Since last October, the Board appointed an independent committee to investigate the causes of the Puerto Rican financial collapse. (horizontal-x3)
Since last October, the Board appointed an independent committee to investigate the causes of the Puerto Rican financial collapse. (GFR Media)

The possibility for the Oversight Board to take action against firms or individuals who could have failed or not fulfilled with their duties when structuring the island´s debt arises for the first time since since the government of Puerto Rico invoked Title III a year ago.

That scenario was formally revealed yesterday when, in an attempt to stop an investigation by the Committee of Unsecured Creditors (UCC), Peter Friedman, Fiscal Agency and Financial Advisory Authority (FAFAA) lawyer, asked Judge Judith Dein to wait for the independent investigator, who examines the causes of Puerto Rico´s financial collapse, to complete the investigation and wait for the federal entity to decide if it will pursue any cause of action after the report. This, before the government has to continue sharing documents and data on the debt issuance process with creditors' committees involved in Title III cases.

Friedman, partner at O'Melveny & Myers, said this during a hearing on the UCC renewed request. The UCC seeks to separately investigate the reasons for the Puerto Rican financial collapse. The hearing was chaired by Judge Dein in Boston Federal District Court and was broadcasted via closed-circuit TV in Hato Rey Federal District Court. Dein assists federal district judge Laura Taylor Swain in Title III cases.

According to Friedman, who presented his arguments on behalf of FAFAA and the Government Development Bank (GDB), continuing to share information with creditors' committees would be equivalent to grant them "a license to spend a lot of money" and to a "highly uncertain" purpose when it would be up to the Board to determine if it should take any action concerning the process to issue the island´s debt.

During the hearing, it was further reaffirmed that, following a previous order from Dein, the GDB shared information with UCC and the Official Committee of Retired Employees (COR, Spanish acronym).

"Let´s wait for the report," said Friedman adding that, currently, the government already shares information through other requests for financial information authorized by court, so in this case, it would be an act of "waste and inefficiency".

A ten-month wait

Since last October, the Board - under PROMESA section 104 - appointed an independent committee to investigate the causes of the Puerto Rican financial collapse. This committee hired the firm Kobre & Kim to conduct the investigation.

However, two months before, the UCC had requested in court for authority to investigate the island's debt, alleging that they were seeking to discern whether the debt was issued against the law and to identify persons or entities that incurred in such practices.

In November and in light of the Board´s efforts, Judge Taylor Swain denied the UCC's request under the 2004 Bankruptcy Code. Kobre & Kim was then committed to completeits investigation in about six months.

Last April, John D. Couriel, lawyer in charge of the investigation for Kobre & Kim, said that the report would not be ready until this summer and by offering some preliminary findings, he said that "we are not interested in pointing fingers".

"We seek to find ways for Puerto Rico to return to financial markets and take constructive measures," Couriel said back then.

D. Farrington Yates, Kobre & Kim lawyer, revealed yesterday that the report would be ready by "the end of the summer".

Immediately, Luc A. Despins, UCC's lead attorney, seemed to interpret Yates's expressions as another delay in the process of investigating Puerto Rico's debt - the summer season ends by the end of September - and asked Dein to take note of it. The motion filed by Despins contemplates that the UCC investigation should begin on August 15.

Changes in position and technicalities

Yates reaffirmed that Kobre & Kim's report would be ready by the end of July and that, on or before July 3, a motion would be filed for the court to authorize all evidence gathered to be in custody in a specific place and to provide a mechanism so that interested parties can access it.

However, in what represents a change of position, in the report that Farrington presented to Dein on yesterday's hearing, the firm states that it will present "an exit plan" for the investigation and that the document will provide "a comprehensive discussion of actions and avenues for recovering" funds, if this were the case.

According to Farrington, the firm proposes to consult such exit plan, as well as the procedure it will suggest the court for the custody and access to the evidence gathered with the creditors' committees, before submitting it.

Farrington explained that, in order to disclose the report to court, the Board was evaluating two paths, since the debt´s investigation is being done according to PROMESA Title I and not in the Title III context.

If it is filed under PROMESA Title I, the Board would inform the court by filing the document before the Puerto Rican district court and the process would begin there, so that the case is transferred to Swain and Dein jurisdiction, who are the judges who address Title III cases. The other option is to file the report under Title III.

In short, Kobre & Kim is investigating the island´s debt based on the mandate established by Congress in PROMESA Title I. The investigation that UCC would conduct occurs in the Title III context, which is similar to the bankruptcy mechanism that Puerto Rico invoked.

GDB cooperatation is requested

However, according to Despins, that collaboration that Farrington and Friedman referred to has been a half-hearted dynamic.

The UCC lawyer explained that actually GDB provided UCC and COR with access to the documents of Kobre & Kim´s interest, since they started from previously defined terms for the firm´s investigation purposes, and not from full access to all the documentation related to the island´s debt issuance.

Despins described the Board´s evaluation to disclose the report through PROMESA Title I as "a procedural quagmire" and criticized the government for trying to establish a mechanism to reserve the protection of documents for themselves.

In essence, the UCC seems to be walking against the clock, since it´s been a year since the Title III cases filing and there might be another additional year to conduct the investigation and then determine if it is appropriate to pursue causes of action against third parties.

For UCC, it is urgent to conduct a investigation consistent with the mandate entrusted to them that as representative of all central government creditors.

However, Despins stressed yesterday that the government continues invoking arguments not to share information and it emerged that still, almost eight months after the Board´s investigation began, the government has not signed a confidentiality agreement to collaborate with creditors committees.

Under the circumstances, Dein instructed Friedman for the GDB not to further delay the confidentiality agreement to cooperate with creditors' committees and to establish a provision for those documents they are interested in protecting.

The judge also ordered the lawyers to meet to make sure that the exit plan presented by Kobre & Kim reflects the parties concerns and urged to honour scheduled dates. The subsequent decision on the UCC's motion to investigate the debt would be made in the context of the July Title III cases general hearing, said Dein.

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