A dozen major financial firms have been sued for at least $1.42 billion because of their work on Puerto Rico municipal bonds and interest rate swaps dating back to 2007.
Puerto Rico's government and the Oversight Board initiated the suit against Barclays Capital, BMO Capital Markets, Banc of America Securities; Citibank; Goldman Sachs Bank USA; Jefferies Group; J.P. Morgan Securities; Merrill, Lynch; Morgan Stanley, RBC Capital Markets, Samuel A. Ramirez & Co., Santander Securities, and UBS Financial Services of Puerto Rico.
While the suit was first filed in May 2019 it has been paused since then as the Puerto Rico central government bankruptcy progressed. After the bankruptcy was consummated in March, the board hired Drivetrain, LLC to pursue this suit, and Drivetrain filed a second amended complaint Thursday.
The suit covers transactions as early as 2007.
"The 13 major banks named as defendants in this action inflicted a financial tragedy of epic proportion on the commonwealth of Puerto Rico and its citizens," Drivetrain said through its attorneys. "By 2008, the commonwealth was irredeemably insolvent. The defendants — who underwrote the municipal bonds issued by Puerto Rico and/or entered into interest rate swap agreements with Puerto Rico — knew it.
"Instead of helping Puerto Rico climb out of its financial hole, the defendants handed the commonwealth and its agencies bigger and bigger shovels, urging them to issue a slew of expensive bonds so that Puerto Rico could pay down existing obligations to the banks," Drivetrain continued. "These bonds were issued without statutory authority or in violation of Puerto Rico's constitutional debt limit. This 'scoop and toss' scheme plunged the commonwealth and its agencies deeper and deeper into debt, making their unavoidable default inevitably worse."
Drivetrain is seeking the return of $84.2 million in underwriting fees and $1.32 billion in swap termination fees that Puerto Rico's government gave to the firms and attorneys' fees. Any money recovered would be distributed to the government's unsecured creditors who have been harmed by the bankruptcy.
Drivetrain said from 2009 to 2014, urged on by the financial firms, Puerto Rico engaged in the "scoop and toss," issuing new debt to pay off old debt, with the new bonds holding higher interest rates and farther out maturities.
Puerto Rico's swap agreements with the financial firms were not registered with the Puerto Rico Comptroller, as Puerto Rico law requires, and because of this the swap termination fees Puerto Rico paid to the firms were illegal, Drivetrain said.
After the U.S. government created the Oversight Board in summer 2016, the board set up a Special Investigation Committee to look at the history of Puerto Rico's debt. The committee hired Kobre & Kim to create a report and the
The board created a
The plan of adjustment Judge Laura Taylor Swain approved in January provided for the creation of a trust to pursue avoidance actions and distribute any recovered assets. The board hired Drivetrain as the trustee.
All the defending firms were given a chance to comment for this story. UBS; Goldman, Sachs; JPMorgan, Barclays, Morgan Stanley, and Citi said they would not comment. The others did not respond.
Casillas, Santiago, Torres of San Juan; Selendy Gay Elsberg of New York City, and Continental of Coral Gables, Florida are the law firms representing Drivetrain. The suit is taking the form of an adversary proceeding within Puerto Rico's central government bankruptcy. Judge Swain will oversee it.
