By Eva Lloréns Vélez From Caribbean Business

SAN JUAN – The Federal Bureau of Investigations (FBI) has allegedly requested documents from investment firms as part of a probe into the $3.5 billion general-obligation bond issue of 2014 and a $600 million bond issue by the Puerto Rico Electric Power Authority (Prepa) in 2013, according to sources with links to Wall Street.

The sources alleged investigators subpoenaed documents from Barclays PLC, Morgan Stanley and RBC Capital Markets regarding the two bond issues.

Barclays, Morgan Stanley and RBC Capital Markets served as joint lead managers for the $3.5 billion bond offering in March 2014, with Barclays acting as lead book-running manager, according to the Government Development Bank (GDB). The bonds will mature in 2035 and were issued at an 8% coupon and an 8.727% yield.

The commonwealth government received about $3.2 billion in net proceeds from the offering, about $900 million of which was used to refinance short-term obligations and swap termination payments.

The $600 million bond offering from Prepa ended up being a $673.1 million municipal-bond transaction due to strong investor demand, the GDB said at the time. Yields were 6.73% on the shorter maturity bonds that will expire in 2030 and 7.12% on the longer maturity bonds that will expire in 2043. Morgan Stanley was the book-running manager and Wells Fargo acted as co-lead manager, the GDB said.

Barclays, through its press spokesman Andrew Smith, declined to comment on whether the FBI requested documents. A source close to Morgan Stanley, however, denied that the FBI requested any documents from the firm. RBC did not respond to requests for comment. Caribbean Business also contacted Wells Fargo but received no response.

In June, the Puerto Rico Commission for the Audit of Public Debt issued a report, which concluded that the $3.5 billion bond issue from 2014 and a $1.2 billion TRANs (tax revenue anticipation notes) issue from 2014 that was given to a syndicate of banks led by J.P. Morgan may have been illegal. The commission noted that the bond issues were used to finance deficits and to pay prior debt issuances when the Puerto Rico Constitution states that budgets must be balanced.

The report also pointed to violations to the U.S. Securities & Exchange Commission (SEC) anti-fraud rules, noting that underwriters and outside professionals are required to determine that a borrower provides financial statements and audits on time. However, Puerto Rico missed a deadline to file its fiscal 2013 audit, weeks after the bond issue was done.

Shortly after the Puerto Rico commission issued its report, seven U.S. Democratic senators, the AFL-CIO and New York City Council Speaker Melissa Mark-Viverito urged SEC Chair Mary Jo White to investigate potential misconduct involving Puerto Rico’s bonds.

“We write to ask you that you investigate possible market manipulation, conflicts of interest, trading practices and fraud in the underwriting, sale, distribution and trading of municipal securities of and relating to Puerto Rico, as well as any other fraudulent, illegal or wrongful conduct,” according to a letter that was released from the office of New Jersey Democratic Sen. Robert Menéndez.

U.S. Sen. Orrin Hatch (R-Utah), head of the Senate Finance Committee, also called on the SEC to investigate the U.S. Treasury Department’s possible involvement in creditor negotiations to restructure Puerto Rico debt and look into potential illegal activity by brokers, advisers or underwriters, as he noted possible “asymmetries” in the information received by public and private officials that could affect the integrity of the bond market.

IMAGE: Treasury Secretary Jacob Lew, left, talks with Senate Finance Committee Sen. Orrin Hatch, R-Utah, center, accompanied by the committee’s ranking member Sen. Ron Wyden, D-Ore., on Capitol Hill in Washington, Wednesday, Feb. 10, 2016, prior to Lew testifying before the committee’s hearing on President Barack Obama’s fiscal 2017 federal budget. (AP Photo/Alex Brandon)

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