Our law firm is pursuing securities arbitration claims in the arbitration forum established by the Financial Industry Regulatory Authority (“FINRA”) to recover losses sustained in Puerto Rico bond funds, sold by full-service brokerage firms, including UBS Financial Services of Puerto Rico and Oriental Financial Services, to their customers. KlaymanToskes has teamed up the law firm of Carlo Law Offices, PSC based in San Juan, Puerto Rico to prosecute securities arbitration cases on behalf of investors. The Puerto Rico bond funds sold by full-service brokerage firms include the following:
With the downturn in the Puerto Rican economy, the value of these funds has declined significantly. Weakness in municipal markets across the United States and Puerto Rico and fear surrounding the direction of interest rates have led to significant declines in Puerto Rico municipal bond and closed-end fund prices, as well as a lack of liquidity for these products. Local losses are reported as being in the hundreds of millions of dollars and numerous high-net-worth investors have been “wiped out.”
According to marketing materials, UBS has sold more than $10 billion of the Puerto Rico bond funds through the end of 2012. Unfortunately, a number of UBS customer accounts were over-concentrated in these funds, exposing their hard earned money or retirement portfolios to significant risks. To make matters worse, in addition to being concentrated in these funds, some UBS customers were encouraged to buy more of these securities through lines of credit offered by Utah-based UBS Bank USA, in violation of UBS firm policy. Additionally, many clients took out margin loans to buy into these funds. With many of the bond funds already highly leveraged themselves, in some cases as high as 53%, losses can be exasperated when the value of the funds decline. UBS has since announced that it put a financial advisor in Puerto Rico on administrative leave while the firm reviews loans that were issued to clients. Caribbean Business reported that UBS also fired as many as seven brokers in September 2013, and received a visit from a global risk official.
According to the New York Times, Robert Mulholland, the head of wealth management advisors in the Americas for UBS, and other senior bank executives made trips to Puerto Rico as the situation grew worse. “I would characterize this as the perfect storm,” Mr. Mulholland told a group of investment advisors last month in San Juan, according to a recording of that meeting reviewed by The New York Times. Mr. Mullholland told brokers at the San Juan meeting that the margin calls in Puerto Rico were “piling up” and that many of the funds were hard to trade because the market was fairly illiquid. In the event of margin calls, he encouraged brokers to search out clients’ most liquid assets “whether they are in the account or outside of the account.”
UBS managed over a dozen closed-end bond funds which have sustained losses due to the downturn in Puerto Rico bonds. For instance, one of the closed-end funds managed by UBS, the Tax-Free Puerto Rico Fund, had a net-asset-value (“NAV”) of $5.52 on September 11, 2013, down from $6.73 the previous week, and from $9.55 on January 31, 2013. Over 75% of this particular closed-end fund is invested in Puerto Rico government bonds. In mid-September 2013, some 30-year Puerto Rico bonds were selling for less than 70 cents on the dollar, causing yields go grow over 10%.
Similarly, at the end of August 2013, the Puerto Rico Fixed Income Fund reported an NAV of $5.46 per share. On September 25, 2013, the fund reported an NAV of $3.74 per share, representing a decline of 31%. The fund had an initial public offering price of $10 per share in 2003. According to UBS marketing materials, through August 2013, the fund experienced a five year annual total return of close to 5%, compared with a market return of almost 8%. This decline is shocking given that this fund was sold as a “Tax-Free Secured Obligations.”
With the declining prices of the bond funds, many UBS clients have been forced to liquidate hundreds of millions of dollars in holdings in these funds after incurring margin calls. Because the funds were already leveraged, it was unsuitable for investors to purchase these securities through the use of margin loans or lines of credit.
In May of 2012, the U.S. Securities & Exchange Commission (“SEC”) charged UBS Puerto Rico and two of its executives with “making misleading statements to investors, concealing a liquidity crisis, and masking its control of the secondary market for 23 proprietary closed-end mutual funds.” The SEC also stated that in 2008, UBS PR promoted the closed-end funds’ “extraordinary ‘market returns’ and low risk and volatility, but failed to disclose that share prices and liquidity were increasingly dependent on UBS PR’s support of the [closed-end funds’] secondary market.” During 2008 alone, UBS PR’s non-exchange traded closed-end fund business produced $94.5 million in revenue for the firm. While UBS PR paid $26.6 million to settle the SEC’s charges, UBS PR has agreed that “in any Related Investor Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any award of compensatory damages by the amount of any part of [UBS’] payment of a civil penalty in this action.”
Investigation Into Sales of Puerto Rico Funds by Other Broker-Dealers
Our firm’s investigation of Puerto Rico Bond Funds showed that other brokerage firms, including Santander Securities and Popular Securities, also ran closed-end funds with large holdings of Puerto Rico bonds which also experienced losses. Our firm is investigating whether Merrill Lynch and Raymond James were also involved in selling securities which had exposure to Puerto Rico debt. As FINRA broker dealers, these firms were obligated to make only suitable recommendations and fully disclose to their customers the entirety of the risks associated with Puerto Rico bonds and bond funds. Investors who purchased Puerto Rico debt from these brokerage firms may also be able to recover their money by filing an individual securities arbitration claim.
Recovery Options For Investors
As a result of the recent losses in UBS Puerto Rico bond funds and other Puerto Rico debt products, securities arbitration claims have already begun to be filed with FIRNA’s arbitration department to recover losses on behalf of Puerto Rico bond fund investors. A flood of cases is expected to be filed as a result of the alleged wrongful conduct of FINRA brokerage firms, including UBS Puerto Rico. Due to the binding arbitration clause contained in the customer agreement that accompanies the new account forms presented by FINRA brokerage firms to their customers, investors who have sustained losses in the Puerto Rico bond funds are required to file a claim with FINRA in order to attempt to recover their investment losses.
KlaymanToskes has also launched two websites to provide information to investors who sustained losses in Puerto Rico bonds and bond funds: www.sueubspuertorico.com and www.perdidasenbonospr.com. For more information on how to start a claim, or to find out if you have a claim, please contact our law firm at (787) 919-7325 for a free consultation.