Former bankruptcy-specialized Puerto Rican judge Gerardo A. Carlo-Altieri said it is time for the US Congress to probe the issues of Puerto Rican debt, given the possible violations of federal law and conflicts of interest.
With the end of the automatic stay on litigations provided by PROMESA, which gives rise to multiple legal battles against the Island, Carlo-Altieri said that the Congress, which gave Puerto Rico a remedy for bankruptcy without equal on US soil and created the Fiscal Oversight Board (OB), must also inquire on Puerto Rico’s debt.
“I don’t know why it hasn’t been fully studied whether someone may be found guilty, but there are insurance companies who insured some of the law firms that issued opinions. These alleged to have based theirs on the opinion of the secretary of Justice, but these are matters that should be litigated,” said Carlo-Altieri when asked whether the judge who should preside over the renegotiation of Puerto Rico´s debt may request an audit on the debt to rule on the matter.
According to Carlo-Altieri, beyond invalidating any part of the debt, probing the matter will also serve to “clear the air” in the face of accusations of conflict of interest and inappropriate actions that involve from members of the OB to the investment banks who have structured the Island’s debt.
Section 411 of PROMESA directs the General Accounting Office (GAO) to prepare a report on Puerto Rico’s debt and send it to Congress, but it doesn’t establish any instructions to investigate the matter.
For Carlo-Altieri, who during his career presided over the United Bankruptcy Court District of Puerto Rico and was a bankruptcy panel member of the First Circuit of Appeals, there are too many questions around the reliability of the government’s figures and the manner in which the debt was issued that urge investigating the matter.
As an example, Carlo-Altieri recalled that credit rating companies issued a credit rating for Puerto Rico in 2014 to issue close to $3.5 billion without financial statements, which would be contrary to federal securities’ regulations.
Further, he said, that governments adopted the practice of issuing debt to pay for operating expenses, which would be forbidden by the Constitution.
“The mess existing in Puerto Rico with figures and numbers is impressive,” added Carlo-Altieri.
Additionally, the former judge said that the OB has given instructions for cuts to the government’s operations as well as those of the University of Puerto Rico without any audited financial statements, while “inventing” the concept of “bridge report” which uses as its basis “false” numbers from fiscal years 2012 to 2014 to justify the steps that will be taken.
Above all, Carlo Altieri said that following the approval of PROMESA, they now participate in the restructuring of the debt they helped create.
“We have professionals with conflict. Those approving the negotiations have participated in many of the issues,” said dijo Carlo-Altieri, by indicating that in the case of PROMESA they are failing to apply the regulations on conflict of interest that apply in bankruptcy procedures.
All these matters take on a particular light since midnight, when Puerto Rico lost the protection awarded by PROMESA and which for the past eight months prevented multiple bondholders from demanding their claims from the government before a judge.
El Nuevo Día reported on Sunday that in the absence of a substantive agreement between Puerto Rico and its attorneys, the financial and economic future of the Island will fall into the hands of the federal justice system. This situation will result in an avalanche of suits against the Island or the possibility that a state government may petition for a remedy akin to the bankruptcy processes that people, companies or governments appeal to when they’re unable to pay their debts. In the space of governments, notwithstanding, there applies that provided in Chapter 9 of the US Bankruptcy Code, but it only applies to municipal governments or public corporations. In this sense, the US Congress afforded Puerto Rico a unique treatment when it granted the central government the opportunity to seek a remission among constitutional bondholders.
According to the also academic Vice President of Ibero American Institute of Insolvency Law in Spain, in bankruptcy processes, experts are retained to understand the situation and make decisions on legal grounds, but immediately thereafter, he said that the multiple controversies regarding the conditions under which Puerto Rico has issued debt throughout the years makes it necessary to take regulatory and investigative actions.
He explained that one possibility could be a committee to audit the debt. Said claim by citizens, said the former judge, first arose in Brazil, where attempts were made to approve a law that ended nowhere after a decade. In Ecuador, the process forced creditors to sit at the negotiation table.
In the case of Puerto Rico, said Carlo-Altieri, the effort would have failed, because the make of the committee as created was flawed and the body “has no teeth.”
Last year, during congressional hearings, the Securities and Exchange Commission (SEC) said it was examining the matter. El Nuevo Día reported last year that the regulator was investigating debt issues by the Puerto Rico Electric Power Authority (PREPA), but the results of that investigation are unknown. Prior to that it did the same with the issue by the Pensions Systems’ Administration (ASR, by its Spanish acronym), but the regulator found no reasons to intervene, according to sources of this daily.
“The other possibility would be for the SEC to investigate, but the SEC was asleep and it remains to be seen upto what point it turned a blind eye when this was happening. What this truly deserves is a congressional probe, that investigates brokerage houses, the law firms, government officials and the companies that did the marketing of course, the accountants who issued the opinions,” said Carlo-Altieri.
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