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  • The San Juan Daily Star

Monoline insurers sue 9 banks in PR high court for inciting debt crisis

By The Star Staff

Monolines MBIA Insurance Corp. and National Public Finance Guarantee have filed a petition before the commonwealth Supreme Court against nine banks that, they say, catalyzed Puerto Rico’s financial crisis by urging the island government and its agencies to issue debt that was unsustainable.

The monolines want to overturn an Appeals Court ruling that dismissed the suit filed against UBS Financial Services, UBS Securities LLC, Citigroup Global Markets, Goldman Sachs & Co., Morgan Stanley & Co., Merrill Lynch, Pierce Fenner & Smith, RBC Capital Markets and Santander Securities. The Superior Court had allowed the case to move forward.

From 2001 through 2007, the monolines insured some $11.5 billion in payments for 16 bond issuances underwritten, issued and sold through the banks, the suit says. In August 2018, the Financial Oversight and Management Board for Puerto Rico published a report that revealed for the first time that the banks did not carry out the promised due diligence to which they were obligated. “In fact, the Special Investigative Report concluded that the Banks did not even conduct basic due diligence, and certainly did not examine vital metrics for public financing such as debt service coverage ratios, net income, or the use of proceeds that generated issuances,” the insurers said.

The “Banks induced National to insure those bonds — a critical stamp of approval that enabled the Banks to market the debt to the public — by submitting Official Statements for each bond offering, promising to conduct a reasonable investigation of the information contained in those Official Statements and voluntarily obligating themselves to National to do so,” they said.

When the issuers defaulted on the bonds, Puerto Rico was plunged into bankruptcy, from which it is still fighting to recover, the monolines said.

“We all know that as a result, the Government of Puerto Rico has had to make drastic cuts to essential public services that have affected hospitals, schools, retirement pensions, the judicial system, and basic infrastructure like electricity and transportation, among many other aspects that impacted the community at large,” they said.

National has been left to compensate bondholders, paying more than $720 million to date, while the underwriter banks reaped hundreds of millions of dollars by selling the bonds, the insurers said.

The monolines said the Court of Appeals’ decision is contrary to law, there is a conflict between lower court decisions regarding the issues in the case, National’s complaint presents a novel question of law and the issues in the case require more consideration than they received in the appellate court.

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