed in May, when the
federal judge overseeing the bankruptcy case ordered the submission
of more detailed disclosures.
Some bondholders later revealed they owned bonds they had said
publicly "were of no value" while "engaging in confidential
mediation talks about their restructuring," according to the New
York lawmakers. A restructuring proposal released after those
restructuring talks included higher recoveries for some of the
older, disputed bonds compared to earlier discussions, rallying
prices.
The lawmakers' letter called for an investigation "to reveal
whether some hedge funds may have made these trades with non-public
information obtained through the mediation discussions."
Other large creditors in Puerto Rico's bankruptcy have hinted at
similar concerns about bondholder disclosures. In March, financial
guarantors with billions of dollars on the line asked for greater
transparency and raised concerns about bond trading based on
"non-public information." They later amended their court filings to
remove those allegations.
Write to Natalie Andrews at Natalie.Andrews@wsj.com and Andrew
Scurria at Andrew.Scurria@wsj.com
(END) Dow Jones Newswires
August 05, 2020 14:08 ET (18:08 GMT)
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