Shepherd Smith Edwards & Kantas LLP Investigating Claims Involving Doral Bank and the Puerto Rico Conservation Trust Fund

Securities attorneys with the law firm Shepherd Smith Edwards & Kantas LLP are investigating claims related to Doral Bank.  Currently, the financial challenges which have engulfed Puerto Rico are spreading into a new direction: Doral Bank and its related entities Doral Financial Corp. and the Puerto Rico Conservation Trust Fund.  Doral Financial Corporation is the bank holding company for Doral Bank.  Doral Bank operates 22 branch locations in Puerto Rico and 8 branches in New York and Florida.  The Conservation Trust Fund is a private, nonprofit organization which manages many of Puerto Rico’s “environmentally sensitive” areas.
The Conservation Trust Fund issued $200 million in senior unsecured notes which mature in April 2022.  The way the transaction was set up, the Conservation Trust Fund is a conduit issuer, and Doral Financial is the actual obligor.  The Conservation Trust Fund used the proceeds from the sale of its notes to purchase notes issued by Doral.  As a result of this system, the only source of repayment for holders of the Trust Fund’s notes are payments from Doral Bank.

While this may have seemed like a good idea at the time, Doral Bank has fallen into serious financial problems.  Doral Financial Corporation reported a 4th quarter loss of over $50 million in 2013.  For 2013 as a whole, the company reported a loss of almost $90 million.  To make matters worse, apparently Doral overpaid taxes to Puerto Rico to the tune of almost $230 million between 2000 and 2013.  Doral had been counting an expected repayment of those funds in its Tier 1 Capital, which are essentially required capital reserves for banks. 

On May 1, 2014, Doral received a notice from the Federal Deposit Insurance Corporation (“FDIC”) that Doral would no longer be permitted to include these promised repayments.  On May 14, 2014, Doral received a letter from Puerto Rico’s government which apparently states that Puerto Rico isn’t going to refund the $230 million Doral believes it overpaid.  As a result of these problems, Doral is now prohibited from accepting new brokered deposits or rolling over old brokered deposits unless it can get a waiver from the FDIC.  The FDIC has indicated that no such waiver is forthcoming. 

This means that Doral has (1) been losing money in its normal operations last year; (2) lost hundreds of millions of expected and accounted for assets; and (3) been prevented from continuing to operate a substantial and lucrative portion of its business.  As a result of these problems, Doral was downgraded by Moody’s to Caa3, which is Moody’s lowest possible rating, indicating near certain default.  Doral’s stock fell 98% between April 2010 and May 9, 2014. 

Similarly, because of how the transaction with the Conservation Trust Fund was structured, Moody’s dropped the rating on the Trust Fund’s notes to Caa3, indicating near certain default on these notes. 

If you have invested in any securities based upon the Puerto Rico Conservation Trust Fund or Doral Bank, contact us for a free, no obligation evaluation of your situation.

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