Hedge funds sue Puerto Rico, accuse govt of diverting funds

SAN JUAN, Puerto Rico – Hedge funds representing a group of Puerto Rico bondholders sued the U.S. territory on Wednesday, saying it violated the terms of a rescue package recently approved by Congress to help pull the island’s government out of a dire economic crisis.

The federal lawsuit claims the government recently approved measures that allow it to divert hundreds of millions of dollars as it announced the biggest default in the island’s history. The hedge funds contend Puerto Rico is barred from taking those and other actions before the creation of a federal control board that will oversee the island government’s finances.

“The potential for mischief is palpable: With bondholders unable to sue for payment, the Commonwealth could attempt to divert resources toward more politically popular interests,” the lawsuit states.

It is the first lawsuit filed since Gov. Alejandro Garcia Padilla announced on July 1 that the government did not have the money to pay $779 million worth of general obligation bonds that are protected by the island’s constitution. It is the latest in a string of defaults that occurred as President Barack Obama signed a bipartisan bill that in part authorizes a federal control board to negotiate with creditors and restructure some of the island’s $68 billion public debt load.

The hedge funds accuse Garcia of illegally declaring a moratorium on the general obligation debt as well as diverting money toward things such as the island’s vastly underfunded public pension systems. The lawsuit seeks to stop Puerto Rico from diverting funds before the federal control board is approved.

The hedge funds that filed the suit include Aurelius Capital Management, Autonomy Capital and Covalent Partners.

Grace Santana, Garcia’s chief of staff, said she expects more lawsuits but said that creditors who sue the government will not receive special treatment.

“Such litigation is pointless and counterproductive,” she said, adding that it is further straining the government’s resources, which have been hurt by Puerto Rico’s decade-long economic slump.

“This administration continues to face the gravest fiscal crisis in the history of Puerto Rico. In order to continue providing basic and essential services to our citizens, the government has enacted a series of emergency measures,” Santana said.

Those measures include declaring a debt moratorium as well as a state of emergency at various government agencies including the Government Development Bank, which is only allowing withdrawals for essential public services.