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One of the biggest speculators on Puerto Rico’s debt remained unknown until last week. Here’s an inside account of how the Baupost Group was exposed.


One of the biggest speculators on Puerto Rico’s debt had managed to keep his identity a secret for years, even as his hedge fund was actively involved in litigation to force bond payments from an island that is dealing with a deep economic crisis, and is now struggling to recover from a catastrophic hurricane.

Last Tuesday, David Dayen and the Intercept revealed that the speculator is billionaire Seth Klarman and his Boston-based hedge fund, the Baupost Group.

LittleSis worked with the Intercept to unmask Baupost and Klarman, who clearly would have preferred to remain anonymous. Here’s a bit more context on the research process that eventually exposed them.

Hedge Funds and Puerto Rican Debt

The identities of many of the biggest hedge fund speculators on Puerto Rico’s debt have only slowly become public in recent months and years. As the economic crisis deepened in Puerto Rico, bond prices plummeted and so-called vulture funds began buying up the debt. At first, news of which hedge funds were involved came out mostly through rumors and press reports. Then, as Puerto Rico began to reduce, withhold, and attempt to cancel debt payments, and after it declared bankruptcy this spring, many of these speculators became plaintiffs in litigation to force payment.

(It is worth noting that while bond traders like to talk up their uncanny abilities with probabilities and the like, the heart of the vulture strategy is litigation: hiring high-powered lawyers to engage in a deeply immoral, relentless, and expensive campaign to force governments to prioritize the payment of creditors over basic human needs. It is class war in a courtroom, and the billionaires with endless resources often win.)

As a result of filings in these court cases, the identities of many of these hedge funds, as well as the amounts of debt they held, became public information.

Uncovering Seth Klarman and the Baupost Group

But in one of the major lawsuits, initiated by investors in COFINA (sales tax-backed) debt, the plaintiff that owned the largest amount of debt remained unknown, hidden behind a series of shell companies. Together, these ten shell companies – named Decagon Holdings 1 through 10, LLC – owned $911 million in COFINA debt. This made it the second-biggest hedge fund creditor actively involved in litigation. The Decagon Holdings entities were incorporated in 2015, suggesting that they entered the trade in the secondary market, when COFINA debt was trading at a discount.

Ultimately, we were able to link Decagon to the Baupost Group through obsessive googling and database searches, some educated guesswork, and a strange phone call that seemed to confirm our hypothesis. Dayen and the Intercept were able to extract confirmation from the Baupost Group, which was a real feat.

(For those interested in the wonkier details of how we figured this out, see the section below for more info on our research process).

There are several signs that Klarman really didn’t want his name associated with the trade in Puerto Rican debt. First is the use of the shell company structure. While this is not necessarily an uncommon practice for these kinds of trades, none of the other major bondholder plaintiffs in the COFINA case were hiding behind shell companies.

Second, the public relations firms and attorneys working on behalf of the COFINA group of hedge funds were extremely evasive about Baupost’s involvement, as if they were under orders to keep it under wraps.

The lead attorney for the COFINA group testified before the House Committee on Natural Resources in April 2016 and named only four hedge funds as clients, none of them Baupost. When Rep. Doug LaMalfa asked him to name his clients, he again named only the four, and added that he was also representing some individuals.

Just weeks after the testimony, an op-ed in Fox News Latino named Baupost as part of the group – suggesting that Baupost had been part of the group at the time of the Congressional testimony, and that the attorney had been evasive under questioning. There was, however, no clear sourcing in the piece, and when CQ tried to confirm Baupost’s involvement, it could only extract a sort of non-denial denial from the group’s spokesperson, who said that Baupost was “not part of the steering committee group that is the main driver of the coalition.” Dayen and the Intercept ran into similar verbal gymnastics before Baupost finally confirmed.

Baupost and Klarman were, perhaps, seeking to hide their involvement from the rest of the market and avoid the reputational damage associated with aggressively trying to extract bond payments from Puerto Rico. Similarly, Klarman’s $3 million contribution to a pro-charter PAC in Massachusetts was initially undisclosed, along with other contributions to that PAC. That eventually resulted in a historic fine and generated significant backlash in Boston. (More on Klarman’s secret backing of charter schools is here.)

Klarman’s Puerto Rico trade, too, only remained secret for so long. Now Baupost and Klarman are potentially facing much more public pressure than they would have if they had not chosen to hide their involvement.

How the Research Process Worked

For those interested, here are some key points from the research process that might help others do this kind of digging in the future:

  • The Intercept had the address for Decagon Holdings and sent it our way, which was helpful, along with the building directory, which was obtained by an Intercept source. We used it to look at every entity in the building – a rather large building, the Prudential Tower – to determine whether they might be involved. None of the investment firms there seemed to fit the profile of what we thought we were looking for: a hedge fund big enough to sink hundreds of millions of dollars into a very risky debt trade (none looked big enough to us, but we also checked assets under management in the SEC investment adviser database).
  • Ropes & Gray is in the Prudential Tower, and we suspected that they might have set up the LLCs on behalf of a client. Of course, it is a giant firm with many Wall Street clients, so that alone is not enough to go on. Perhaps, at this point, we should have suspected Baupost, since they are the biggest hedge fund in Boston and have a reputation for secrecy and for investing in distressed debt. Never having seen Baupost linked to Puerto Rico, we didn’t.
  • We also started looking at the attorneys for the COFINA group, to identify past clients and find anything we could on what they had said about the case. This eventually led us back to Susheel Kirpalani’s testimony and the subsequent Fox News Latino piece and its mention of Baupost. Still, none of that linked Decagon to Baupost.
  • Returning to the Ropes & Gray thread, we identified several attorneys who had worked with the Baupost Group, and one, Jeffrey Katz, who – in addition to having worked directly with Baupost – seemed to describe a particularly close and longstanding relationship with a firm fitting Baupost’s profile on his experience page. His description of work conducted for the fund also seemed to match what we were looking for:
    • Advises a private fund with over $25 billion of assets under management, on the purchase and sale of various private debt, equity and real estate investments, including domestic and cross-border joint ventures often involving complex structures. In addition, Jeff advises on matters relating to the fund’s trading of public debt and equity securities, and bankruptcy claims.
  • I called Katz and he picked up, to my surprise. I identified myself, as well as my affiliation with the Public Accountability Initiative, and asked if he was the right person to talk to about Decagon Holdings and Baupost. He paused, started to respond, and then evidently thought better of it and said that he was actually in a meeting, and that I would need to call back (apparently, this high-powered lawyer picks up calls from strange numbers when he is in important meetings). As he was telling me to call back, I asked him again if he was the right person to talk to about Decagon, and that I wouldn’t call back if he wasn’t, and he seemed to get even more flustered. At that point he started talking too much, about how he was a lawyer and has clients, how I must think I’m onto some kind of big scoop, and how there was a person standing right in front of him – literally, standing right in front of him – while I rudely insisted on keeping him on the line.
  • It felt very likely, based on his reaction, that our hypothesis was right. We passed this information back along to Dayen and the Intercept, and they managed to extract confirmation from Baupost.
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Because of our longstanding focus on Wall Street, our interest in vulture funds and their debt strategies, as well as our work with Hedge Clippers and organizations in Puerto Rico including Espacios Abiertos and the Center for Investigative Journalism (CPI), we have done quite a bit of work to identify hedge funds speculating on Puerto Rico’s debt. This experience certainly helped in the above search.

Thanks to David Dayen and the Intercept for bringing us in on this story, and thank you to our friends working on the frontlines to expose and resist the profiteering behind the debt crisis, and to fight for an equitable, just, and sustainable recovery in Puerto Rico.