Allegations that various hedge funds may have used confidential information from the local debt restructuring to gain financial gain could trigger a federal investigation that threatens to halt all bankruptcy-related proceedings.
The matter has already been raised with the United States Securities and Exchange Commission (SEC), where a letter from Resident Commissioner Jenniffer González arrived on Wednesday, in which she demanded that a “thorough investigation be initiated. “To” ensure integrity and public confidence in a final restructuring agreement. “
The matter has been brought before federal judge Laura Taylor Swain and the Fiscal Control Board, but had not been brought before the securities market regulator.
In early October, the bond insurer National Public Finance Guarantee filed a motion with Judge Swain, who is handling the bankruptcy of the government of Puerto Rico, to demand an independent investigation into the bond purchase and sale transactions that occurred while creditors negotiated with the Fiscal Control Board.
According to the document, National seeks to determine whether the transactions executed by the firms Aristeia Capital LLC, Whitebox Advisors LLC, Taconic Capital Advisors and Golden Tree Asses Management – represented by the Legitimate Constitutional Debt Coalition (CDCL) – are legal after have been concluded while they were holding confidential negotiations.
Both the regulator and the four hedge funds opposed the insurer’s petition, which alleges that from January 2019 to June 2020 these funds went from having $ 5 billion in bonds to $ 7.7 billion.
“Such conduct would have materially undermined and negatively impacted the negotiation to reach a restructuring agreement … Any irregularity of this type would cloud the resulting restructuring and affect the ability of the Commonwealth to re-enter the capital markets,” said the insurer.
Investigation is urgent
Given the seriousness of the matter, the resident commissioner went to the SEC to request the “exhaustive investigation” in the place where there are personnel with the expertise to analyze the transactions.
“If true, these allegations raise serious doubts about the legality, not only of the current mediation process, but also of the restructuring agreements already approved, in whose mediation process the same parties will participate,” González said in the letter to the what THE SPOKESMAN had access.
The official also stated that the agreement reached through confidential mediation increased the offer for the challenged bonds from 35 to 45 cents to between 65 and 75 cents. “Investment patterns and price developments raise doubts about the legality of the behavior of hedge funds, which warrants an investigation,” added González.
Price evolution raises doubts
National stated that in the initial restructuring agreement (PSA) – signed in June 2019 – a minimum recovery amount had been granted to the General Obligation (OG) bonds issued between 2012 and 2014 – also known as Late Vintage – because they were produced after reaching the constitutional debt limit.
Six months later, in February 2020, a new agreement with creditors envisioned a recovery of almost double. The insurer denounced that while the negotiations were underway, various hedge funds – which initially questioned the validity of the Late Vintage – exchanged large amounts of these bonds.
This is also supported by a report from the Public Accountability Initiative (PAI), where it is established that at least four hedge funds – those represented by the CDCL – bought bonds that they themselves claimed were worthless during the period. confidential mediation process.
They participated in Cofina
On the other hand, the four firms that comprise the CDCL – accused of having engaged in illegal practices to advance their economic interests – also participated in the restructuring of the debt of the Corporation of the Compelling Interest Fund (Cofina).
In August of last year, THE SPOKESMAN had reported that almost $ 25,000 million of Cofina’s current debt was in the hands of Puerto Rican bondholders, a figure that has been reduced to $ 7,000 million after the discount sale of its bonds.
“The discount bonds fell into the hands of speculative bondholders who were placed in a good position to be able to take control of the negotiations and a restructuring where they make good money and Puerto Ricans lose it,” commented a source close to the restructuring process of the Island debt.
“Now they are trying to manipulate OG’s debt. They have been involved in all the restructurings. Since 2015 they have gotten into all the debts of the Country. They were part of Cofina and these are very alarming allegations. As they have been there and had senior and junior bonds, they have to investigate that as well, “he added.
Aristeia Capital LLC, Whitebox Advisors LLC, Taconic Capital Advisors and Golden Tree Asses Management have been represented in all negotiations by the New York law firm Quinn Emanuel Urquhart & Sullivan. “The lawyers are the ones in the negotiations and if they have confidential information it is because they are passing it on. His lawyers are helping ‘inside trading’. They are part of the scheme ”, the source pointed out.
Management of congressmen
For his part, the Democratic congressman and chairman of the Federal House Committee on Natural Resources, Raúl Grijalva, recently sent a letter to the executive director of the fiscal board, Natalie Jaresko, requesting a “thorough investigation” into the allegations.
“There is a lot at stake. A final restructuring agreement could bind all of Puerto Rico’s creditors and residents for decades. We urge you to support a thorough and independent investigation into possible wrongdoing by the hedge funds, ”said Grijalva.
He added in the letter – signed by Congressmen José Serrano, Nydia Velázquez, Alexandria Ocasio-Cortez, Darren Soto, Adriano Espaillat and Jesús García – that the restructuring negotiations should not continue without an investigation.
“(Hedge funds) are trying to argue that speedy execution of a restructuring agreement is best for Puerto Rico. However, a restructuring agreement contaminated by the suspicion of illicit activity and unjust enrichment should not be an acceptable path ”, stated Grijalva.
This is not the first time the alleged ‘inside trading’ has been reported. Last August, the same group of congressmen asked New York Attorney General Letitia James to launch an in-depth investigation of hedge funds for the same allegations. The request was made to the New York Department of Justice because the bonds at stake are governed by the laws of New York and the purchase of these occurs in the stock market of this state.
THE SPOKESMAN he requested a reaction to the fiscal board on the letter sent to Jaresko and the entity replied that “we received it and we will be answering it.”
At the close of this edition, the reaction of the aforementioned bondholders could not be obtained.