Investors Get Whacked in Virgin Island Municipal Bonds: Should Consider Arbitration to Recover Losses in these High Risk Investments

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from risky municipal bonds. One of the most troubling investments for investors has been bond mutual funds and single municipal bonds issued by Caribbean territories like Puerto Rico. The island was devastated by Hurricane Maria and a debt crisis. The island’s government, which issued billions in municipal bonds, filed for bankruptcy, which forced bondholders to take losses. Like Puerto Rico, the neighboring Virgin Islands may be facing a debt meltdown of its own.

The U.S. Virgin Islands, also severely damaged by two hurricanes in recent years, is also dealing with an ongoing debt crisis. With only about 100,000 inhabitants spanning three Caribbean Islands, the U.S. protectorate had been issuing high-yield municipal bonds in recent years to fund essential government services such as a power utility. The government owes more than $6.5 billion to creditors, which averages some $19,000 per resident. In addition, the islands have billions in unfunded pension and healthcare obligations. That’s one of the highest per-capita debt loads in the Western Hemisphere.

The debt explosion in the Virgin Islands has gone from bad to worse. Three years ago, credit ratings agencies slashed the ratings on government bonds to junk status. While that made the bonds’ yields more attractive (they rose), it also indicated a higher risk of default. As a result, prices on those issues dropped.

Faced with declining government revenues and loss of a major employer, the Virgin Islands was cut off from issuing more debt a few years ago. Then the islands’ government faced a cash crisis. According to The New York Times: “the debt dilemma is now most acute in the Virgin Islands — the three main islands are St. Thomas, St. Croix and St. John — where the government has been struggling ever since a giant refinery closed in 2012, wiping out the territory’s biggest nongovernment employer and a mainstay of its tax base.” Of particular concern is the islands’ Public Financing Authority Loan Note Series C agm bonds.

Municipal bonds are debt securities usually issued by government entities to raise money for a wide range of projects from schools to airport expansions. They are generally seen and marketed as secure since their payments are based on (normally) predictable and steady tax revenues. While you can often find high yields on lower-rated municipal bonds, they have a much higher risk of default. When tax revenues fall significantly, these securities become even riskier. You can lose money.

Thousands of investors, for example, lost money in funds that invested in Puerto Rican bonds and have recouped losses through FINRA arbitrations. In those cases, arbitrators found that bond fund managers did not fully disclose the high-risk nature of the island’s debt. Other Caribbean nations have faced bond defaults in the past: The Dominican Republic in 2005 for $1.6 billion; Belize in 2006 for $242 million. Mutual funds that invested in these bonds also lost money.

Brokers and mutual fund managers have a legal obligation to fully disclose financial risks to investors. When they don’t, investors who lose money can file arbitration claims with FINRA: This regulator’s rules mandate that brokers perform due diligence for investors to ensure that investments they sell are suitable for a client’s age, risk tolerance, net worth and sophistication. Like many investments, municipal bond terms can be complicated, but brokers have a legal responsibility to clearly spell out investment risks and ensure that these vehicles are suitable for individual clients.

If you lost money investing in municipal bonds and municipal bond funds, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!

CNBC
FOX Business
The Wall Street Journal
Bloomberg
CBS
FOX News Channel
USA Today
abc NEWS
DATELINE
npr
Contact Information