• The Star Staff

LCDC: Independent probe not needed, insider trading allegations against its members are unfounded


By The Star Staff


The Lawful Constitutional Debt Coalition (LCDC), a group that supports the legality of early vintage general obligation (GO) bonds and Public Buildings Authority (PBA) bonds in Puerto Rico’s bankruptcy process, objected on Sunday to the appointment of an independent investigator to probe allegations of insider trading as requested by bond insurer National Public Finance.


The LCDC has been the target of allegations that its members used confidential information obtained during bankruptcy mediation to manipulate its bonds because they had purchased late vintage GO bonds (bonds issued after 2012) whose legality the LCDC had challenged in court. After initially trying to have late vintage GO bonds and PBA bonds declared illegal during the bankruptcy, the Financial Oversight and Management Board withdrew such objections.


Boiled down to its essence, the LCDC said National Public Finance is asking the people of Puerto Rico to foot the bill for National Public Finance Guarantee Corp.’s upcoming objection to confirmation of a plan of adjustment of the central government debt that it dislikes.


National Public Finance seeks to promote a theory that LCDC members violated the mediation protocol and the law by engaging in improper trading and activities that were inconsistent with their legal positions before the court.


LCDC said National Public Finance is wrongly implying that any changes to the holdings of members of the LCDC correlate with the period in which the LCDC was engaged in negotiations.


“National’s contentions are baseless,” the LCDC said.


In addition, National’s motion fails to allege a single fact showing any LCDC member breached its obligation of confidentiality in the mediation because, the LCDC said, there was no such breach by any LCDC member.


“Likewise, the Motion fails entirely to mention that the mediation was governed by the Mediation Agreement (which National executed), the terms of which address the permissibility of trading, and with which LCDC members fully complied,” the LCDC said. “As is clear from the facts, the totality of the isolated trades were by and among sophisticated institutions all signatory to the Mediation Agreement, and those trades did not violate the Mediation Agreement. Each of these institutions also signed the New PSA [plan support agreement] after the trades and support the deal opposed by National.”


No LCDC member traded in any securities that were the subject of bilateral confidential negotiations with the oversight board while participating in such negotiations from the moment discussion began on March 14, 2019 until after the public release on June 16, 2019, which led to the initial PSA released in February, the LCDC said.


Five of the seven members of the LCDC (Aristeia, Farmstead, FCO, Monarch and Taconic) did not trade in any securities that were the subject of confidential mediation while participating in such mediation, which began on Oct. 2, 2019 for some firms and ended Feb. 9, 2020, which led to the New PSA, the LCDC said, adding that the two LCDC members (GoldenTree and Whitebox) that engaged in a few isolated trades while participating in mediation did so with other signatories to the mediation agreement in a manner that complied fully with the court’s orders.


The LCDC also denied assertions that the economic interests of members of the LCDC are inconsistent with the legal positions taken by the LCDC in court.


“In fact, and as disclosed by the LCDC throughout these proceedings, the aggregate holdings of LCDC members have always been weighted towards bonds issued by PBA and guaranteed by the Commonwealth, and very heavily weighted towards Early Vintage Bonds (i.e., PBA Bonds and GO Bonds issued prior to March 2012) over Late Vintage Bonds (i.e., bonds issued in and after March 2012),” the LCDC said. “The LCDC’s Rule 2019 Statements — the public disclosures that National supposedly relies upon to support an investigation — actually show that the percentage of Early Vintage Bonds held by its members has never been below 85 percent of the group’s total holdings. In other words, the LCDC’s positions before the Court as defenders of PBA Bonds generally and Early Vintage Bonds specifically have at all times been consistent with its members’ economic interests. Put even more simply, the LCDC has advocated for respecting the PBA and the relative lawful priority of Early Vintage Bonds because it believed those positions were right on the law. And, therefore, it should come as no surprise that the compromise negotiated with the [oversight board] and holders of Late Vintage Bonds — under the auspices of the Mediation Team — is consistent with those positions and interests.”


“Since National knows it cannot credibly assert that holders of Early Vintage Bonds are not permitted to compromise with holders of Late Vintage Bonds, National resorts to false accusations in an effort to spin an unfair characterization of events,” the LCDC added.

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