SEC ends probe into Puerto Rico's $3.5 bln 2014 bond issuance - sources

By Nick Brown

NEW YORK, April 9 (Reuters) - The U.S. Securities and Exchange Commission has dropped a probe into whether former Puerto Rican officials misled investors when they sold $3.5 billion of general obligation bonds in March 2014, according to two sources with direct knowledge of the matter.

Ex-Puerto Rican leaders who had been interviewed as part of the SEC (Shanghai: 603988.SS - news) 's investigation received letters last week from the agency, saying the SEC would not recommend enforcement actions, said the sources.

The issuance came during the administration of ex-Governor Alejandro Garcia Padilla and then-Puerto Rico Treasury Secretary Melba Acosta, as the U.S. territory slid precipitously toward bankruptcy.

Prices on the bonds began to fall shortly after they were sold, leading the SEC to look into whether issuers painted too rosy a picture of Puerto Rico's finances.

The probe targeted Puerto Rican officials and underwriters at Morgan Stanley (Xetra: 885836 - news) and Barclays (LSE: BARC.L - news) .

In June, the SEC made preliminary recommendations to file enforcement actions against brokers at Barclays and Morgan Stanley (Shenzhen: 002588.SZ - news) , but the underwriters are now off the hook as well, the sources said.

A spokesman for Barclays declined to comment, while a representative for Morgan Stanley could not be immediately reached on Monday night.

The bonds, now held largely by hedge funds and mutual funds, were the last big debt issuance from Puerto Rico, which declared the biggest bankruptcy in U.S. government history in May.

As the island was trying to restructure some $120 billion in bond and pension debt, Hurricane Maria devastated its infrastructure in September, cutting power to the entire island and causing tens of billions of dollars in damage.

Puerto Rico's GO bonds, which had traded at roughly 60 cents on the dollar, plummeted to about 20 cents after the storm. They have rebounded somewhat over the last two months, trading at just over 40 cents on Monday, according to Thomson Reuters (Dusseldorf: TOC.DU - news) data.

GO holders are locked in a legal battle with creditors who hold so-called COFINA debt, which is backed by the island's sales tax revenue.

Both sides claim an ironclad right to Puerto Rico's sales tax, and a hearing on the matter is scheduled for Tuesday in New (KOSDAQ: 160550.KQ - news) York, before U.S. Judge Laura Taylor Swain. (Reporting by Nick Brown; Editing by Cynthia Osterman)