On Wednesday, Congress approved a bill to rescue Puerto Rico’s finances, only two days before the U.S. territory’s deadline on a $2 billion payment. But Governor Alejandro Garcia Padilla declared that the island would still not be able to pay bondholders.

“On July 1, 2016, Puerto Rico will default on more than $1 billion in general obligation bonds, the island’s senior credits protected by a constitutional lien on revenues,” he wrote on CNBC’s website.

Puerto Rico is in deep financial trouble; as Law Street previously reported, the island is $72 billion in debt, and is due to pay a big chunk of it this week. It has already defaulted on previous payments, but the payment due on Friday includes about $780 million of General Obligation bonds, which are the most important and supposed to be paid off first.

Since the island is not expected to make that deadline, this would be its first default of GO bonds, which it is bound to pay according to its constitution. The White House has expressed warnings that unless the U.S. steps in and helps, the island could face a possible humanitarian crisis and complete financial chaos. Since Puerto Rico is not a U.S. state but a territory, it can’t file for bankruptcy, which would allow it to restructure their debt.

Last Minute Bill

The bill that was voted through, called the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), will provide protection from any creditor litigations that could be brought to the Puerto Rican government. It will also put together a control board that will supervise restructuring of debts and finances. Both Republicans and Democrats unanimously supported it.

“If we don’t act before the island misses a critical debt payment deadline this Friday, matters will only get worse — for Puerto Rico and for taxpayers,” said Senate Majority Leader Mitch McConnell.

And President Obama said “This bill is not perfect, but it is a critical first step toward economic recovery and restored hope for millions of Americans who call Puerto Rico home.”

Puerto Rico’s Governor Padilla has mixed feelings about PROMESA, and wrote in a commentary on CNBC:

PROMESA is a mixed bag. On the one hand, it provides the tools needed to protect the people of Puerto Rico from disorderly actions taken by the creditors. The immediate stay granted by the bill on all litigation is of the utmost importance in this moment. Most importantly, the authority to adjust our debt stock provides the legal tools to complete a broad restructuring and route Puerto Rico’s revitalization.

On the other hand, PROMESA has its downsides. It creates an oversight board that unnecessarily undercuts the democratic institution of the Commonwealth of Puerto Rico. But facing the upsides and downsides of the bill, it gives Puerto Rico no true choice at this point in time.

The bill will provide some hope for the people of Puerto Rico. Thousands have already fled their homes on the island, while hospitals can’t treat patients without advance cash payments. Obama has promised to sign the new bill before July 1.

Emma Von Zeipel

Emma Von Zeipel is a staff writer at Law Street Media. She is originally from one of the islands of Stockholm, Sweden. After working for Democratic Voice of Burma in Thailand, she ended up in New York City. She has a BA in journalism from Stockholm University and is passionate about human rights, good books, horses, and European chocolate. Contact Emma at EVonZeipel@LawStreetMedia.com.

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Puerto Rico received a rather unwelcome and tightly wrapped Christmas gift this year from the United States as it was reminded, in a brief filed by Solicitor General Donald B. Verrilli Jr., that it is not a sovereign state regardless of the fact that it has its own Constitution and is much more independent than a colony or territory.

The United States, taking a substantial interest in the outcome of the two cases reaching the Supreme Court in January 2016 regarding Puerto Rico’s political status and future, just planted its feet firmly in the argument that Puerto Rico does not self-govern and is actually a territory with a limited ability and authority to govern over its own interests, disputes, and affairs. The brief has created a media frenzy in Puerto Rico and has even involved the United Nations through an appeal highlighting human rights issues pertaining to self-determination.

Image Courtesy Of [Vxla via Flickr]

Historically speaking, Puerto Rico was ceded to the United States by Spain in 1898 following the conclusion of the Spanish-American War pursuant to the Treaty of Paris signed on December 10, 1898. Following several years of constructing Puerto Rico’s government, legislature, and judiciary, it was finally provided a bill of rights by Congress in 1917, and the people of Puerto Rico were granted U.S. citizenship. In 1950, Congress gave Puerto Rico the right to create its own Constitution to be adopted by its government so long as it “provided a republican form of government” and “include[d] a bill of rights.” Puerto Rico’s Constitution was approved by Congress in 1952 following several changes and revisions. Since then, Puerto Rico has enjoyed a level of autonomy and sovereignty similar to that of the states. Constitutionally speaking however, Congress has directly managed and overseen Puerto Rico’s affairs under the Territory Clause of Article IV of the Constitution.

The cases to be heard by the Supreme Court, while narrow in focus, will directly address the debate over Puerto Rico’s constitutional and political future–a bigger picture effect, if you will. One case addresses whether the United States and Puerto Rico are separate sovereign nations for the purposes of Double Jeopardy under the Fifth Amendment of the U.S. Constitution. Due to the fact that the Double Jeopardy Clause prohibits individuals from being tried for the same offense twice, Puerto Rico would have to have sovereignty and operate in an autonomous fashion to charge individuals for the same crimes they were convicted of in federal court. While the federal U.S. government and the states are considered separate sovereigns for the purposes of Double Jeopardy, in its brief, the U.S., who is not a party to the case, submitted support for the Respondents in Commonwealth of Puerto Rico v. Luis M. Sanchez Valle, concluding that Puerto Rico is not a separate sovereign entity and therefore, Puerto Rico’s individual and independent prosecution of the individuals convicted in federal court violates the Double Jeopardy Clause of the Fifth Amendment.

The second case to be heard by the Supreme Court centers around Puerto Rico’s catastrophic public debt of approximately $72 billion, which it wants to be able to control and restructure in the same way each individual state can, but is not able to under the Bankruptcy Code of U.S. law. The debt incorporates $20 billion for public utilities, used by the people of Puerto Rico including 3.5 million Americans, which Puerto Rico is unable to pay. It is urging the Supreme Court to grant Puerto Rico the right to enact laws allowing for restructuring. This desperate measure comes on the heels of a 2014 decision by the U.S. Court of Appeals for the First Circuit that struck down Puerto Rico’s Recovery Act, which allowed for Puerto Rico to fill the gaps of Chapter 9 of the Bankruptcy Code that had excluded any part of Puerto Rico’s government to take part in restructuring. As such, the Recovery Act was found to be in direct opposition to U.S. law and deemed unconstitutional. The financial crisis in Puerto Rico has brought the small island to the brink of an economic meltdown.

Puerto Rico’s Governor, Alejandro García Padilla, issued an impassioned and assertive statement following Verrilli’s brief filing, stating that the Solicitor General’s stance is “contrary to all Supreme Court jurisprudence” and that Verrilli’s position is “at odds with prior postures by his office with regards to the sovereignty of the Commonwealth.” As far as Padilla is concerned, using the term “colony” to describe Puerto Rico’s current political status, well, those were fighting words.

While the upcoming Supreme Court cases both carry the answer to a long-lasting debate about Puerto Rico’s constitutional and political future, it appears that both sides want their cake and to eat it too. Padilla does not support either statehood or independence for Puerto Rico and wants U.S. financial and legal support on his own terms. The U.S. has received many benefits from its relationship with Puerto Rico, yet it fails to address the major pitfalls threatening the territory and is unwilling to be flexible in order to address dire concerns that only it can to date. Nothing is for certain except this–come early 2016, the Supreme Court will tackle the issue as to whether Puerto Rico is separate and sovereign from the United States. Until then, all we can do is wait and hope that Puerto Rico works with the United States to come up with additional solutions to the major problems at hand.

Ajla Glavasevic

Ajla Glavasevic is a first-generation Bosnian full of spunk, sass, and humor. She graduated from SUNY Buffalo with a Bachelor of Science in Finance and received her J.D. from the University of Cincinnati College of Law. Ajla is currently a licensed attorney in Pennsylvania and when she isn’t lawyering and writing, the former Team USA Women’s Bobsled athlete (2014-2015 National Team) likes to stay active and travel. Contact Ajla at Staff@LawStreetMedia.com.

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In the wake of the 2008 financial crisis, the Justice Department levied record-breaking fines against many of the big banks involved in the meltdown, but very few individuals actually served time behind bars. That may finally be changing. According to a memo released on Wednesday, the Department of Justice (DOJ) is shifting its priorities to focus on prosecuting specific individuals who are responsible for financial wrongdoing.

“One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing,” wrote Deputy Attorny General Sally Q. Yates in a memo to all federal prosecutors. Yates outlined six “key steps” that should guide prosecutors in their handling of corporate misconduct cases. While many of these steps are not necessarily new, the memo seeks to standardize the DOJ’s priorities going forward.

So far, billions of dollars have been collected by the DOJ from fines and civil penalties from major banks for the roles that they played in the financial crisis. However, very few individuals have actually been prosecuted, and even fewer were sentenced to time in prison. This has lead to some harsh criticism of the DOJ and the way that it handles financial crimes.

In an article about the recent DOJ shift, the New York Times notes:

The Justice Department often targets companies themselves and turns its eyes toward individuals only after negotiating a corporate settlement. In many cases, that means the offending employees go unpunished.

While using massive fines allow for record breaking headlines, it also shifts the burden of punishment from the individuals who defrauded the public to a company’s shareholders. Some argue that shareholders should also share in the punishment, as they have a lot of control over a company’s management, but few also argue that the responsible individuals should escape punishment.

The policy shift outlined in Yates’ memo will both prioritize individual prosecution as well as help compel companies to cooperate with investigations, specifically in terms of providing information about responsible individuals. The first point in Yates’ memo instructs prosecutors not to give cooperation credit to a company unless it provides information about all of the people responsible. This cooperation credit can significantly reduce the punishment that companies and individuals receive.

Although the DOJ is not directly admitting that its previous policies were insufficient, Yates does emphasize that her memo marks a significant change. In a speech given at New York University Law School, Yates said:

Now, to the average guy on the street, this might not sound like a big deal.  But those of you active in the white-collar area will recognize it as a substantial shift from our prior practice. While we have long emphasized the importance of identifying culpable individuals, until now, companies could cooperate with the government by voluntarily disclosing improper corporate practices, but then stop short of identifying who engaged in the wrongdoing and what exactly they did.

While this memo is certainly notable, it’s actually bringing some white collar prosecution standards in line with established standards for all criminals. In her speech to NYU Law School, Yates also notes that this is how it works for criminals who give information about their co-conspirators to the authorities. She uses the example of a drug trafficker, who can receive a cooperation agreement for informing on other criminals, but will not get any relief if he or she does not give information about the cartel boss. While ending special treatment for corporations is certainly a popular idea, it’s also a little disheartening to hear that hasn’t already been the norm.

This does mark a sort of reprioritization at the DJO, but the question remains: will it matter? Prosecutors face a wide range of challenges when they try to prosecute corporate crime. Yates acknowledges these challenges in her memo, but it is worth noting that this isn’t the first time people have called on regulators to focus on individuals.

The issue isn’t that the penalties for financial crimes are too weak, rather it is simply very difficult to prosecute people in corporate cases. In order to convict someone, prosecutors must trace misconduct to individuals and show intent behind their actions. This can be particularly challenging for issues at the magnitude of the financial crisis, which can involve wrongdoing at several levels of a company, but be difficult to tie executives to. The DOJ can also have a very hard time getting information about what happened; because many banks operate internationally other countries’ laws can restrict the information that is available to U.S. prosecutors.

The recent shift will hopefully make companies more likely to cooperate and provide useful information about individuals, but the prosecutorial challenges remain. Even after the DOJ’s recent announcement, reform advocates remain skeptical. Dennis Kelleher, the head of financial reform watchdog Better Markets told the Huffington Post, “Based on their past dereliction of duty, no one should believe anything DOJ says until they see actual, concrete and repeated prosecution of supervisors and executives.”

Yates is right to say that prosecuting responsible individuals is the best way to discourage future misconduct, but whether that can and will happen remains to be seen. These changes are a step in the right direction and acknowledge the importance of public confidence in regulators, but don’t expect to see many executives in prison any time soon.

Kevin Rizzo

Kevin Rizzo is the Crime in America Editor at Law Street Media. An Ohio Native, the George Washington University graduate is a founding member of the company. Contact Kevin at krizzo@LawStreetMedia.com.

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After the federal government bailed out insurance giant American International Group (AIG), the company’s former CEO Maurice “Hank” Greenberg expressed his gratitude by suing the United States. In 2008 the government lent AIG $85 billion in return for a 79.9 percent stake in the company, which Greenberg claimed was an illegal taking of property from shareholders. Although the court ruled in Greenberg’s favor, it decided not to award the $40 billion in damages that he wanted. This decision, which both sides will likely appeal, could discourage the government from engaging in future bailouts, as such a move could be deemed illegal.

In his ruling, Judge Thomas Wheeler stated that the Fed had crossed the legal line in demanding an equity stake in the company; however, he did not believe that AIG’s shareholders had been damaged by the move. Since the company would have gone bankrupt without government funding, he did not award damages. According to Wheeler, “20 percent of something [is] better than 100 percent of nothing.”

While Wheeler acknowledged the positive effects of the bailout, he also argued that the government should not have taken such a large portion of the company’s ownership. But without that requirement, the government may not have been confident enough to give billions of dollars to a company that was failing due to risky business practices. The ruling could create a precedent that discourages the government from dealing with future financial crises. Many Americans are upset by Greenberg’s victory, especially because the taxpayer-financed bailout clearly saved AIG.

AIG and several other companies were involved in the sale of credit default swaps, but as the value of its mortgage-backed securities fell, its credit was downgraded because it could not provide adequate collateral to back outstanding loans. No private creditors were willing to provide money to the company since AIG was in a downward spiral and any loan would mean taking on a considerable amount of risk. But if AIG did not receive the necessary collateral, it would have almost certainly gone bankrupt and its collapse could have disastrously affected the global economy. As a result, the federal government stepped in. The Fed offered AIG an $85 billion bailout package, but also required the company to give a 79.9 percent stake to the U.S. government, which later grew to as much as 92 percent.

AIG signed the deal the same day it was offered. The company not only avoided bankruptcy but also rebounded to an even larger recovery than expected. Since 2010, AIG made a series of moves to gain value and the U.S. government sold back its last shares in 2012, generating about $22 billion for taxpayers.

So what exactly was Greenberg upset about? He sued the Fed because he believes that demanding an 80 percent stake in the company as a condition of the bailout violated the takings clause of the Fifth Amendment. As the largest stockholder, he argues that the terms of the bailout constituted an illegal taking of shareholders’ property. Big banking corporations were arguably just as guilty as AIG of risky practices, yet they received much more lenient terms for government funding. Greenberg notes that the terms given to Morgan Stanley and Citigroup were much more generous.

In what has been termed “backdoor bailouts,” corporations like Goldman Sachs and Bank of America ended up receiving AIG bailout funds, but without the same demands. Because these banks were the largest creditors of AIG, they received some of the $85 billion without any terms and despite their involvement in the risky investments. When Greenberg brought his case to the AIG Board in an attempt to get the corporation to join the lawsuit, they declined–particularly because it would have created a PR nightmare for the company. The sad thing is that Greenberg’s case has some validity–other giant corporations were bailed out but did not face harsh penalties.

Despite Greenberg’s argument, the fact remains that the government’s actions saved AIG and its stockholders from imminent bankruptcy. The terms of the bailout were steep since AIG was grossly insolvent, and the loan was riskier than many of the other bailouts. Moreover, the influx of $85 billion was worth much more than the $12.8 billion that the company was worth on the day before the bailout. Some, like Senator Elizabeth Warren (D-Mass.), have also pointed out that the rate at which the Fed loaned AIG money, known as the Libor rate, was artificially low at the time due to manipulation by several large banks. As a result it saved AIG and other bailout recipients millions or even billions of dollars. Greenberg’s frustration over not being treated exactly the same as others sounds like it belongs more in a kindergarten classroom than in a courtroom.

The results of this case will almost certainly affect how the government deals with any future financial crises. Due to the dramatic amount of money the government gave AIG and the circumstances that led to its downfall, the government decided to demand assets, a deal that AIG accepted. This case may set precedent that harsh terms for a bailout, even when they are crucial to the health of the U.S. economy, may be deemed illegal, forcing the government to use a light hand when a heavy one is needed. Although he technically won, Greenberg did not receive the money he wanted, sending another powerful message: if the government bails you out, good luck trying to get compensation for the terms.

The U.S. government found AIG a stray, starving dog with no one else willing to feed it. Sure, AIG wasn’t given Purina like some of the other dogs, but it was fed enough to survive and get back on its feet. In response, Greenberg decided to bite the hand that fed him. Maybe we should have left AIG to face the hungry hounds of the free market.

Maurin Mwombela

Maurin Mwombela is a member of the University of Pennsylvania class of 2017 and was a Law Street Media Fellow for the Summer 2015. He now blogs for Law Street, focusing on politics. Contact Maurin at staff@LawStreetMedia.com.

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