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Editor's note: This is the first of several articles about the Final Investigative Report on the debt of Puerto Rico, conducted by the firm Kobre & Kim and commissioned by the Oversight Board.

 The Final Report that independent investigator Kobre & Kim submitted to the Oversight Board can serve as a platform for Puerto Rico to start recovering after its massive indebtedness but it does not offer clear solutions that allow accountability to third parties for their role in the island´s bankruptcy.

Above all, according to two experts, the fact that Judge Laura Taylor Swain  the Board - allowed the entity to investigate the island's debt, instead of accepting the request of the Committee of Unsecured Creditors (UCC) - could harm thousands of government creditors waiting to recover their money through PROMESA Title III. This is because the time that Kobre & Kim invested in the investigation commissioned by the Board acts against the UCC and the Official Committee of Retired Employees (COR) to carry out their own investigations and sue third parties, if necessary.

 "The report can be described as a commendable compilation of everything that has been said in newspapers for the last ten years," said lawyer Rolando Emmanuelli, in referring to the 608-page document that Kobre & Kim submitted to the Board last August 20.

"It can not be overlooked that the Board's investigation comes just when the UCC tries to conduct a thorough investigation," added the co-author of a book on PROMESA and who represents two unions and pensioners of the Electric Power Authority (PREPA) in Title III cases.

  "The Board received the report that it requested. It's a facelift," said bankruptcy attorney John Mudd.

 "If the Board does nothing, then the UCC will have to work quickly to file (claims) by May 2019," added Mudd, who also represents some creditors and municipalities in Title III cases.

 Last week, after receiving the report, the Board announced the creation of a special complaints committee and said that it will hold a hearing on September 18 for various parties to express their views on the document.

Judicial mistake

 Last August, the UCC filed a motion under the 2004 Bankruptcy Code to investigate the island´s debt.

The Board then alleged that it was their responsibility to investigate the island's debt, according to PROMESA. Judge Swain and Judge Judith Dein - who handles procedural disputes in Title III cases - welcomed the Board's statements. Last November, the UCC motion was denied.

 For Emmanuelli and Mudd, having dismissed the request of unsecured creditors may be a mistake of the Court, for two reasons.

 On one hand, the lawyers explained that the investigating the financial debacle of Puerto Rico is not an exclusive faculty of the Board. On the other hand, the motivations of the Board and the UCC were always different. In the case of the Board, Kobre & Kim said -before publishing the final report- that its instructions when investigating the Puerto Rican debt did not include "identifying the guilty parties".

On the other hand, the ulterior goal of a UCC investigation is to identify if any entity or individual has failed in its duty to structure the island’s debt so that they respond monetarily for their actions. In short, the more money a debtor has - the government in this case - the more for the creditors. The UCC and COR are two groups appointed by the US Trustee to renegotiate the government's obligations with bondholders, employees and government contractors in Title III processes.

 According to Mudd, section 546 of the Bankruptcy Code establishes that the debtor's trustee - in this case, the Board - has only two years from the filing of the bankruptcy application to initiate claims against third parties. In the case of the central government, that term ends at the beginning of May 2019.

Weaknesses of the report

 The short time that the Board, the UCC and COR have to take the actions they deem necessary would be intangible were it not for the fact that, in the opinion of the interviewees, the Kobre & Kim report lacked the investigative rigor required to gather evidence that allows to sue third parties for making false representations when selling a securities instrument or incurring in fraud practices, among other possible violations of the law.

 To begin with, for example, one consideration that caught Mudd´s attention - who said he had read the entire report - is that about 120 interviews conducted by Kobre & Kim were voluntary. There were no oath or transcripts for these interviews.

" In Part XVI of this Report, we present certain legal principles and concepts that, when

applied to the facts, various categories of stakeholders may find useful when seeking to make their own determinations about whether they may have a legal right to sue any entity or

individual we discuss elsewhere in this Report.2 Note, however, that this Report is not evidence;

nor should it be relied upon as such,” reads the report.

"Much of the information was obtained under confidentiality agreements," said Emmanuelli, referring to other observations about the methods used by Kobre & Kim. "When have you seen that people who may be responsible for an improper act are told that the information they provide will not be used; it's like telling the suspect of a crime to confess and assure him that information will not be shared with anyone".

For Mudd, Kobre & Kim's report establishes that Puerto Rico's debt issues were plagued with multiple failures, errors and even possible violations of the law, but "nobody did it."

However, the lawyer said he was not surprised with the conclusions, since the report was entrusted by an entity that now has those who were part the Puerto Rican indebtedness as advisors. 

 That is the case of Citigroup, an entity that, according to Bloomberg, along with other companies such as Goldman Sachs and Morgan Stanley participated in the largest amount of debt issues in Puerto Rico. Now, Citi advises the Board in debt restructuring and the privatization of PREPA.

 Likewise, Mudd said, the report pays particular attention to the issuance of 2014 General Obligations, a transaction that was sold at the time when the government - the report says - already knew it would have to renegotiate its obligations. Back then, the government hired Proskauer & Rose, the firm that now is Board‘s main external legal advisor.

Emmanuelli was surprised that Kobre & Kim almost excluded the Government Development Bank (GDB) governing board from liability even though that entity was "the epicenter" of the island's fiscal chaos. The lawyer recalled that the Board itself has two former GDB presidents among its officials.

Kobre & Kim point out that GDB officials that moved between the bank and investment banks that sold the island's debt, in essence, complied with the regulations required from the Office of Government Ethics, but they warn about the necessity of changes in ethical controls. 

In addition, the document concludes in different parts that the GDB may have breached its duty when it acquired and handled billions of dollars in swaps and did not keep records of these transactions or how they managed them. Puerto Rico went into "swaps" after Goldman Sachs lobbied for the government to acquire these complex securities instruments.

However, when Kobre & Kim explain the possible causes of legal action, it only seems to be specific with the case of Popular Securities. By 2014, they would have advised the government not to sell General Obligation bonds and then participated in the banks syndicate that sold such an instrument.

 "The report seems to point at some scapegoats such as local banks, and to ignore the responsibility of large US financial firms and credit rating firms long involved in the issue, it seems that they did nothing", emphasized Emmanueli.

The opportunity

In spite of the deficiencies, neither Emmanuelli nor Mudd dismiss the Kobre & Kim investigation.

 "The efforts that people have made regarding some events, such as a dictatorship or after experiencing colonialism, not only include imprisoning those who committed the acts, but pointing to who is to blame. Sometimes, a public punishment helps healing to begin," said Emmanuelli.

According to Emmanuelli, although the report suggests that, in many cases, events may have expired, there are still responsibilities.

Mudd agreed and noted that in the case of the issuance of General Obligations in 2014, the period of five years to file accusations has not concluded yet, but accepted that, to date, the government has not shown any signs to take action.

 Meanwhile, Emmanuelli stressed that there are crimes such as hiding or destroying information associated with government debt transactions that do not expire.

The lawyer also argued that there is no space for impunity when it comes to using public funds for a purpose other than that indicated, which, according to Kobre & Kim, happened in PREPA.

Above all, according to Emmanuelli, even if causes of action have expired, in the world of ethics, this is not necessarily the case. He could not specify if federal, securities or professional regulations have expiring terms for improper actions when dealing with financial advisors, bankers or public accountants.

"All those officials who were deceitful have an ethical responsibility and we, the lawyers, and many lawyers who participated in government's transactions, do not have an expiring date for ethics," Emmanuelli said.


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