Puerto Rico's Debt Investigation to Be Broad: Official

(Bloomberg) -- The independent investigation of Puerto Rico’s $74 billion debt crisis will be a comprehensive look at the borrowing that pushed the island into its record-setting bankruptcy, according to the executive director of the island’s federal oversight board.

The federal panel this month hired the law firm Kobre & Kim LLP to conduct a probe of Puerto Rico’s financial disclosures, how its bonds were marketed and other issues surrounding the borrowing that pushed it to the brink.

“It’s going to be as broad as can be,” Natalie Jaresko, the board’s executive director, said in an interview Monday. “There’s no desire to limit it in any way. Once you’ve started down this road the only way to get credible conclusions from it is to be broad, open and inclusive.”

Puerto Rico filed for bankruptcy in May after years of borrowing to cover over budget deficits. A U.S. emergency rescue law enacted last year gave the oversight board broad authority over the territory’s finances, including the power to investigate the causes of its crisis.

The board is at odds with a formal committee of unsecured creditors who claim the oversight panel has delayed the investigation. The committee wants the bankruptcy court to allow it to conduct its own debt investigation into the role of Banco Santander Puerto Rico, the Government Development Bank for Puerto Rico and Banco Popular de Puerto Rico, which those bondholders said were key actors in the crisis. But Jaresko said that’s too limited a scope.

“The reason why we wanted to do it and not leave it just to that is to broaden the scope to make sure we were covering all different angles,” she said.

Kobre & Kim plans to conduct interviews and take sworn testimony from government officials and underwriters, court documents show. It will give its recommendations next month on whether a board committee should approve a more expansive, formal investigation and seek subpoena power. A final report is expected within six months.

The investigation will examine Puerto Rico’s debt issuance, disclosures, the use of the proceeds and how the securities were marketed to investors. The firm will also review the island’s constitutional debt limit, which prohibits it from selling bonds if principal and interest payments would take up too much of the government’s revenue.

Critics have questioned the board’s ability to oversee an independent probe when some board members helped work on Puerto Rico’s earlier debt deals. A subcommittee consisting of three board members will work with Kobre & Kim. Jaresko said those members weren’t involved in the commonwealth’s debt issuances.

“There would be no reason for the board to go through this expense, time and effort and not have it be credible,” Jaresko said.

--With assistance from Steven Church.

To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net;Rebecca Spalding in New York at rspalding@bloomberg.net

To contact the editors responsible for this story: Christopher Maloney at cmaloney16@bloomberg.net, William Selway

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