In 2014, as the García Padilla administration geared up to launch its largest (and last) junk bond issue in the market, Banco Popular of Puerto Rico (BPPR) and Citi warned that said issue made no sense due to the immediate fiscal challenges it faced.

The certainty of Citi was such that they decided to distance themselves from the issue. BPPR on the other hand, and in spite of having recommended that the issue not be carried out, went onto form part of the bank trustees involved in --and enriched by-- the $3.5 billion issue.

According to the final report from Kobre & Kim, the firm hired by the Fiscal Control Board (FCB)

to investigate the causes of the government's debt, these actions have left the banking institution open to claims and repayments in the Puerto Rican government's bankruptcy process.

This document, which is over 600 pages long, includes a breakdown of the potential causes for action that could emerge from the investigation findings. In various instances, the debt investigators are ambiguous or timid in allocating responsibility, but in the case of Popular, they were adamant to point out that they are still liable to pay for participating in an issue that they themselves had advised against.

Nonetheless, Kobre & Kim clearly states that its list of potential disputes should not be construed as legal advice and recommends further counseling on the given facts. The investigation was mainly focused on BPPR, Banco Santander, and the Government Development Bank (GDB).

According to the report, the claims against BPPR revolve around their advice to the government regarding the controversial bond issue in 2014. The evidence gathered by the firm consists mainly of a memorandum letter written by Citi and BPPR and sent to David Chafey --who back then was president of the GDB and a former Popular executive-- where they advise that the issue made no sense.

Both financial institutions proposed instead to provide an immediate, tax-secured $2-billion injection to their liquidity. The government in exchange would have to approve a balanced budget act, an additional fiscal control act, and a 5-member oversight board including appointees from the Federal Reserve and the US Treasury.

As a sort of foreshadowing, the ideas contained in the proposal from BPPR and Citi gained traction in US Congress, laying the foundations for the Puerto Rico Oversight, Management, and

Economic Stability Act (PROMESA).

'A Citi witness stated that it made more sense to follow some of the suggestions in the memorandum, rather than do another bond offering. The witness also expressed his view that, after having a conversation with GDB about Citi's recommendations in the memorandum, Citi could not in good conscience underwrite another bond while proposing a different path.', reads the Kobre & Kim report.

The report states that, with the assessed evidence, it is possible that a court may conclude that Popular's actions serve as a basis to equitably subordinate any claim it files in the Title III proceeding to other claims. This means that, inasmuch as BPPR has any pending claims in the bankruptcy proceedings, there could be additional claims filed against BPPR by both creditors and the FCB, forcing the bank to pay instead of being able to collect as a creditor.

'These remedies may be key to the chances of value recovery here, because other claims premised on the same conduct are likely to be barred by relevant statute of limitations and/or other defenses', the report says, explaining that, although other conducts may have already been prescribed, claims against Popular could still arise in the bankruptcy case through this recovery mechanism.

FCB Chairman Jose Carrión III had previously stated that he was ready to follow through with any cause for action determined through the investigation, and now the firm helps advance the prospect of selecting the jurisdiction for legal action. Aside from Puerto Rico, the report also mentions New York as a possible legal jurisdiction, since it has a statute of limitations of either 6 years after the event happened or two years after fraud was discovered.

After these discoveries were published, we attempted to contact BPPR, but they merely responded that 'at this moment, Popular is unable to provide specific feedback, since it involves current legal proceedings subject to strict confidentiality rules'.