Puerto Rican municipal bonds became increasingly attractive to U.S. investors over the past decade given their tax-exempt status from federal, state and local taxes, as well as their potential for high yields. Indeed, Puerto Rico is currently carrying $72 billion in public debt—approximately 70% of its Gross Domestic Product (“GDP”). While Puerto Rico has been struggling with its debt for a number of years, recent prospects for economic improvement have become significantly grimmer for the commonwealth. In February of 2014, all three major credit ratings agencies–Standard & Poor’s Rating Services, Moody’s Investors Services, and Fitch Ratings–downgraded Puerto Rico’s general obligation bonds to junk-bond status. Subsequently, numerous mutual funds with high exposure to Puerto Rico municipal bonds began selling their holdings; particularly those funds that are not permitted to hold municipal bonds below investment-grade status. Thereafter, beginning in August 2015, Puerto Rico failed to pay $58,000,000 to bondholders out of a total $483,000,000 due that month. In January 2016, Puerto Rico again defaulted and failed to pay $37,300,000 owed to bondholders that month. Conditions have only continued to worsen over time. Indeed, Puerto Rico failed to pay $370,000,000 in principal owed to bondholders on May 2, 2016. Finally, as recently as July 1, 2016, Puerto Rico defaulted on approximately $800,000,000 owed to its bondholders.
Puerto Rico’s ongoing default, coupled with the avalanche of selling, has been a disaster for many investors who continue to hold these investments and for those who recently purchased these investments from institutional investors dumping their holdings. Although the downgrades of Puerto Rican bonds to junk-bond status occurred within a matter of weeks, the actual collapse of Puerto Rico’s municipal bonds appears to have been far from a surprise to investment professionals, as warning signs began to surface as early as 2012. Despite this, the evidence thus far suggests that many financial advisors failed to disclose to investors the rising tide of risks associated with these bonds—information which would have enabled investors to avoid the losses that have resulted. Indeed, in December 2016 a panel of arbitrators from the Financial Industry Regulatory Authority (“FINRA”) ruled in favor of two private clients of UBS, ordering UBS to pay more than $18,000,000 to settle claims that it failed to meet its obligations to the two clients with respect to investments in Puerto Rico closed-end municipal bond funds.
To date, Puerto Rico has now defaulted on billions of dollars owed to bondholders since August 2015 and is in the midst of restructuring its debt under the newly passed Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”), the viability of which is currently being challenged by investors in court. The attorneys at Crosby & Higgins LLP have significant experience prosecuting claims on behalf of clients who were victims of dishonest investment activities, including misrepresentations and the failure to disclose material risks in connection with investments. In fact, Crosby & Higgins LLP was at the forefront of litigation against firms arising out of the purchase and sale of auction rate securities that were deceptively marketed to investors as safe, liquid investments, despite the firms’ knowledge that the auction market was volatile and would eventually collapse. For many investors, the facts here appear to be unfortunately similar.
Crosby & Higgins LLP’s investigation is ongoing and it welcomes inquiries by investors who have sustained a possible loss in connection with the collapse of Puerto Rican municipal bonds. If you have any questions or would like to discuss a potential claim with one of our attorneys, please feel free to contact us directly at 646-452-2300.