Lawmakers Want Puerto Rico Oversight Board to Recover from Banks Fees Earned on Invalid Debt

Washington, DC- Led by Rep. Nydia M. Velázquez (D-NY), Members of Congress are calling on the Financial Oversight and Management Board of Puerto Rico to recoup fees that were paid out to banks and other advisors in connection with debt the Board previously said is invalid.

In a letter signed by seventeen Members of the U.S. House of Representatives and six U.S. Senators, the lawmakers ask whether the Board will pursue legal recourse against banks and other entities that were involved in issuing $6 billion in debt that a previous audit found to be in violation of Puerto Rico's constitution.

"It makes no sense that the original, underlying debt was incurred illegitimately and has to be voided, but the fees collected in issuing that debt are presumably still going to line bankers' pockets," said Velázquez who spearheaded the letter. "This is especially alarming when the Island's residents are in such need. We're not talking about an insignificant amount of money. These are resources that could fund Puerto Rico's Nutrition Assistance Program for six months, or shore up pension funds, keep schools open or ensure hospitals stay operational. The Board needs to act to recoup these funds immediately."

"For too long, Wall Street has profited off of the people of Puerto Rico," said Senator Warren (D-MA). "The FOMB has the power to investigate the fees that big banks earned by underwriting $6 billion in Puerto Rico's debt—and it should take action."

"As Puerto Rico strives to recover from its debt crisis as well as the devastating hurricanes, every dollar that it can access to foster economic growth and stability is critically important," said Senate Democratic Leader Schumer. "The Oversight Board should therefore investigate and work to correct any circumstance in which funds that should rightfully be returned to the Commonwealth are instead diverted to bondholders and their representatives."

"The people of Puerto Rico deserve to be made whole," said Congresswoman Yvette Clarke (D-NY). "Our letter calls for answers on why legal action has yet to be pursued against the financial institutions that participated in problematic bond issuances. FOMB has a duty to investigate and stand up for all Puerto Ricans- they are Americans too."

"The cancellation of $6 billion in debt as unconstitutional was an important first step in bringing accountability for Puerto Rico's fiscal crisis. However, we also need to make sure the banks and advisors that counseled the government of Puerto Rico are held accountable for aiding and abetting the creation of this debt. The Financial Oversight and Management Board of Puerto Rico has a duty to investigate and take appropriate legal action against these entities to make Puerto Rico whole again and recover any fees accrued in obtaining ‘expert' advice. We urge the Board to take action on this matter immediately, which could help Puerto Rico in its path to recovery," said Congressman Serrano (D-NY).

"Hurricane Maria decimated the island of Puerto Rico, killed thousands of American citizens and devastated communities," said Rep. Adriano Espaillat (D-NY). "Residents have suffered for more than 18 months, and it is up to each of us – regardless of political party or ideology – to help our fellow citizens who need our help the most. The FOMB has a duty to pursue legal claims against banks, advisors or any other parties to recover fees associated with Puerto Rico's debt, and we must do all that we can, collectively, to ensure Puerto Rico recovers and residents and families can get their lives back on track."

The letter was applauded by a number of labor, advocacy groups and others.

"Our VAMOS4PR members applaud the push from Rep. Velazquez and fellow Congressmembers to Puerto Rico's Financial Oversight Board to fulfill a key duty that only the Board can exercise, using the courts to get back money that banks took through fees on illegal debt and that rightfully belongs to Puerto Rico's people," said Héctor Figueroa, President of 32BJ Service Employees International Union. "As the island's people continue to suffer under severe economic stress, and time grows short to resolve Puerto Rico's public debt, we encourage Congress to continue to more forcefully take up the powers granted by the PROMESA law to scrutinize and oversee the work of the Board."

"Over the past few years, we have stressed the urgency of an audit to the Puerto Rican debt before any payment to bondholders. In January, the Financial Management and Oversight Board (FOMB) finally heard our concerns and asked Judge Swain to declare 6 billion dollars of the debt illegal. However, the FOMB still needs to make sure the banks that created, financed and are now profiting from the illegal debt are not let off the hook. While Trump is planning to pull funds from an island still in recovery, Rep. Velazquez is ushering Congress in the right direction by cracking down on those who have intentionally hurt our community and demanding that the FOMB do their job. We applaud her leadership and hope to work together making sure no one profits from illegal debt that could be going to the rebuilding of Puerto Rico" stated Julio Varona López, Co-director of Community Dignity Campaigns at the Center For Popular Democracy, VAMOS4PR steering committee member and coordinator at Hedge Clippers.

A .pdf of the letter is online here and the full text of the letter is below.

April 1, 2019

Mr. Jose B. Carrion III
Chairman
Financial Oversight and Management Board of Puerto Rico
PO Box 192018
San Juan, PR 00919-218

Dear Chairman Carrion and Members of the Financial Oversight and Management Board,

We write to inquire about the plans of the Financial Oversight and Management Board (FOMB) to pursue any legal claims against banks, advisors or any other parties to recover fees associated with $6 billion debt issued since 2012. While the FOMB and the Unsecured Creditors Committee (UCC) have filed in federal court that three bond issuances totaling $6 billion should be nullified for being in violation of Puerto Rico's constitutional debt limit , we would like to know if the FOMB will pursue further legal action to recoup associated fees.

As reported, the three unconstitutional bond issuances earned multiple financial institutions hundreds of millions of fees in the process, some even managing to "double-dip on these deals." According to a recent report by the Public Accountability Initiative, underwriting fees and swap termination fees paid out for the three offerings totaled $293,863,051. While the initial step to invalidate a portion of the debt is a positive one, without any legal action against the banks and advisors that counseled the Puerto Rico government to create and market the underlying bonds, we feel Puerto Rico will not be made whole.

Pursuant to PROMESA, Congress made the FOMB the trustee of the Government of Puerto Rico and gave the FOMB, the power to pursue avoidance actions and to bring money back to the Government of Puerto Rico. The FOMB has an affirmative duty to investigate the acts of the debtor and file a statement of any investigation including any fact discovered pertaining to dishonesty, incompetence, misconduct, and mismanagement of the debtor.

Furthermore, Congress gave the FOMB special powers to initiate claims that could return fraudulently transferred assets to Puerto Rico's coffers including taking any action necessary on behalf of the debtor to prosecute the case of the debtor. Considering no other entity may currently initiate such claims, the duty of the FOMB to do so is paramount. As you know, the two-year statute of limitations to pursue recoupment of these fees is quickly closing since the FOMB filed Title III Bankruptcy Protection petition on May 5, 2017. It is imperative to take adequate measures to resolve Puerto Rico's Debt, so the island will once again be able to experience economic and social prosperity after this difficult process is resolved.

Due to the time sensitivity of this matter and the fast-approaching deadline of May 2, 2019, we would greatly appreciate a response to these inquires by April 11th. Thank you.

Sincerely,

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