Allegations of insider trading by Puerto Rico debtholders gain momentum

By The Star Staff

The Committee of Unsecured Creditors in Puerto Rico’s bankruptcy process wants the U.S. District Court to allow discovery to determine if certain bondholders used non-public information obtained during negotiations for a restructuring agreement to buy government bonds and obtain an unfair advantage.

Pending before the court is an Oct. 5 request from National Public Finance Corp., a bond insurer, to appoint an independent investigator to probe possible insider trading by Puerto Rico’s bondholders. Bondholders last week denied the claims and noted that any trading conducted during the mediation process for a commonwealth debt was done only after the release of so-called cleansing materials or information related to the bonds was made public.

The unsecured creditors, which support National’s request and have asked to be appointed to investigate, told the court that they plan to do their own probe and asked to be allowed to conduct discovery or a “Rule 2004 examination of the Bondholder Groups concerning their trading of the Debtors’ securities during the pendency of the Title III process.”

National’s request asked for the appointment of a special investigator or for the U.S. Trustee Office to do the probe.

Regardless of the disposition of the National motion, the unsecured creditors said they want to conduct the Rule 2004 discovery.

Section 301(a) of the Puerto Rico Oversight, Management and Economic Stability Act, better known as PROMESA, provides, in pertinent part, that a creditors’ committee may “investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor’s business and the desirability of the continuance of such business, and any other matter relevant to the case or the formulation of a plan.”

The allegations came out after Judge Laura Taylor Swain agreed to an unsecured creditors request to enhance financial disclosures. From June 2019 to about February of this year, when the government unveiled a new restructuring agreement for some $35 billion in debt, some 21 hedge funds that make up the four coalitions that are negotiating with the Financial Oversight and Management Board for Puerto Rico had $7.7 billion in central government bonds. That sum represents around 42 percent of the central government bonds to be restructured in the adjustment plan.

In August, several members of Congress asked the New York attorney general to investigate.

The allegations contend that at least four hedge funds, taking advantage of the drop in prices as a consequence of the COVID-19 pandemic, acquired over $443 million in central government bonds. The Lawful Constitutional Debt Coalition, one of the bonded debt groups, supported the oversight board in its challenge to the legality of central government bonds issued after 2012. However, four vulture funds from this coalition -- GoldenTree, Monarch, Taconic, and Whitebox -- bought bonds on the market whose legality they themselves were challenging in court. Thus, those investors were placed on both sides of the legal dispute.

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