Puerto Rico Government to Cooperativas: Where’s the Fraud?

The government files a motion arguing the lawsuit contending it committed fraud fails to present any supporting facts.

A street in San Juan, Puerto Rico

Puerto Rico’s government has asked a federal judge to dismiss a lawsuit contending it defrauded seven island-insured cooperativas.

In documents filed in Puerto Rico federal court, the government, its fiscal oversight board and its local credit union regulator said the cooperativas have not demonstrated that they were coerced into buying government bonds whose values have dropped as a result of the fiscal crisis the island faces.

“The Complaint fails to allege any facts supporting the conclusion that any Defendants knowingly participated in this purported fraudulent scheme or knew of any false or misleading statements” regarding government bonds purchased by the cooperativas, the motion stated.

The value of those bonds is questionable, since the local government has filed for bankruptcy and its finances are supervised by an oversight board created by Congress. The island is also still recovering from hurricane damage from last year’s devastating storms.

The cooperativa system is well established in Puerto Rico. Earlier this year, the island regulator, the Corporation for the Supervision and Insurance of Cooperatives, reported there were 115 cooperativas on the island that held $8.1 billion in shares and deposits for almost one million members.

That is in addition to federal credit unions backed by the NCUA.

In the suit, the cooperativas asked the U.S. District Court for Puerto Rico to rule that the debts they are owed based on those investments cannot be discharged by the bankruptcy filing because they were based on false representations and fraud.

The government ignored its responsibility and induced the sale of “unsound” securities, they charged.

The government coerced the cooperativas by delivering “threats” and “warnings” of possible revocation of the tax-exempt status of cooperativas, which has been in effect since the 1940s, the lawsuit said.

In its response, the government said the cooperativas contend that 65% of its investment portfolio is comprised of Puerto Rico government securities.

In an interview with CU Times in April 2016, attorney Jose Sosa-Llorens leveled similar charges about coercion. At the time, Sosa-Llorens, a former commissioner for Financial Institutions of the Commonwealth of Puerto Rico, represented 25 of the largest cooperativas on the island.