Securities Lawyers Blog
Albert Einstein once defined insanity as “doing the same thing over and over again and expecting different results.” While UBS does not challenge Einstein’s theories in physics it does challenge his thoughts on insanity. According to several news sources, including Financial Advisor Magazine and Reuters, UBS has told its brokers to continue selling its extremely speculative and risky UBS Puerto Rico bond funds to investors even after some investors have lost their entire investment and many others have suffered very substantial losses. Obviously, UBS believes a different result can be achieved with these recommendations. Let’s examine the facts and determine whether UBS has any grounds for such a belief.
Recently, investors have filed more than 500 complaints against UBS concerning the sales of the UBS Puerto Rico bond fund with more cases being filed daily. UBS’ sales tactics and recommendations to its customers to invest in 23 proprietary closed-end funds has come under fire and investors claim that the firm hid the substantial risks of the funds in order to generate sales and lucrative fees. On the surface the funds’ risks include is the excessive amount of leverage the funds employ. UBS leveraged up to 100% of the funds’ investments to raise additional cash, or the borrowing of a dollar for every dollar of capital invested in the funds. U.S. based funds by contrast are not allowed to take on such large leverage risk.
UBS has claimed that these funds have provided excellent returns and tax benefits to investors for decades. These claims appear to be the support for continuing to sell and recommend the bond funds to investors. However, investigations into UBS practices regarding the bond funds reveals that UBS’ decision to continue to sell the funds may come back to haunt the firm.
On October 9, 2014, Puerto Rico’s Office of the Commissioner of Financial Institutions (OCFI) has settled its claims with UBS Financial Services Incorporated of Puerto Rico and agreed to the payment and restitution of $1,681,556 to certain clients and anther $3,500,000 to the Investor Education and Investigation Fund. The claims brought by Puerto Rico involved claims of overconcentrating client funds in the UBS bond funds as well as claims that six UBS brokers steered clients into wrongful bank loans to be used to invest in additional UBS bond funds. These loans have been alleged to be illegal and were sold through UBS Bank USA of Utah.
In addition, sources report that UBS underwrote large amounts of unmarketable Employee Retirement System (ERS) bonds and bought them into the UBS Funds in 2008. The ERS bonds were unmarketable because Puerto Rico’s retirement system is the most underfunded system in the country by leaps and bounds. These claims allege that UBS had tremendous difficulty in selling the ERS bonds due to their extreme risk and lack of funding causing the ERS bonds to become the “subprime” of municipal bonds. In 2008, UBS stuffed their bond funds full of ERS bonds, on extreme leverage, ultimately leading to a large portion of the fund’s current woes.
If this is true, the question then becomes, what is the reasonable basis for UBS to continue to sell the Puerto Rico bond funds to clients? What information does UBS have that somehow Puerto Rico’s retirement system funding ratios will improve in the future? If UBS continues to sell these funds, UBS will have a tough time showing how the investment was suitable for nearly any investor.
Dozens of investors have contacted our law firm concerning their investment losses in UBS Puerto Rico closed-end-bond funds and other Puerto Rico municipal debt. Many investors were recommended by their financial advisors to heavily invest in these funds and have watched their accounts be sent into free fall as a result. The attorneys at Gana Weinstein LLP are experienced in representing investors. Our consultations are free of charge and the firm is only compensated if you recover.