National, MBIA Insurance sue Wall Street banks for role in P.R.’s fiscal crisis
National Public Finance Guarantee Corporation and MBIA Insurance Corporation filed suit in the San Juan Superior Court against eight Wall Street banks to hold them accountable for “inequitable conduct in Puerto Rico’s municipal bond market that contributed to Puerto Rico’s economic collapse.”
Plaintiffs are bond insurers that have been presented with more than $1 billion in claims after the municipal debt underwritten by the banks became unsustainable on their terms for the Commonwealth and its agencies and they defaulted on their obligations.
The lawsuit names as defendants UBS Financial Services, Inc.; UBS Securities LLC; Citigroup Global Markets Inc.; Goldman Sachs & Co. LLC; J.P. Morgan Securities LLC; Morgan Stanley & Co. LLC; Merrill Lynch, Pierce, Fenner & Smith Inc.; RBC Capital Markets LLC; and Santander Securities LLC.
Each bank underwrote one or more bonds issued by each of the Commonwealth, the Puerto Rico Electric Power Authority, the Puerto Rico Highways and Transportation Authority, and the Puerto Rico Sales Tax Financing Corporation.
The complaint alleges that, for more than a decade, these banks urged Puerto Rico and its agencies to issue massive amounts of this debt, allowing the banks to profit from underwriting and selling the bonds, as well as from related interest rate swap, refinancing and other transactions. In their capacity as underwriters, the banks had a fundamental ‘gatekeeper’ responsibility that assured the markets that these municipal bonds could be repaid.
But, as shown by a Special Investigation Report prepared for Puerto Rico’s Financial Oversight and Management Board, the banks did not conduct appropriate due diligence, resulting in key disclosures being materially false or misleading.
These diligence failures concealed essential facts that would have demonstrated that the debt was not sustainable and could not be repaid in accordance with its terms.
This debt burden ultimately forced the Commonwealth from the municipal markets, leaving it and its public institutions — like power utilities, hospitals, schools, and essential infrastructure on which millions of Puerto Ricans rely — in financial distress, the plaintiffs said.
“Bond insurers like National have paid billions of dollars in claims payments to date, while uninsured municipal bond investors, including many Puerto Ricans, have suffered huge losses,” they claimed in a press release.
The complaint is based upon two equitable doctrines of Puerto Rican law — doctrine of self-acts and unilateral declaration of will.
“In the face of the bonds’ defaults, National has paid every cent of every claim on its policies—over $1 billion — to cover the losses of insured investors,” the company stated.
“Just like the Commonwealth, and the people of Puerto Rico, National was misled by the underwriters of the Commonwealth’s bonds,” said Bill Fallon, CEO of MBIA Inc., the parent company of the plaintiffs.
“This time of turmoil should be the occasion for rebuilding. National insured its first Puerto Rico government bond more than 30 years ago and to date has insured more than $15.7 billion of debt for Puerto Rico issuers,” Fallon added.
“Our insurance has helped Puerto Rico raise the money to build schools and hospitals and other vital public services. We’re proud of that. The future of Puerto Rico and the integrity and transparency of the capital markets demand that the underwriters be held accountable,” he said.
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