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Old 07-16-2019, 05:55 AM
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Mary Pat Campbell
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Puerto Rico corruption arrests rock local government

The FBI arrested current and former officials of Puerto Rico Gov. Ricardo Rosselló's administration on corruption charges, potentially undermining his administration in the midst of the commonwealth's historic bankruptcy.

The FBI on Wednesday arrested and charged former Rosselló Secretary of Education Julia Keleher and former Executive Director of Health Insurance Administration Angela Avila Marrero over alleged corruption in the awarding of contracts. In addition the FBI arrested and charged Glenda Ponce Mendoza, an assistant to Keleher in the education department, Alberto Velazquez Piñol, president and owner of the private company Azur, Fernando Scherrer Caillet, managing partner at consultant BDO, and Mayra Ponce Mendoza, owner of the private firm Colón & Ponce and sister of Glenda.

In their charging documents released Wednesday, federal prosecutors listed three corruption schemes, five types of charges, and 32 counts of these charges. The charge types were: wire fraud conspiracy, conspiracy involving theft, wire fraud, money laundering conspiracy, and money laundering.

Keleher had served as Education Secretary from the start of the governor’s administration in January 2017 until April 1 of this year. She was arrested in Washington, D.C. The others were arrested in Puerto Rico.

Avila Marrero worked as head of the Health Insurance Administration until June 25.

Bond market observers and local politicians said the busts may weaken Rosselló relative to the Puerto Rico Oversight Board, with which he has been struggling over fiscal policy from the start of his administration.

The FBI action “lessens the weight the government will have to the commonwealth plan of adjustment,” said Puerto Rico attorney John Mudd. About $35 billion of commonwealth debt is subject to a plan of adjustment being worked out in a bankruptcy proceeding.

“Puerto Rico's current leadership has failed the island, its citizens and all stakeholders around the world," said Puerto Rico Senate Minority Leader Eduardo Bhatia Gautier. "The immediate effect of today's indictments will be more direct control from the Oversight Board on day-to-day operations of basic government functions. The governor has lost all credibility to deal with Congress, the U.S. Government and the financial community.”

Bhatia Gautier, who has declared his candidacy to replace Rosselló, continued, “The Puerto Rican people need new leadership for a way forward out of the Oversight Board's grip, grappling debt and to restore the confidence of the federal government."

Puerto Rico commentator Cate Long saw the episode as a step in the board’s rivalry with the board.

“Relations between the Oversight Board and Rosselló administration have been adversarial for a long time as detailed in the April, 2019 New York Magazine article by Andrew Rice, ‘The McKinsey Way to Save an Island.’ The board has used a technocratic, corporatist approach to try and force the government to operate more efficiently and transparently. This has been mostly ineffective.”

Long said that last week the board sued the governor for approving Law 29, exempting municipalities from paying for pension benefits thereby, in the board’s view, undermining the central government’s finances. The board is also trying to get a central government plan of adjustment passed that would include pension cuts, something Rosselló is opposing.

“In my opinion the board will try to use the indictments to argue to Congress that they need more authority, but I believe it’s unlikely Congress will agree,” Long said.

In the aftermath of the arrests, Evercore Director of Municipal Research Howard Cure said he had several questions: “Does this give the board more moral authority to commandeer the budgeting and auditing responsibilities from the elected officials? Will the current government continue to oppose proposed cuts to commonwealth operations in order to maintain government employment levels? Is the additional $12 billion from Congress for the government health plan now in jeopardy? Will debt restructuring also include a larger pension haircut to retirees and current employees?” he asked.

"I am incredibly saddened, but even more so frustrated to see the news coming out from Puerto Rico today," said Puerto Rico Resident Commissioner Jenniffer González Colón. Puerto Rico residents "will be the ones hurt, as things like these make the process of obtaining and disbursing funds, and of making decisions on programs, even harder at all levels."

She said she would work in Washington, D.C. to "avoid the political trap of having these events used to justify avoiding or delaying the resources the Island so desperately needs to rebuild."

The charging documents indicate that two of the alleged schemes involve contracts the Education Department awarded to Colón & Ponce or BDO. One of the alleged schemes involved contracts the Health Insurance Administration awarded to BDO with the assistance of Azur.

Keleher awarded contracts to Colón & Ponce “accomplished through a corrupted bidding process wherein Colón & Ponce was provided with a competitive advantage based in part on the close relationship between Julia Beatrice Keleher, Glenda Ponce Mendoza, and Mayra Ponce Mendoza,” the charging documents allege.

In exchange for diverting contracts to the firm, Colón & Ponce allegedly paid Glenda Ponce Mendoza $16,425.

Whereas the education Department’s contract with Colón & Ponce was ultimately around a half million dollars, the contract with BDO was ultimately nearly $2 million. Alberto Velazquez Piñol allegedly received illegal commissions of $113,000 for gaining the contract and its expansions for BDO.

The charge regarding the Health Insurance Administration connects to contracts around $2 million to BDO, which allegedly paid kickbacks to Alberto Velazquez Piñol of $711,000. Avila Marrero allegedly used her knowledge of confidential information to assure BDO would succeed in its bids.

In addition to Wednesday’s charges and arrests, news web sites including that of El Vocero reported that the FBI had seized the computer and iPad that Raul Maldonado Gautier had used as Secretary of the Treasury until the governor dismissed him in late June. The governor dismissed Maldonado Gautier after the secretary gave a media interview claiming there was a “mafia” of professionals within the Treasury and that these individuals were trying to sell their influence and confidential information.


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Old 07-16-2019, 06:16 AM
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Mary Pat Campbell
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Puerto Rico’s Bankruptcy Plan Is Almost Done, and It Could Start a Fight

After three years of negotiations, Puerto Rico's federal overseers are at last finishing up a plan to complete the restructuring of the island's roughly $124 billion in debt. To resolve the biggest government financial collapse in United States history, they have had to untangle the island's thorny finances, negotiate with creditors and figure out how to do it without endangering the livelihoods of retirees who rely solely on their pensions.

That may have been the easy part.

Some of the island's creditors -- including the hedge fund Aurelius Capital Management, which held up Argentina's debt settlement for years for a better deal -- will almost certainly challenge the plan on the ground that it violates the territory's 1952 Constitution.

At the center of it all are two intertwined issues. The oversight board wants to cut back the amount paid to some of those who hold the territory's debt while also giving an unexpectedly good deal to more than 300,000 workers and retirees, some of whom do not even have Social Security. The good deal for the pension holders means a worse one for the holders of Puerto Rico's debt.

"You can make social and political decisions," said James E. Spiotto, a longtime municipal bankruptcy lawyer who is not involved in Puerto Rico's legal proceedings. "But it's best to have them wrapped up in a settlement that everybody agrees to."

The plan is expected to be presented to Judge Laura Taylor Swain in Federal District Court in San Juan, P.R., in the next few weeks. But the approach the board has taken could invite titanic legal battles and appeals, Mr. Spiotto said.

"You want resolution, not litigation," he said. "I think there's a significant risk to what's being done."

In many ways, Puerto Rico's collapse has been uncharted legal territory. It took an act of Congress in 2016 to create the bankruptcy-like law, known as Promesa, that is being used to deal with the crisis.

That has turned Puerto Rico into something of a test case. Although cities and municipalities -- most notably Detroit in 2013 -- have declared bankruptcy, states are not eligible to do so. But a number of them are dealing with serious financial problems because of pension costs.

A combination of inadequate funding over the decades, a wave of retiring baby boomers and the lingering effects of the 2008 financial crisis has forced states to reduce benefits, increase funding or both. But a few states -- including Illinois, New Jersey, Kentucky, Connecticut and Colorado -- are still far behind, and more drastic measures may be tempting if Puerto Rico can provide a road map to recovery.

"If this works -- if Promesa works and the restructuring works -- it may make bankruptcy for states seem like something that lawmakers should be considering a little more seriously," said David A. Skeel Jr., a University of Pennsylvania law professor who is on the oversight board and has written on the possibility of states using bankruptcy. "But if it doesn't work, it would have the opposite effect."

Whether Puerto Rico is able to blaze new ground in the world of government debt restructuring will not be decided until after the courts resolve any challenges to the novel steps the oversight board has taken: its treatment of retirees and an attempt to have $9 billion of its debt declared unconstitutional.

Promesa contains a legal requirement that Puerto Rico "provide adequate funding for public pension systems" -- carefully chosen language that has given the island legal cover to keep paying retirees their pensions, even as it defaulted on bonds that would normally have been paid first.

The board has essentially switched the usual order of priority used in bankruptcy: It put workers and retirees, with their roughly $55 billion in pension obligations, near the front of the line, and pushed back the general-obligation bondholders whose investments financed the island over the years.

Under the current proposals, 61 percent of the retirees would keep receiving their full pensions, said Natalie Jaresko, the oversight board's executive director. Other pensions would be cut on a sliding scale, but even those owed the most would get 91.5 percent of their payments. Current employees would be shifted into individual retirement accounts.

That's a better deal than is being offered to the general-obligation bondholders, who would get 64 cents on the dollar, at best. And retirees are being offered a far more generous deal than expected, given that the island's pension system has been stripped bare.

Normally, the money in a pension fund secures the benefits. If an employer goes bankrupt, the participants are still guaranteed benefits based on what has been set aside: A fully funded pension system will pay full benefits, and a partly funded pension system will pay partial benefits.

But there is no money set aside in Puerto Rico. The participants in such a case would normally be considered unsecured creditors -- the kind who typically get a fraction of what they're owed. One group of unsecured creditors, trade vendors to the Puerto Rican government, is being offered just 9 cents on the dollar, on average.

The retirees' terms rival those achieved by Detroit's after their city went bankrupt. (Unlike states, cities are eligible for bankruptcy unless prohibited by state law.) Detroit's retired police officers and firefighters are still receiving 100 percent of their original pensions, with smaller annual cost-of-living increases, while other retirees are getting 95.5 percent.

But Detroit's pension funds were said to be about two-thirds funded, and a threat to sell off treasures owned by the Detroit Institute of Arts raised hundreds of millions of dollars more from philanthropic and governmental bodies that were horrified at the idea of pieces by van Gogh, Matisse and others going to private collectors.

At least one company that stands to lose money under the proposed Puerto Rico deal says it is preparing a challenge.

Assured Guaranty, a bond insurer with exposure to some of Puerto Rico's debt, said it was ready to go to court because the deal threatened to "significantly erode the municipal bond market's confidence" and make it harder for governments to take on big projects.

The proposed deal, the insurer said, is based on "a number of terms that violate Puerto Rico law, its Constitution and Promesa."

Under the island's Constitution, general-obligation bondholders are said to have "first claim" on "all available resources" of the government to ensure the repayment of their roughly $17 billion of bonds.

But they're being offered less than the pension holders, who are being offered more than 90 percent of what they're owed. Some general-obligation bondholders are being offered 64 cents on the dollar, but others are being offered less as part of a hardball negotiating tactic by the oversight board.

The board said this year that it would challenge the validity of several billion dollars' worth of bonds, including general-obligation bonds that were brought to market in 2012 and 2014. It says that those bonds were issued in violation of Puerto Rico's constitutional debt ceiling, and that the people of Puerto Rico should not have to repay them.

As a result, only the general-obligation bonds issued before 2012 would pay the proposed 64 cents on the dollar. Investors who hold the bonds issued in 2012 are being offered 45 cents, and those holding the 2014 vintage are being offered 35 cents.

Many holders of the older bonds are expected to take their 64 cents and be done with it. But holders of the 2012 and 2014 bonds -- including Aurelius -- are likely to sue.

Aurelius declined to comment on its plans. But it has already sued Puerto Rico, contending that the island must respect its constitutional pledge of using "all available resources" to ensure repayment. That suit has been stayed while the oversight board works on its plan, but any challenge could use the same argument.

Aurelius could also use the legal argument that got results in the Argentine case: that the restructuring plan illegally discriminates against the holders of similar bonds.

Such lawsuits would be an all-or-nothing gamble. If the bondholders won, they would get the same 64 percent repayment rate as the holders of the older bonds. If the board won, the bonds would be voided and the bondholders would get nothing.

That group of bondholders has some company in opposing the deal. Puerto Rican teachers -- who would be moved into individual retirement accounts under the deal -- voted against it in an early ballot, even though the American Federation of Teachers had urged a yes vote.

Retired teachers will not cast ballots until after the restructuring plan is introduced in court.


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Old 07-17-2019, 04:54 PM
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What are the odds that the recent leaks are not a power play related to the Promesa drama? I'm putting them pretty low.
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Old 07-23-2019, 06:15 AM
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Puerto Rico governor refuses to resign as island braces for big protest

(Reuters) - Puerto Rico's governor on Sunday said he would not seek re-election next year but refused to resign as the island braced for more protests by demonstrators demanding he step down over offensive chat messages.

A day before a planned general strike and massive street demonstrations in the bankrupt U.S. territory, Ricardo Rossello, 40, said he respected the wishes of Puerto Ricans and would not seek a second term in November 2020 elections.

He also said he would resign as head of his New Progressive Party (PNP) but would remain as governor until the end of his term in January, 2021.

"I know that apologizing is not enough," Rossello said in a video posted on Facebook. "A significant sector of the population has been protesting for days. I'm aware of the dissatisfaction and discomfort they feel. Only my work will help restore the trust of these sectors."

His comments drew outrage from many Puerto Ricans, with social media videos showing San Juan residents leaning out of apartment windows banging pots and pans in a third day of so-called "cacerolazo" protests.

The July 13 publication of sexist and homophobic chat messages between Rossello and top aides unleashed simmering resentment over his handling of devastating 2017 hurricanes, alleged corruption in his administration and the island's bankruptcy process.

"'#Resign Ricky isn't just a call for him to resign from the party, but from his seat as the top official," tweeted Linda Michelle, an industrial engineer and Puerto Rico radio personality. "Whoever wasn't sure about going to the march tomorrow has now made up their mind to go."


Puerto Rico's non-voting representative to the U.S. Congress, as well as Democratic presidential candidates and lawmakers have called for the governor to step aside after nine days of sometimes violent protests.

"Once again: Rosselló must resign," tweeted U.S. Representative Alexandria Ocasio-Cortez in response to his video.

But Puerto Rico's Senate President Thomas Rivera Schatz, who may takeover leadership of the pro-statehood PNP, said Rossello's actions "put an end to part of the controversies and trauma hitting our people."

Puerto Rico House Speaker Carlos Mendez, also of the PNP, appointed an independent panel on Friday to investigate whether the chats warranted impeachment.

"I welcome the process started by the legislative assembly, which I will confront with complete truth," Rossello said in the video.

The political turmoil comes at a critical stage in the U.S. territory's bankruptcy process as it tries to restructure around $120 billion in debt and pension obligations.

It has also raised concerns among U.S. lawmakers who are weighing the island's requests for billions of federal dollars for healthcare and work to recover from Hurricane Maria, which led to nearly 3,000 deaths.

Opposing Rossello are a raft of Puerto Rican celebrities ranging from singer Ricky Martin and rapper Bad Bunny to "Hamilton" creator Lin-Manuel Miranda.

Martin, a target of the governor's chats, said he would march with protesters on Monday, when some businesses have said they will close after trade unions called a national strike.

"I want to feel the power of the people," Martin, 47, said in a Facebook video, urging legislative leaders to start the impeachment process.

(Reporting by Andrew Hay in Taos, New Mexico; Additional reporting by Luis Valentin Ortiz in San Juan and Karen Pierog in Chicago; Editing by Peter Cooney, Dan Grebler and Daniel Wallis)


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Old 07-23-2019, 06:16 AM
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What GM and Puerto Rico have in common

What do General Motors and the Commonwealth of Puerto Rico have in common? Both experienced deep financial distress and organizational dysfunction in recent years, culminating in bankruptcy or the legal equivalent thereof.

And in each case, the fundamental cause was not mistakes or misconduct by the people in charge — though there were plenty of both. The problem was that, in a real sense, no one was in charge.

Clear and consistent lines of authority and accountability are the hallmarks of any well-run organization.

At GM, however, the buck stopped nowhere. Legally binding but conflicting demands of shareholders, unions, federal, state and local governments, even car dealers, buffeted the company for decades, distracting from the basic mission — making popular cars — and forcing it to meet obligations with borrowed cash. Finally, GM collapsed into federally subsidized bankruptcy in 2009.

Acquired from Spain by the United States in 1898, and subject to American sovereignty and policy experiments ever since, Puerto Rico is governed by, or financially beholden to (partial list): Congress; the Treasury Department; bondholders, public-sector unions; two machine-like, island-based political parties; and the U.S. shipping industry — which gets rich at Puerto Rico’s expense via a protectionist law barring lower-cost, non-U.S. vessels from supplying the island.

With growth and reform stymied, Puerto Rico lived off artificially easy credit — U.S. law made its bonds “triple tax-free” — until running out of cash in 2016. The devastation of Hurricane Maria in 2017 compounded the catastrophe.

The current uprising against Gov. Ricardo Rosselló, amid corruption charges and anger at his inner circle’s nasty online chat messages about constituents and other politicians, is both entirely understandable, given Puerto Rico’s suffering — and not likely to resolve the island’s predicament.

Whether Rosselló stays or steps aside, Puerto Rico’s incoherent lines of political authority will remain.

Their origins lie in the island’s murky political status — it is neither independent like, say, its neighbor Jamaica, nor a full-fledged U.S. state, but a “commonwealth” with all sorts of cobbled-together rules for receiving federal aid, paying federal taxes and participating (without a vote) in Congress.

True, Puerto Rico has a new pseudo-constitution: the 2016 Promesa Act, a bipartisan law that gave the island a version of the deal GM got — debt relief via bankruptcy, in exchange for structural reform.

Promesa created an independent board to supervise the process and guarantee fiscal responsibility, much like the financial control board Congress imposed on the District, when a similar financial crisis struck that semiautonomous city’s government in the mid-1990s.

Like residents of the District, Puerto Ricans, including Rosselló himself, resent having to obey an unelected seven-person board, known on the island as “la junta,” and it is a rhetorical target of some demonstrators now.

In reality, though, only the board can mediate competing claims on Puerto Rico’s resources with a measure of impartiality. It remains the island’s best hope of restoring solvency and economic growth, as the now-booming District’s post-control board experience shows.

When and if Promesa runs its course (perhaps a decade from now), the island will again face the same three choices: perpetuating the commonwealth, statehood — or independence.

Thus far, several referendums among Puerto Rico’s voters have supplied no clear answer. To understand their ambivalence, consider another analogy: Puerto Rico is to the United States as Greece is to the European Union — that is, an economically uncompetitive but not fully sovereign entity, joined in a monetary union with a far larger and stronger neighbor.

It’s an unsatisfactory situation, fraught with indignities, but — because of the access it provides to a strong currency (the dollar for Puerto Rico; the euro for Greece) — not so easy to renounce.

Statehood would give the island a direct say in the federal policies that affect its 3.2 million people (more, it’s worth noting, than the population of some 20 states). This option is increasingly popular on the mainland — 66 percent in favor, according to the latest Gallup Poll. But Republicans resist it as a plan to tilt the Senate to the Democrats; many Puerto Ricans, too, are cool to an idea that could compromise their distinctive identity and culture.

Independence would establish definitively that Puerto Rico runs Puerto Rico. Precedents exist: The United States restored sovereignty to the Philippines, acquired simultaneously with Puerto Rico, in 1946. The problem is that the vast majority of Puerto Ricans, U.S. citizens all, don’t want it.

“Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed,” Thomas Jefferson wrote, in a passage of the Declaration of Independence that explains why the American colonies and the British Empire had to go their separate ways — and why Puerto Rico and the United States cannot.


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Old 07-23-2019, 10:28 AM
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The pillaging of Puerto Rico public funds behind the chat

There is a multimillion-dollar corruption network behind the Telegram chat between Puerto Rico Gov. Ricardo Rosselló-Nevares and some of his closest collaborators.

Amid the worst fiscal crisis in its modern history, the island is the target of a pillage of public funds perpetrated through the sale of influences, contracts and access to benefits in the government, according to an investigation by the Center for Investigative Journalism (CPI by its Spanish initials.)

The investigation included interviews with more than 20 sources with direct knowledge of the facts, the review of documents and databases of contracts and corporate records. Analysis and testimonies from sources suggest that the practice went on in many of the government agencies.

The looting — carried out through a main scheme and several secondary ones that share the same modus operandi and similar protagonists — was orchestrated from La Fortaleza by the Gov. Rosselló-Nevares’s closest collaborators and with his knowledge, the investigation found.

The modus operandi involved planting internal personnel and external contractors in key advisory and communications positions in the agencies to control information. Also, sharing privileged data on government contracts to benefit private clients in exchange for commissions and payments.

At the top of the scheme is the former chairman of the Transition Committee, lobbyist, former campaign director and a close friend of Rosselló’s, Elías Sánchez-Sifonte, followed closely by publicist Edwin Miranda-Reyes and media and communications strategist, Carlos Bermúdez-Urbina.

The three are among the 12 participants of the 889 pages of the Governor’s chat revealed by the CPI on Saturday which shows the exchange of inside information with people who are not public officials, and the use of public resources for partisan purposes.

Sánchez met Rosselló in early 2000 when they both belonged to the New Progressive Party Youth (NPP, for the party’s initials in English) and, according to people who have been close to the duo, over the years they developed a very close relationship that included living together for a period of time in Torrimar, a San Juan suburb, along with who later would be the Governor’s wife, Beatriz Areizaga. Rosselló was Sánchez’s best man at his wedding, who in turn supported him fiercely when the “Boricua Ahora Es” movement began, prior to starting his campaign for governor.

The main scheme includes these three figures — Sánchez, Bermúdez and Miranda — who, on paper, appeared as “private citizens” and “contractors,” but actually constitute the top of the government, with more power than any of Gov. Rossello’s constitutional cabinet members, according to multiple sources. In turn, it connects, sometimes directly and in others tangentially with particular schemes, such as those uncovered with the arrests made by the U.S. Attorney’s Office in July in the Department of Education, the Health Insurance Administration and the accounting firm BDO.

Two sources close to the federal investigations told the CPI that arrests linked to corruption schemes in the Rosselló-Nevares administration are imminent.

Sánchez, Bermúdez and Miranda have generated millions through their businesses and have decided much of what has happened in the government in terms of hiring, firing and public projection since Rosselló-Nevares took office in January 2017, the sources agree. In Sánchez’s case, there are also inappropriate and illegal interventions with cabinet secretaries.

At least four agency heads went directly to the governor or his advisors in La Fortaleza to denounce these interventions by Sánchez as early as 2017, but the governor never ordered an investigation or took action.

Although he does not have direct contracts with the government, Sánchez — who has the closest link with the governor — controls most of the contracts with the highest amounts, placing his clients in many of the agencies and charging commissions of up to 25% of the amount of the contracts and fixed retainers that have reached $50,000 per month, indicated four sources that have witnessed the dynamic.

According to separate conversations, the lobbyist had constant access to La Fortaleza and to privileged information on the big contracts that would be given in the agencies, which he would match with his clients. He would also show up, often uninvited, knocking at the doors of these agencies to present tailored proposals for the services his clients were offering.

In some instances, Sánchez encountered resistance from agency secretaries.

One of those cases occurred in the midst of the Hurricane María-related emergency, when Adjusters International was contracted for recovery work through the Department of Housing’s “Tu Hogar Renace” program. Sánchez’s client, AECOM, lost that bid and in December 2017, Sánchez went to Housing Secretary Fernando Gil-Enseñat’s office to complain about his decision, two sources revealed to the CPI.

Gil-Enseñat acknowledge that the meeting took place and that he considered the intervention inappropriate. He said he informed Sánchez that he would uphold his decision because it complied with legal proceedings and was $21 million cheaper than his client’s proposal. AECOM appealed the decision before the agency’s Review Board, which halted the contract, and litigated against Housing reaching the Supreme Court, where it dismissed the case.

“Yes, he showed up at my office and asked to speak with me… He told me that I had made a mistake in choosing the bidder I had chosen for ‘Mi Hogar Renace,’” acknowledged Gil-Enseñat.

He explained that as a lawyer and an official who has previously served in the Government, he knows that he should abide to the law and not cede to this type of pressure.

“I know that I will pay the final consequence. In that sense, I did not hesitate,” he said.

Do you consider this type of intervention by lobbyists appropriate? he was asked.

“No, it’s not appropriate, I’ll tell you that,” he replied.

“The thing is these things happen and I don’t like it, and I don’t agree with it,” he added, emphasizing that it is the responsibility of each individual government official not to yield to pressures.

Gil-Enseñat said he went to the Governor personally to report the event in order to anticipate the possible legal battle that would begin since he was not going to yield to Sánchez’s request, and to tell him that he had everything documented and that he would see it through its final consequences. He said Rosselló told him to move forward with his decision.

The CPI asked La Fortaleza for a reaction to this story but did not receive it at the time of publication.

Although AECOM did not get the “Tu Hogar Renace” contract, the company has $ 1.1 million in government contracts. Gil-Enseñat said some of these contracts were prior to the incident and others after it, and that they were obtained in good faith.

In mid-2018, Sánchez personally took his client GILA Corporation to the Treasury Department to push a delinquent debt collection contract and met at least four times, with two of the main agency officials and a contractor: the current Treasury secretary and then contract advisor, Francisco Parés, the former Treasury secretary and then contract consultant, Juan Carlos Puig and the then Treasury secretary and chief financial officer, Raúl Maldonado, according to two sources with direct knowledge of the meetings.

Maldonado, who for years also participated in the dynamics, according to sources, ended up going to the Federal Bureau of Investigation (FBI) to provide information on the government’s illegalities, shortly after his brief successor at Treasury, Teresita Fuentes-Marimón, had been to the FBI, and then to Rosselló in January 2019, with complaints related to the schemes at Treasury. Rosselló took no action on the matter. Fuentes-Marimón resigned immediately.

Fuentes-Marimón — who was not reachable for this story — has not specified whether her complaints were about Sánchez’s interventions at Treasury , and was not available for an interview.

She too went to Rosselló to denounce the alleged illegal profit schemes operated by Maldonado and his son, Raúl Maldonado-Nieves, through at least seven companies: Virtus, Óptima, Centurion, 6th Element, On Point, Integrity and OPG, three sources said. The companies had at least 65 contracts for $12.6 million and allegedly charged for access to Maldonado (senior) for negotiations, favorable agreements and tax reductions in Treasury, among other services.

The CPI tried to obtain a reaction from Maldonado through his lawyer Mayra López-Mulero, but she indicated that they would not make any statements.

On the other hand, multiple sources told the CPI about improper interventions by Sánchez in favor of his client, Microsoft. The technology company has landed more than $100 million in contracts during this administration. Two sources pointed, for example, to the $11 million contract signed last summer to obtain licenses for AmpliFund, a Microsoft-owned grant management application. Despite the fact that the government already had a similar and effective tool, and that it would cost a fraction to extend this license, the Rosselló-Nevares administration decided to acquire the AmpliFund license from Sanchez client.

The CPI called Herbert Lewy, president of Microsoft, who acknowledged the call through his public relations officer, Vivian Sánchez. Written questions were sent to him, however, at press time, no response had been received.

The CPI called for a reaction from Herbert Lewy, president of Microsoft, and later received expressions from Soledad Lago Rodríguez, Communications Manager for Microsoft Caribe, that doesn’t deny that Sánchez has worked for the company: “Microsoft is committed to doing business in a way that generates and maintains trust with all our customers and partners. We currently do not work with Elías Sánchez, World Professionals Government Affairs or any of its executives or shareholders.” The company did not respond if it has received any information request or request for an interview from the federal authorities.

According to two sources, in the Department of Correction there was also an improper intervention by Sánchez when Carolina Catering Services landed a $300 million contract to manage the commission, laundry and food service in the prisons. The contract was awarded to this company even though it bid higher than the other competitor, Trinity. Two sources told the CPI that the person responsible for intervening in the bid and getting Carolina Catering to land the contract was Sánchez.

The CPI questioned the Secretary of Correction, Erik Rolón, if Sánchez intervened in any way in the bid for these services. “Not at all; that is totally incorrect,” said Rolón, who is also the governor’s deputy chief of staff, adding that there were no irregularities in the process.

The CPI contacted the president of Carolina Catering, José Algarín, who denied any relationship with Sánchez and his associates, relatives or companies related to him, and said that they do not use external lobbyists. “Absolutely not,” he answered through his spokesperson, María “Maypi” Casta. Carolina Catering is part of the MGI Caribe conglomerate, which in turn is related to Empresas Santana.

At the Health Insurance Administration (ASES, for its initials in Spanish,) the jewel in the crown for the enormous amount of government’s health plan contracts for indigent people, Vital, an insurance company managed to have its participation in the auction admitted and was awarded the largest contract even though it submitted its proposal two days late, so it did not qualify.

This information is part of the indictment filed a few days ago for fraud, conspiracy, theft of public funds and money laundering against the head of that agency, Ángela Ávila, the president of BDO, Fernando Scherrer, and against his employee and lobbyist in the agency, Alberto Velázquez Piñol. The latter was a senior government official and consultant from former Gov. Luis Fortuño’s administration and has links with Sánchez’s family, through a close relationship with his ex-mother-in-law Katherine Erazo-García, and his ex-wife and partner Valerie Rodríguez-Erazo. According to two CPI sources, the insurer in question is Triple-S, which is also a client of Sánchez and his partner, former Secretary of Corrections and vice chair of the University of Puerto Rico’s Governing Board, Zoraida Buxó.

Triple-S did not answer whether Sánchez or any of his companies or associates lobbied on his behalf, or whether it has received requests from federal authorities.

“Triple-S has already issued a statement stating that it will not comment on federal investigations and will not feed rumors or speculation,” according to a written statement from the company’s chief communications officer, Ivelisse M. Fernández.

In the past, Triple-S and Empresas Santana were among the participants in the corruption scheme for which former Governor Aníbal Acevedo-Vilá was accused of receiving numerous illegal campaign donations from his executives. He was found not guilty of all charges.

“If you do not hire Elías’s clients, there is no room for you in (Ricardo Rosselló’s) government,” a source told the CPI.

A source said that after Hurricane María, Sánchez, through Christian Sobrino, brought in the CSA firm, so that, through the Disaster and Emergencies Management Agency, it could obtain the contract for the inspection of schools after the emergency. The $800,000 contract was awarded at the end of September 2017 and canceled shortly after amid criticism, including that of then-Secretary of Education, Julia Keleher. Last week, Keleher was also indicted by the feds in a scheme — until now unrelated — in which BDO, Scherrer and Velázquez were also central characters.

Company President Frederik Riefkohl, categorically denied that CSA has any relationship, “directly or indirectly,” with Sánchez or with “any of his associates.”

“Sánchez has not been a consultant, contractor, advisor or director of CSA,” Riefkohl told CPI, noting that CSA is a Puerto Rican company that has been in operation for more than 60 years and has contracted with the government for years.

“We don’t need to use lobbyists or anyone else as a business card with the government,” he added.

CSA has attained $26 million in contracts in 10 agencies with this administration, according to the Comptroller’s Office contracts registry.

The CPI contacted Sobrino for a reaction, but there was no answer by press time.

During a press conference on Tuesday, the CPI asked Rosselló directly why Sánchez has such power and direct access to his cabinet secretaries but the governor eluded the question. Instead, he offered a puzzled answer in which he did not denied Sánchez having such access.

“Yes, well, there are people here who have different relationships. There are relationships [that] the individuals establish, but for my part, I have taken care of, and my job is to take care of the existence of a process, independent of relationships, of friendships, of whatever, [and] the process is what determines the future actions,” he answered.

Earlier, at the same conference, Rosselló said, also in a very brief way , that “all” of Sánchez´s contracts are under evaluation.

Not everything was contracts
Two sources said that the Laborers’ International Union of North America (LIUNA), Sánchez’s client, got the executive order from the Rosselló administration that increased the minimum wage in the construction industry to $15.

The CPI also learned, from three other sources, that Sánchez and his associates arrange important economic benefits for their clients through top agency officials, such as tax exemptions and credits, the payment of arrears with the government and the reduction or forgiveness of tax debts, among others.

The sources have also given information that points to the intervention of other lobbyists and lawyers in similar practices during this administration.

Sánchez did not want to answer questions about this story, although in June he denied participation in any act of corruption.

He answered a request for interview from the CPI via a text message in which he said “there is no arrest warrant against him.”

“I have no additional comments,” he added.

After insisting on the importance of this story, which also mentions the business of his mother-in-law, a former government official and former adviser to Pedro Rosselló and Thomas Rivera-Schatz, Katherine Erazo-García, and his ex wife, businesswoman, lobbyist and radio commentator, Valerie Ann Rodríguez-Erazo business, Sánchez said via text message: “Right now I’m on vacation with my family and I’m not available for an interview. Some of my family are not public figures, so we will be looking into corresponding (legal) actions.”

Erazo-García, who is also the ex-wife of former Senate President, Charlie Rodríguez, has contracts for $357,500 with the Department of Economic Development and Commerce, and the Telecommunications Bureau through her company BCS Consulting Group. With this company she represents private clients in negotiations with the government, and in 2018 alone, it reported $625,000 in assets, more than doubling the amount for 2017 when it reported $276,000.

Some of the contracts reviewed for this story are for bonafide services. It is unknown what portion went to the payment of commissions to lobbyists and intermediaries, and non-existent or over-invoiced services.

It is also unknown how much was granted in debt reductions and tax credits. The Government of Puerto Rico maintains that the information related to the tax benefits it grants, including those via Acts 20 and 22, is confidential.

Media management
In direct contracts alone, Edwin Miranda and his companies obtained more than $50 million from 22 government agencies. In the case of Carlos Bermúdez, his public relations company, Ojo Creativo, won 16 contracts with seven agencies, for a total of $540,000.

Three sources indicated that Bermúdez and Miranda allegedly exerted pressure on companies and individuals to hire them privately if they wanted to do business with the government. These contracts, because they are private, do not show in the Comptroller’s Office. Miranda and Bermúdez also served on the Juntos por Puerto Rico Board of Directors. Currently they are not included in the organization’s official website.

One of Miranda’s companies, for example, was hired by Microsoft — one of the government’s largest contractors and Sánchez’s client, according to two sources — and by Unidos por Puerto Rico, the nonprofit organization created by First Lady Beatriz Rosselló, to handle donations after Hurricane María. Unidos por Puerto Rico, whose president was Elías Sánchez’s brother-in-law, Jorge del Pino, received $41 million in donations and is also being investigated by federal authorities.

Although Miranda has said his political-partisan work was done through other companies and not KOI, his advertising agency, the CPI learned that earlier this year, he allegedly instructed a group of his employees at KOI that they would have to include political work among their duties with private and government clients.

The publicist, who began in political oversight and management during Luis Fortuño’s administration, has four companies registered in the State Department, and two sources with access to the documents assured that there is duplicate or false invoicing. Independent Representative Manuel Natal referred some of the irregularities in the invoicing by Miranda’s companies to the heads of the U.S. District Attorney’s Office Office, the Puerto Rico Department of Justice, the Government Ethics Office, and the Comptroller’s Office as early as Nov. 17, 2017.

The CPI tried to contact Miranda for a reaction, but it was not possible by press time.

In addition to politics, Bermúdez has a long history of public relations entertainment figures and celebrities, although the Puerto Rico Association of Public Relations Professionals clarified that he is not licensed in this profession. The public relations law prohibits acting as such without a license, although there is no penalty. Among models and beauty queens, he serves as the president of San Juan Moda and was the executive director of Miss Mundo of Puerto Rico. Bermúdez’s portfolio of artists included figures such as presenter and model Cynthia Olavarría, rappers Tempo and Ozuna, Maripily, El Molusco and merengue singer Joseph Fonseca.

Ozuna has participated as a talent in several public events along with the governor. The chat mentions, for example, the musical theme “Llegó la Navidad” by Ozuna and “cuatro” musician Christian Nieves, who was managed through a contract with the Tourism Company.

Molusco clarified that Carlos Bermúdez is not his representative nor permanent public relations official, but said he has handled his public relations for specific projects. “Bermu worked on one or two projects for me. Carlos Bermúdez is a friend of artists, he’s my friend,” he said.

He said he has not received any money for interventions in government events in which he participated as a talent after the hurricane, when Unidos por Puerto Rico was created.

Although he denied being Ozuna’s representative, Bermúdez, who said he was not in Puerto Rico, acknowledged in written statements that the artist’s company hires him and that he has been hired “some times” by the other artists. However, he rejected that he or his clients have benefited from his relationships with the governor and the government. He also denied exerting pressure for private contracting by the public sector.

In the political sphere, in addition to representing Resident Commissioner in Washington, Jenniffer González, former Mayor of San Juan, Jorge Santini and the Mayor of Ponce, María “Mayita” Meléndez, Bermúdez introduced himself as press contact for politicians Melinda Romero and Leo Diaz-Urbina, his cousin. González said that after the publication of the chat she canceled his contract, although Bermúdez wanted to make it seem like he was the one who had relinquished it.

In Ricardo Rosselló’s administration, Bermúdez has controlled most relations with the press and the media, to the point that he was the person who selected almost all the communications directors for the government agencies, as well as being an additional external media consultant in most cases. According to two sources with first-hand knowledge, the communications from almost all of the government chiefs were channeled to Bermúdez through La Fortaleza’s Communication Director, Rossy Santiago.

“The reality is that it was he (Bermúdez) who put everyone in their posts (press and communications),” said one of the sources.

Among the key communicators allegedly placed Bermúdez include former journalists and people linked to the world of entertainment: Denisse Pérez, Rosselló’s current press secretary; Rossy Santiago, La Fortaleza’s communications director; Yolanda Rosaly and Farrash López in Education; Eric Perlloni in Health; Alejandro Pabón in ASES; Maura Ríos, at DDEC; Waldo Díaz, in Corrections; Iván Caraballo at the Fiscal Agency and Financial Advisory Authority, or AAFAF; and María Batista at the Chief of Staff’s office.

Bermúdez accepted that he participated in the selection process and recommended some of these people but denied having chosen them.

“I recommended some of them and it was through a final, group determination by which they ultimately were included in the team. I was part of the team (there) to identify talents,” he said.

The CPI also confirmed with several sources the existence of a chat between communications officers, in which Bermúdez and Santiago gave instructions on when and how to respond to requests from the press.

“I did not give orders but was part of the strategic work group, we were a team as there are in all governments. We always tried to respond to media and their requests,” Bermúdez said, although the CPI could see instances in which Bermúdez ordered that the requests be stalled.

The chat was a trigger
The issue of corruption in the Rosselló-Nevares administration, which have been revealed in cases that seem isolated, began to explode with Raúl Maldonado’s abrupt departure, his visit to the FBI and public statements by his son, Raúl Maldonado-Nieves, who directly labeled the governor as “corrupt” and made direct reference to Rosselló’s alleged intervention to alter the audit of Unidos por Puerto Rico’s management of supplies for Hurricane María to protect his wife. As of that date, parts of the chat where the governor and 11 members of his inner circle began to leak to the press. In it Rosselló, his officials, advisers — including Bermúdez and Miranda — and Sánchez, made misogynistic, homophobic and insulting comments toward different sectors of the population.

On Saturday, July 14, the CPI published 889 full pages of the chat and a report stating how, in addition to insults and ridicule, including mockery about Hurricane María’s dead, Rosselló, his officials, advisors and Sánchez, who has no formal relationship with the government of Puerto Rico, planned the use of public tools to go after government officials, to manipulate media, and exchanged privileged information on government operations. From that Saturday on, the people took to social media networks and the streets in protests that have continued heating up demanding Rosselló’s immediate resignation.

On Saturday, after the CPI revealed the full content of the governor’s chat with his closest allies, Rosselló announced that he would no longer use the advice and services of most of the chat’s members, some of whom had no official relationship with the government, but he is clinging to his position. Since then, he has maintained that he will not resign.

That day, both Bermúdez and Miranda announced they had given up all of their contracts with the government. In Sánchez’s case, the governor — in an ambiguous way — said he “ended” his contracts. But Sánchez has not had any contract registered with the government. Rosselló has neither been clear in defining exactly what Sánchez’s role has been after leaving the position as his representative before the Fiscal Control Board.

Two of the chat members, the chief financial officer and the government’s representative to the Board, Christian Sobrino, and Secretary of State, Luis Rivera-Marín, submitted their resignations on Saturday. Sobrino’s resignation was immediate, while Rivera-Marín’s is effective at the end of July. Two other public officials in the chat, Chief of Staff Ricardo Llerandi and Public Affairs Secretary, Anthony Maceira, will remain in their posts.

House of Representatives Speaker Méndez has had before him for almost a year a request for to investigate the lobbying for companies that Sánchez and his associates did without being properly registered, but he has not done anything about it.

Carla Minet, Laura Moscoso, Vanessa Colón, Damaris Suárez and Jeniffer Wiscovitch contributed to this story.

–The Center for Investigative Journalism (CPI by its Spanish initials) is a nonprofit organization that trains journalists and has a legal program to help it in its objective of “working for freedom of information in Puerto Rico.”


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Old 07-24-2019, 09:56 AM
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While mentioning corruption, the bankruptcy/bailout aspect is treated

Corruption in Puerto Rico—Gasp!
Federal permission to declare bankruptcy emboldens the political class

Puerto Rico Gov. Ricardo Rossello is fighting for his political life after private messages he sent as part of a group chat were made public earlier this month.

Some of the texts, targeting both political adversaries and allies -- and even making light of Hurricane Maria fatalities -- were crude and disrespectful, and left the governor looking sophomoric at best.

The bigger problem for Mr. Rossello is that "chatgate" lends credence to allegations that the commonwealth government is deeply corrupt.

Public opinion is solidly against Mr. Rossello in the matter and in Old San Juan last week there were large daily demonstrations that reportedly cut across political divides. Most of the protesters were peaceful, but violence broke out on several occasions at night and police used tear gas and rubber bullets to restore order.

A key question now is whether the commonwealth will follow the rule of law in dealing with its unpopular governor or whether a lynch mob will run him out of town.

Having violated its own constitution by defaulting on the commonwealth debt in 2017 -- with encouragement from President Obama and House Speaker Paul Ryan -- the road to a lawless resolution of the crisis is wide open. But if Puerto Rico wants to save itself from full-blown descent into a banana republic, it will use this moment to recommit itself to its constitution.

Mr. Rossello says that because he did nothing illegal, he need not step down. The institutional path, in that case, is either impeachment by the Legislature or for him to limp through the last 18 months of his term. He said Sunday he wont run for re-election and will resign as head of the New Progressive Party.

Politically he appears to be finished. He was a Hillary Clinton delegate in the 2008 nominating convention and a delegate for Mr. Obama in 2012. But he is not far left enough for the extremists on his side of the aisle. This includes the radicalized mayor of San Juan, whom he mocked in the chats. Needless to say, the schadenfreude from his left flank is off the charts. And even in the big tent of his pro-statehood party, no one is rushing to his defense.

All of this is happening in the midst of a fiscal mess that Washington has made worse by blessing an illegal default.

Puerto Rico's Constitution explicitly states that the government must pay general-obligation bondholders before using its resources for any other spending item in the budget. Mr. Rossello ran on a commitment to follow the law. Once elected, he reversed course.

In 2016 Congress passed the Puerto Rico Oversight, Management and Economic Stability Act, or Promesa. It created an oversight board with a mandate to help Puerto Rico deliver a viable fiscal plan and restore access to the capital markets.

In May 2017, some five months after Mr. Rossello took office, Puerto Rico nonetheless declared bankruptcy, in violation of the constitution, with full-throated cheers from Washington.

More than two years into bankruptcy, there is still no agreement on the budget and no access to capital markets. On July 3 the oversight board sued the governor in federal court over his decision to allow municipalities to transfer some $330 million in pension and health-insurance costs to the bankrupt commonwealth.

The governor shared his sentiment about the board in the chat thread when he wrote: "Dear OB, Go f---- yourself. Sincerely, R2." The words were followed by six middle-finger emojis.

That attitude may be popular on the island, where the board has been branded a colonialist tool robbing Puerto Rico of its sovereignty. But he can't blame corruption inside his own government on the mainlanders.

On July 10, before the full 889 pages of chats went public, federal agents arrested Mr. Rossello's former secretary of education and former executive director of health administration on charges of fraud and theft of government funds.

On Wednesday the Puerto Rican online news site Noticel reported that the Center for Investigative Journalism has unearthed evidence that the Rossello administration engaged in influence peddling and doled out illegal sweetheart deals to friends and close confidants. The center's "investigation included interviews with more than twenty people with direct knowledge of the facts, the review of documents and databases of contracts and corporate records. The analysis and testimonies of the sources suggest that the practice spread to many of the public agencies," according to Noticel.

This alleged "pillage of public funds," Noticel wrote, happened "in the midst of the worst fiscal crisis in [the island's] modern history." It was also while Puerto Ricans suffered through Hurricane Maria and its aftermath.

It wasn't hard to foresee that giving the creditors a haircut would turn out to be nothing more than a blank check for the political class to continue business-as-usual graft and patronage. Sure enough Mr. Rossello liked the part of Promesa that allowed Puerto Rico not to pay its creditors; the part about fiscal restraint and cleaning up Tammany Hall, not so much.


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Old 07-26-2019, 05:01 PM
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Puerto Rico scandals may strengthen Oversight Board's hand

Widespread Puerto Rico protests and calls for the resignation of Gov. Ricardo Rosselló may strengthen the Oversight Board’s impact, at least temporarily.

The Oversight Board, formed in 2016 to manage fiscal policy and help the territory restructure its debt, is “facing a weak government,” said Vicente Feliciano, president of Advantage Business Consulting. “Thus, it could impose its will as long as it stays within reasonable bounds.”

Evercore Director of Municipal Research Howard Cure agreed. “With the taint surrounding the administration, the board may now feel emboldened to make more unilateral decisions and hope they get the cooperation of the bankruptcy court judge who might be less sympathetic to the administration.”

“With Rosselló’s declaration of not seeking reelection, the governor is a lame duck so I am not sure whether or not it makes a difference if he resigns or finishes his term,” Cure said.

Over the last 12 days the governor has been rocked by federal charges of corruption and mis-allocation of contracts against two cabinet officials and three government consultants and by the leaking of private chat messages among Rosselló and other prominent members of his administration. In the chat messages the governor referred to New York City Councilwoman Melissa Mark Vivirito as a “whore” and suggested that she should be raped. He used an obscenity with regards to the Oversight Board.

In other messages officials made what some have seen as sexist remarks about woman. Chief Financial Officer Christian Sobrino Vega made a joke about shooting San Juan Mayor Carmen Yulin Cruz and the governor said the shooting would do him a favor.

Since then there have been several San Juan demonstrations calling for the governor to resign, which he has said he won’t do. He has apologized, said he won’t run for reelection, and resigned his role leading his political party.

Because of the texts, Sobrino Vega has said he will cease service for the governor in a few days. The governor’s secretary of state has also resigned because of his texts.

Since the progressive release of the texts in mid-July, several key Puerto Rican political actors have called for the governor to resign. The governor’s 2016 running mate and current non-voting Puerto Rico representative in Congress Jenniffer González Colón said Friday the governor should resign.

The El Nuevo Día news web site, one of most respected local news sources, added its voice to the resignation calls Monday. Puerto Rico House Speaker Carlos Méndez Núñez, who is a member of the New Progressive Party with the governor, said he was exploring the possibility of impeachment.

On Monday President Donald Trump told members of the press that Rosselló was a “terrible” governor.

Cumberland Advisors Portfolio Manager Sean Burgess said: “I think all the turmoil and chaos has now prolonged the restructuring process. We already had an increase in uncertainty because of everything going on with the board. They still have not been confirmed by the Senate and are running up on the end of their term. Unfortunately all this chaos has taken what was looking to be a somewhat orderly process following the restructuring of COFINA Puerto Rico Sales Tax Financing Corp. and turned it on its head.” Cumberland owns insured Puerto Rico bonds.

Feliciano said that as long as the crisis was evolving the local elected government will be paralyzed regarding debt negotiations.

Burgess said the economy was doing reasonably well and the political chaos seemed unlikely to negatively impact it.

University of Illinois Professor Robert Chirinko said, "at this point, whether or not Rosselló resigns is only of modest importance for the economy. Chaos has been created, uncertainty has risen, and the damage has been done. One thing is certain; uncertainty is bad for the economy, as businesses are now going to be reluctant to expand and banks and investors reluctant to provide capital. The political crisis may well exacerbate the existing economic crisis.”

Cure said he was concerned that the political problems might affect the amount of federal aid that the island gets. He cited hurricane relief aid, Medicaid aid, and possible beneficial federal tax proposals as possibly being at stake.

Feliciano said that though the governor has said he won’t resign, he would be forced out of office. “The New Progressive Party cannot contest the 2020 election with Rosselló in the governor’s office of Fortaleza.” Because of this Méndez Núñez and other House of Representative members are looking into impeachment. “The rumor is that they have the votes for impeachment.”

“Today, the most likely scenario is for negotiations as to who will be the new governor in exchange for Rosselló's resignation,” Feliciano said. “The stick is the impeachment process. The negotiations are not going to be easy since the only thing that Rosselló might covet is a pardon by his successor while he has nothing to lose by holding on.

“The president of the Senate, Thomas Rivera Schatz, is the kingmaker,” Feliciano said. “The new secretary of state needs to be confirmed by the Senate and Rivera Schatz has total control of his caucus. Rivera Schatz loathes the Secretary of Justice Wanda Vázquez Garced, who is next in line to be governor while there is no secretary of state.”
Puerto Rico bankruptcy Judge to put stay on litigation to allow mediation

Puerto Rico bankruptcy Judge Laura Taylor Swain was poised Wednesday to put a stay on court filings regarding almost $25 billion of defaulted bonds and divert the treatment of the debt into mediation until December.

Swain presented her approach to commonwealth general obligation, Employees Retirement System, Highways and Transportation Authority, and Public Building Authority bonds in an omnibus hearing under Title III, a bankruptcy provision of the Puerto Rico Oversight, Management and Economic Stability Act. Altogether there were $24.7 billion of these bonds outstanding as of February 2017.

There was also talk of including Puerto Rico Infrastructure Financing Authority bonds in the mediation process, but as of Wednesday morning Swain hadn’t indicated her position on this topic.

The hearing took place in the U.S. District Court for Puerto Rico against a backdrop of political uncertainty in the territory. The news sites El Nuevo Día and El Vocero reported that Gov. Ricardo Rosselló had decided to resign in the face of widespread protests and that he would make the decision public on Wednesday. A spokesman for the governor denied any decision had been made. As of mid-afternoon the governor hadn’t publicly resigned.

Swain said that parties had brought up several complicated issues concerning the bonds. The Oversight Board has proposed to postpone consideration of the issues until after the plans of adjustments are confirmed. She said that she believed that to be unwise.

On the other hand, she said she thought the current process whereby various groups are pursuing separate challenges to the board’s treatments of the bonds to amount to “chaos.”

To remedy the situation she called for a stay on filings in the cases and the handling of the issues by a committee overseen by chief mediator Barbara Houser.

Among the topics to be handled are the bonds’ validity and secured status; the possibility of consolidating challenges to bonds into a single case, the treatment of bonds under the U.S. constitution, and whether the elected government’s assent to any agreement is required.

Swain said that the committee could come up with a proposed schedule for handling the issues. Alternately, the committee could file a report on areas of agreement.

Houser said that she expected to present a set of procedures for handling the topics. Alternately, she said she might be able to present solutions for the topics.

After Swain presented her idea, the lawyers representing the key parties in the case expressed their support of the idea.

Swain said would issue a written order for the stay and mediation, which expire on Nov. 30.
Puerto Rico government in flux after Rosselló quits

Puerto Rico's political upheaval has already hurt the economy and a disorderly transfer of power may lead to near-term delays in the territory's historic debt restructuring.

Gov. Ricardo Rosselló said late Wednesday he would resign effective Aug. 2, leaving the future of the government in flux. His resignation came after a series of corruption arrests, leaked chats, and protests that slowed economic activity by about 15% over two weeks, according to a study by Gustavo Veléz, chair of Inteligencia Económica.

Under Puerto Rico’s constitution the secretary of state is in line to replace the governor, but the secretary of state just resigned and the post is open. So the constitution says the governorship should go to the secretary of justice, Wanda Vázquez Garced.

Observers expressed doubt that this will happen. Thomas Rivera Schatz has just become the new president of the the New Progressive Party, which controls the governor’s office and the legislature. Rivera Schatz, who is president of the Puerto Rico Senate, is reported to hate Vázquez Garced, making collaboration between them difficult in the 17 months left in the governor’s term.

To have Vázquez Garced become the governor would lead to a “political crisis,” said Javier Colón, a professor at the University of Puerto Rico.

In order to avoid this difficult interaction and to get someone in the governor’s office who is poised to run for reelection — something that Vázquez Garced is unlikely to seek — the party’s leaders may take steps to find a different governor. One possibility would be for Rosselló to nominate a secretary of state and for the island’s House and Senate to confirm him or her before Aug. 2.

Another might be for Vázquez Garced to assume office and to then nominate and have confirmed a new secretary of state before resigning her role as governor.

The party’s leaders are currently discussing possible future governors. Colón suggested that Pedro Pierluisi could become the next governor. He was Puerto Rico’s last non-voting representative to the U.S. Congress and was a close runner-up to Rosselló in the 2016 gubernatorial NPP election primary.

Since Pierluisi helped write the Puerto Rico Oversight, Management, and Economic Stability Act, he might be more inclined to collaborate with the Oversight Board, Colón said.

Some of the corruption scandals that have recently hit parts of the Rosselló administration had been brought to her attention and some Puerto Ricans perceive Vázquez Garced as having done little or nothing, Colón said. This is another reason that the NPP may try to avoid her taking the reins of government.

If she becomes governor, “The political pressure will be very intense,” Colón said.

On Wednesday El Vocero reported that the Puerto Rico Office of Government Ethics was looking into Vázquez Garced’s handling of some supply trucks in the aftermath of Hurricane Maria. In response the secretary of justice released a statement that said, among other things, “the interpretation given to these matters by the story is false and defamatory.”

The business community is still uncertain about the situation, Veléz said. “We’re still in the crisis as far as who will be the next governor.”

While the business community would like the governor to have a better attitude toward the board, it is unclear if that will happen, Veléz said.

If a good governor comes into office and stability is restored, the economic situation could quickly return to normal, Veléz said.

“The governor's actual resignation doesn't change too much," said Municipal Market Analytics Partner Matt Fabian. "The board should put its debt restructuring plans in hold while PR government situation stabilizes and to allow for a full validation of all data that came from the commonwealth and a re-vetting of any professionals hired or used by the Rosselló administration. The commonwealth itself should begin a deep study of potential corruption in the government.”

By contrast, Puerto Rico Senate Minority Leader Eduardo Bhatia Gautier emphasized change and potential for continued change: “Puerto Rico has just experienced a democratic revolution lead by its young people. They are saying enough is enough with corruption, with lies and deception. And their voices are being heard.

“Silence for all Puerto Ricans is not an option,” the senator continued. “This is a new awakening that I hope lasts forever. It is a new Puerto Rico.”

The island’s bonds were mixed Thursday with the PREPA electric power bonds down 1 7/8 cents on the dollar and the 2012 dated GO bonds up 1 1/8 cents on the dollar, according to ICE Data Services.


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Old 07-29-2019, 02:08 PM
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Reducing Puerto Rican Corruption Requires Not Just A New Governor But Fresh U.S. Oversight
The Oversight Board has failed in their mandate to assist the Puerto Rico government in achieving fiscal responsibility. Board members believe their role does not include addressing corruption.
Mainland Americans are watching their fellow citizens in Puerto Rico engage in some of the largest protests since the pushback against U.S. military’s use of Vieques Island for bombing practice in 1999—2003.

Now students, union members, grandmothers, families, and superstars Bad Bunny, Ricky Martin, and Bendito are marching against the crass immorality and corruption of their 40-year-old governor, Ricardo Rosello. The protests have included large marches, horse and motorcycle rides, and flotillas of protesters in kayaks outside the governor’s palace.

It’s likely that resistance will continue to grow until the governor either resigns or is impeached. On July 24 it was reported that he is expected to resign. To understand what ignited this conflagration, here are three good background articles.

Meanwhile, where has the Oversight Board created by Congress and appointed by President Obama in 2016 been? Have they been aggressively rooting out corruption and executing their statutory mandate to help “the Puerto Rico government achieve fiscal responsibility and access to the capital markets”?

No. The Oversight Board has failed in their statutory mandate to assist the Puerto Rico government achieve fiscal responsibility. And the Oversight Board explicitly believes their role does not include addressing corruption. Thus the protesters should be marching against the Oversight Board, because they were given significant congressional authority to bring the government’s financial accounts up to date and create transparency in contracting and employee attendance.

The FBI has begun arresting former government officials and contractors and will likely accelerate their arrests, but this is shutting the barn door after the horse has bolted. The Oversight Board has authority to create proactive structural changes in the Puerto Rico government to create transparency and bring government practices closer to mainland state and local government processes.

Failing Their Duties to Puerto Ricans and U.S. Taxpayers

Instead of focusing on necessary changes to government practices, the Oversight Board has spent the majority of their time and money litigating against bondholders and have done almost nothing to stop “no bid” contracts going out the back door to “soul friends” (politically connected individuals). Since the Puerto Rico government filed for bankruptcy on May 3, 2017, government agencies have issued more than 153,000 contracts.

Let me cite a few examples of where the Oversight Board has fallen down. For one, the Puerto Rico government has amassed approximately $7 billion in central government cash since they stopped paying their debts in 2016. This cash now sits in local banks and, contrary to law, the government is not collecting interest on this cash, which means taxpayers are losing about $170 million a year by my estimation ($7.1 billion times the fed funds rate, currently 2.4 percent).

In bankruptcy, the trustee (or Oversight Board) generally secures the debtor’s cash and confirms that cash reported on financial statements has been reconciled with bank statements. Although the Oversight Board hired the firm Duff and Phelps on January 31, 2018 to examine how billions of cash mysteriously appeared in outside bank accounts, there is still no reconciliation of approximately $1.346 billion in bank accounts listed by the government’s fiscal agency and outside financial institutions. Of these outside bank accounts, 764 were not reconciled when Duff and Phelps issued their report in March, 2019.

There is also little outside confirmation of accounts, books, and records maintained by the government. The Oversight Board has also been exceptionally lax on requiring that the government complete their audited financials, although they were given that responsibility by Congress. The latest audited financials issued by the government on May 3, 2019, cover fiscal year 2016. The government just began their fiscal year 2020, so there is a three-year gap in financial reporting.

Are Fraudulent Financials Over for Electric Utility Prepa?

Fernando Scherrer was president of accounting firm BDO Puerto Rico and the U.S. Virgin Islands. He faces five criminal charges linked to BDO contract work with the government of Puerto Rico.

Energy think tank IEEFA wrote, “In the last 2 years, BDO has landed $2.6 million in contracts with PREPA to provide financial consulting and auditing services. For FY 2019, PREPA contracted BDO to prepare monthly financial reports, analyze PREPA’s budgeting and accounts system, draft budget and accounting reports, and perform other tasks critical to the accurate presentation of PREPA’s financial position. These tasks provided the basis for the representations made to the Oversight Board and to the bankruptcy court regarding PREPA’s debt restructuring.”

There is a fundamental problem with presenting financial statements that are two years late and prepared by a firm whose president was just arrested for contracting fraud with the government and for whom the governor cancelled all contracts to a bankruptcy court as the basis of haircutting creditors.

Congress explicitly required reasonably current audited financials to be made available prior to any debt restructuring, but Prepa just published BDO’s audit of their fiscal year 2016 financials last week. Why has the Oversight Board been so lax in enforcing this primary statutory responsibility? Congress gave the board subpoena power, and they could easily have had federal marshals seize all of the government’s books and records in the last two and a half years and supervise the completion of these audits.

And Then There’s Lax Contracting Oversight

After Hurricane Maria devastated the island, the Puerto Rico government gave a $300 million contract to an inexperienced two-person firm named Whitefish to get the electric transmission system up again while shunning the assistance of the electric utility industry association. This caused a political furor in Congress, and the White House and the Oversight Board instituted a contract review program in November, 2017 to review all contracts over $10 million.

The contract review process consists of merely certifying that a contract complies with a certified fiscal plan, which is really just a spreadsheet with broad spending categories. The Oversight Board says they do not do any due diligence on contracts.

This week, the Oversight Board approved a single-bid contract for diesel fuel for the electric utility, but is blaming Prepa officials of negligence on a contract that is double the regular price. The board was involved in the contracting oversight process for almost two months and could have assigned some of their dozens of staff or consultants to assist Prepa officials in negotiating the contract terms, but instead left utility officials to flounder.

Local media outlet El Nuevo Dia reports: “The Oversight Board had no other alternative,” said Natalie Jaresko, in an interview, explaining that the Oversight Board had to hold a virtually emergency meeting this week. This, before the expiration of the contract and after they were told that PREPA has only fuel for three or four days.

Jaresko, the executive director of the Oversight Board, is paid more than $600,000 a year to help the government achieve “fiscal responsibility.” Successfully negotiating a $300 million contract for an essential commodity should be a top priority for all staff and consultants to the government. It’s disheartening that three years into the Oversight’s Board tenure they are still playing a blame game with the government.

Taxpayers Pay If We Fail
Probably the most egregious example of the board failing to help responsibly right the island’s finances is their agreement to pay a $100 million breakup fee to ten hedge funds if their untenable debt restructuring deal with the hedge funds falls apart. A government entity should never be held hostage to hedge funds while doing a financial transaction.

There are many other examples where the Oversight Board has fallen down in their responsibilities. Replacing the current governor, as protesters are demanding, will provide a short-term reduction in corruption. But if the Oversight Board doesn’t take their statutory responsibility of creating change seriously, political corruption will grow again like a weed with the next Puerto Rico administration.

It’s time for the White House to find fresh new board members who will make tackling political corruption their primary goal. This will do more to create economic growth in Puerto Rico than any other reform.

Cate Long is the founder of Puerto Rico Clearinghouse, a consultancy for government creditors and other stakeholders.

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The Many Roots of Puerto Rico’s Crisis

After mounting protests, Ricardo Rosselló has resigned as governor of Puerto Rico, putting the territory's most immediate political crisis to rest. But what the US territory really needs is an accord with officials on the mainland to start addressing structural issues that have been impeding economic growth and formal employment.

WASHINGTON, DC – Puerto Rico is once again in crisis, both politically and economically. A United States territory with more than three million people, it has a larger population than many US states. But its population and real (inflation-adjusted) output have been falling since 2006. More than half of native-born Puerto Ricans alive today have left the island, most of them for the US mainland. The territory’s per capita income is around half that of the poorest US state, Mississippi.

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While the Puerto Rican economy reached dire straits in 2016, its problems go back much further. For the past decade, successive governments promising balanced budgets have consistently been forced to borrow after their estimates proved overly optimistic. Eventually, Puerto Rico was unable to meet its debt-servicing obligations. By 2015, its per capita debt was more than $16,000, compared to the 50 states’ average of $1,473, and its government still had large unfunded obligations.

Then, in June 2016, the US Congress passed PROMESA (the Puerto Rico Oversight, Management, and Economic Stability Act), which allowed Puerto Rico to enter quasi-bankruptcy proceedings under the supervision of a newly created Financial Oversight and Management Board. The FOMB would approve the territory’s budgets. In 2017, the island defaulted on its debt, and there have been legal battles ever since.

The Puerto Rican economy had a number of structural problems before 2016. But the FOMB, as the name implies, was not empowered to address them and could not force the commonwealth’s government to do so. Worse, just as the FOMB began its work, Hurricanes Irma and Maria struck the island in 2017, weakening the economy further. The electric power grid was knocked out, and the publicly owned electric utility, PREPA, having lost money for years, was unable to muster an adequate response. In addition to leaving some residents without power for almost a year, the storms reduced road access and prevented the delivery of humanitarian aid for weeks.

Now a political crisis has exploded. The proximate cause was the release of private messages in which the governor, Ricardo Rosselló, referred to the victims of Hurricane Maria and other groups in disgraceful and degrading terms. Rosselló has now resigned. But corruption charges and poor economic performance have been fueling widespread public discontent across the island, prompting the resignations of several other senior officials.

Like its economic weaknesses, Puerto Rico’s political problems run deep. Its unique governance structure allows both the Puerto Rican government and the US federal government to blame each other for the island’s plight. When the federal government extends the earned income tax credit (EITC) to low-income earners, it does so only for those on the US states, not for Puerto Ricans. Though the Affordable Care Act (Obamacare) actually does extend Medicaid to eligible Puerto Ricans, the island’s federal block grant is too small to cover the costs (and the US Congress has since withheld $12 billion, owing to corruption charges).

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Moreover, the island is subject to the 1920 Jones Act, which, by requiring it to use US-owned and -operated vessels for shipments to and from the US mainland, makes its shipping costs much higher than those of its Caribbean neighbors. And despite its low income, Puerto Rico is subject to the federal minimum wage. As a result, many workers are unable to move out of the informal sector into the formal sector.

But the federal government can also point to failures of Puerto Rico’s own making. For example, the island’s labor laws require employers to award annual bonuses worth a month’s pay, which raises the minimum wage above that on the mainland. Puerto Ricans also benefit from overly generous policies on annual leave, sick leave, and severance payments. Furthermore, the island’s land registry is woefully outdated. And in the 30 years after 1980, the authorities increased the number of teachers by 25%, even though the number of students had fallen by at least the same proportion. This increase has contributed to mounting pension liabilities.

Unless budgetary issues are directly involved, the FOMB is not authorized to require that the Puerto Rican government fix its egregious structural problems. This has led to constant clashes, with the FOMB even suing the governor for allowing municipalities to transfer their pension obligations to the territory.

The Puerto Rican economy has been slow to recover from the hurricanes of recent years. But even if aid were to produce a year or two of economic growth, the island’s political and economic problems would continue to resurface until the underlying structural issues are resolved.

The US government should consider extending the EITC to Puerto Rico, exempting the island from the Jones Act, and permitting flexibility on the minimum wage. And for its part, Puerto Rico needs to adjust its overly generous labor laws, to bring workers into the formal sector. It also needs to strengthen and expand its oversight capacity to reduce corruption and prevent waste, fraud, and abuse. Many additional structural reforms need to be undertaken.

A good crisis, it is said, should never go to waste. Puerto Rico has multiple crises, all of which demand that it focus squarely on its deeper structural problems. Only by addressing them can it improve its long-term prospects and ensure both political and economic stability in the future.

Writing for PS since 2014
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Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the School of Advanced International Studies, Johns Hopkins University, and Senior Fellow at the Center for International Development, Stanford University.

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