Puerto Rico sued over diverted funds amid economic crisis

SAN JUAN, Puerto Rico (AP) — Puerto Rico is facing its first lawsuit over how the U.S. territory's government has diverted funds to meet certain bond payments as its liquidity dwindles amid a worsening economic crisis.

The lawsuit filed late Thursday by Assured Guaranty Corp. and Ambac Assurance Corporation claims the government violated the U.S. constitution by diverting tax revenues meant to back certain bonds and used them instead to finance general obligation bonds, which have higher priority.

"At this time we have no choice but to protect our stakeholders through judicial recourse," Nader Tavakoli, Ambac's CEO and president, said in a statement. "The Commonwealth has committed itself to a 'scorched earth' strategy of blaming its fiscal and structural problems on lenders, Congress and others, in an effort to deflect responsibility and obtain retroactive application of bankruptcy laws."

The two New York-based companies and their affiliates insure nearly $8 billion of the territory's debt, according to the lawsuit filed in the U.S. District Court of Puerto Rico. The companies claim the government illegally diverted at least $163 million when it had other available resources to pay part of its debt.