Puerto Rico Debt Probe Will Be Broad

The Puerto Rico fiscal control board’s investigation of the territory’s debt will go far beyond the probe that that those calling for an investigation have sought — and may not dig into what they have wanted as much as they have wanted.

The Financial Oversight and Management Board made this clear this afternoon in issuing a request for proposals for an “investigation team” (instead of the “investigator” that it two weeks ago said it would hire).

Advocates of an investigation have focused on two areas of allegations:

  • 1) that the territorial government issued bonds beyond the amount authorized by the insular constitution and
  • 2) that bonds were issued without full disclosures of essential and required information, at excessive cost, and by officials too close to investment banks that sold the bonds.

This afternoon the Board explained that the investigation would “include

  • (i) a review of the factors contributing to Puerto Rico’s fiscal crisis, including changes in the economy, expansion of spending commitments and entitlement programs, changes in the federal funding it receives, and its reliance on debt to finance a structural budget deficit;
  • (ii) a review of Puerto Rico’s debt, the general use of proceeds, the relationship between the debt and Puerto Rico’s structural budget deficit, the range of its debt instruments, and how Puerto Rico’s debt practices compare to the debt practices of states and large municipal jurisdictions; and
  • (iii) a review of Puerto Rico’s debt issuance, disclosure, and selling practices, including its interpretation of Puerto Rico’s constitutional debt limit.”

As it has with contracts in the past, the Board set a one week deadline for proposals despite the extraordinary breadth of the investigation and detail it required for proposals.

In making the announcement, the Board said that Chairman Jose Carrion III would not participate in the investigation because of this family’s ties to Banco Popular, a firm that has participated in publicly questioned bond sales. Earlier it had been announced that Carrion would serve on a Special Investigation Committee that will now be comprised of Board Members Ana Matosantos, David Skeel, and Arthur Gonzalez.

It was widely believed that the committee was established because two Board Members, Carlos Garcia and Jose Gonzalez, were presidents of the Government Development Bank that issued bonds and also have worked in senior capacities for banks that have sold Puerto Rico debt.

U.S. Justice Deciding on Defending PROMESA

The U.S. Department of Justice has said that it may want to defend PROMESA against a suit by two investment fund groups, Aurelius and Lex, asserting that the law is unconstitutional because the Members of the Financial Board were not confirmed by the U.S. Senate.

The U.S. Attorney for Puerto Rico, Rosa Emelia Rodriguez, told the PROMESA Title III bankruptcy court, the territory’s Federal District Court, that the U.S. Solicitor General wants the full amount of time under the Federal Rules of Civil Procedure — October 6th — to determine whether to defend the statute.

Although the filing did not address the merits of the Appointments Clause violation claim, it stated that “PROMESA was enacted against the backdrop of the worst fiscal crisis in Puerto Rico’s history and the Oversight Board . . . is charged with enormous responsibilities to tackle Puerto Rico’s debt crisis. By seeking to have the Oversight Board declared unconstitutional, Aurelius seeks to void any action taken by the Board . . . The magnitude of the relief sought by Aurelius cannot be overstated.”

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