Articles Tagged with Puerto Rico bond funds

shutterstock_92699377As our firm has written about on numerous occasions, our firm is currently representing investors who purchased the UBS Puerto Rico closed-end-bond funds and other Puerto Rico municipal debt. The allegations our firm has brought on behalf of clients focuses on UBS’ sales tactics and recommendations to its customers to invest in 23 proprietary closed-end funds. The UBS Puerto Rico bond funds contained substantial risks that allegedly were downplayed by the firm’s advisors in order to generate sales. The funds’ risks included excessive amount of leverage, conflicts of interests, and omission of material information concerning the risky nature of certain of the funds’ holdings.

Many of our clients tell very similar tales about how they were recommended to invest as much as 100% of their portfolios in the UBS Puerto Rico closed-end funds, some through additional margin or bank loans. Now, thanks to an article published by Reuters, Puerto Rico bond fund investors are starting to learn why.

According to the article, a group of brokers came up with a list of 22 reasons why they wanted to stop selling the funds including the facts that the funds suffered from low liquidity, excessive leverage, oversupply and instability, and contained debt underwritten by UBS, a conflict of interests.

shutterstock_180342155Albert 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.

shutterstock_115937266According to UBS’ second quarter earnings report, the bank is now looking at over $600 million in claims brought by Puerto Rico investors, who have suffered significant losses related to their investments in closed-end bond funds. The Financial Industry Regulatory Authority (FINRA) has been inundated with a plethora of claims in connection with the closed-end UBS Puerto Rico Bond Funds. Investors are looking to be made whole after they purportedly received misleading information regarding these investments. While the majority of the claims were filed against UBS Financial Services of Puerto, other firms, including Merrill Lynch, Banco Popular, Santander Securities, and Oriental Financial Services have also been named as Respondents in many of the claims.

UBS recognizes the perilous situation that it now faces with respect to these claims, explaining, “declines in the market prices of Puerto Rico municipal bonds and of UBS Puerto Rico sole-managed and co-managed closed-end funds since August 2013 have led to multiple regulatory inquiries, as well as customer complaints and arbitrations with aggregate claimed damages exceeding [$]600 million filed by clients in Puerto Rico who own those securities.”

Some of the claims that UBS face, including clients represented by our firm, include allegations of unsuitability, over-concentration, fraud, and breach of contract among others. FINRA and the Municipal Securities Rulemaking Board require broker dealers to have a reasonable basis to support the suitability of their recommendations to customers. Legal representatives for many claimants have said that the UBS employees prioritized commissions when they sold the closed-end bond funds to Puerto Rican investors, who were not economically equipped to make those investments.

shutterstock_168737270This article continues our prior posts concerning a recent report by Bloomberg that noted the rise in rollovers from 401(k) plans into IRA accounts. The article pointed to concerns by regulatory agencies and investors concerning the suitability of the investment choices being recommended by brokers soliciting rollovers.

In another example, a mechanical engineer for Hewlett-Packard in Puerto Rico, rolled over $150,000 from a 401(k) to an IRA with UBS. His broker Luis Roberto Fernandez Diaz, recommended Puerto Rico municipal bond funds that contained a 3 percent upfront sales fee and 1 percent annual expenses. Fernandez’s brokercheck lists 17 customer disputes from 2009 through 2014. As we have reported on multiple occasions, our firm represents investors in claims against UBS concerning the firm’s practices in overconcentrating many of their client’s assets in these speculative highly leveraged bond funds. Those articles can be found here, here, and here.

In the case of an IRA, it makes little sense for a financial adviser to recommend investing in municipal bonds because the bonds main advantage is tax avoidance which already is a benefit of investing in an IRA. The investor interviewed by Bloomberg, says that the bonds plunged in value because of the deteriorating finances of Puerto Rico and are only worth $90,000.

On Monday, April 14, 2014, the Financial Industry Regulatory Authority (FINRA) announced that it would lift the hold that it had put on some cases related to the collapse of Puerto Rico Bond Funds.

FINRA has been able to expand its pool of arbitrators that will be available to hear the cases. There are approximately 700 eligible arbitrators on its roster who have agreed to serve in Puerto Rico, where the majority of the 209 cases received to this point, are to be heard.

Last summer, investor fears began to rise when Detroit filed for bankruptcy. Investors, seeing a city go bankrupt, became concerned with Puerto Rico’s $70 billion in municipal debt. As fear set in, investors in the UBS Puerto Rico family of closed-end municipal bond funds began to lose billions. Nineteen of these funds lost $1.66 billion during the first nine months of 2013.

According to Bloomberg News Puerto Rico’s general obligation bonds were cut one step to speculative grade, otherwise known as “junk” status, by Standard & Poor’s citing reduced access to liquidity.  The territory has $16.2 billion of debt as of June 30, according to the Government Development Bank for Puerto Rico.  Investors nationwide are expected to be effected as about 70 percent of U.S. municipal mutual funds own Puerto Rico securities according to Morningstar Inc.  However, investors in Puerto Rico bond funds that were heavily invested in Puerto Rico debt are expected to be hit the hardest.

As we previously reported, a credit rating agency downgrade followed by a default or restructuring of Puerto Rico’s debt seems inevitable.  How did Puerto Rico end up here?  Unfortunately, its the same familiar Wall Street drama that is now perfectly mirroring the mortgage securities crisis experienced only six years ago.  Wall Street firms sell Puerto Rico bonds as safe, tax-free, high-yielding investments and politicians and policy makers take no interest in stopping the underwriting, issuance, and debt selling machine.  Moreover, firms know that by packaging unloved and unwanted municipal bonds and other assets into mutual funds the firms can sell speculative assets to retirees and other investors seeking income as conservative and diversified bond funds.

Firms such UBS, sold proprietary bond funds to customer such as the Puerto Rico Fixed Income Fund and the Puerto Rico Investors Tax-Free Fund series that invested up to 140% of their assets in Puerto Rico debt through the employment of leverage.  While UBS recommends that Puerto Rico residents should, in some cases, invest up to 100%+ of their assets in the Funds, UBS secretly recommends that UBS Puerto Rico, the firm’s island subsidiary, liquidate its own UBS bond fund holdings due to UBS  the overconcentration risk.  Thus, according to complaints filed against the firm, UBS’ recommendation to clients to invest in the funds was a conflict of interests with the firm’s own internal analysis that found the funds to be too risky.

This question is on the minds of many investors.  Many clients and potential clients have contacted our firm concerned about the effect of a default on their UBS Puerto Rico municipal bond funds that are heavily invested in the island’s debt

The UBS Puerto Rico bond funds, including the Puerto Rico Fixed Income Fund and the Puerto Rico Investors Tax-Free Fund series, invested up to 140% in Puerto Rico debt through the employment of leverage.  The extreme use of leverage has exacerbated recent declines.  As losses continue to increase clients tell us very similar stories about how their brokers recommended that they invest as much as 100% of their portfolios in the UBS Puerto Rico closed-end funds.

Now our clients worry about a potential Puerto Rico default on its municipal debt.  Puerto Rico’s public debt of $53 billion is nearly $15,000 per person.  When you add on the severely under-funded pension and healthcare obligations, the amount of debt approaches $160 billion, or $46,000 per person.

La caída en los precios de los bonos de Puerto Rico ha causado pérdidas financieras sustanciales a los inversionistas en activos que les fueron vendidos como como bonos seguros y garantizados. Según el New York Times, la raíz de los problemas de Puerto rico es el hecho de que  3.7 millones de sus habitantes tienen aproximadamente $87 billones de deudas pendientes (alrededor de $23,000 de deuda por cada hombre, mujer y niño) y por el aumento en el costo de las pensiones. Puerto Rico ha experimentado una disminución en la población y una cifra alta de desempleo causando que la deuda financiera del país pase a un segundo plano y dejando a una población menor y más pobre con la carga de la deuda sobre sus hombros.

Las pérdidas de valor en los bonos de Puerto Rico han sido de tal magnitud que han quedado fuera del mercado de valores. El gobierno se ha visto en la obligación de financiar sus operaciones con créditos de banco y medidas a corto plazo que no son sostenibles. Los bonos de Puerto Rico están ampliamente mercadeados por fondos mutuos locales expedidos por algunas de las firmas de corretaje más grandes en la isla, se encuentran incluidas UBS Puerto Rico, Popular Securities, Inc., y Santander Securities, Corp.  Si la situación financiera continua empeorando, se teme que Puerto Rico necesite alguna intervención federal para poder salir de su situación financiera.

La pérdida de los inversionistas atada a la liquidación de activos de los fondos de bonos se estima que ha alcanzado los cientos de millones de dólares. Sin embargo, una cifra total y exacta de los daños es imposible de determinar en estos momentos. Algunos inversionistas ya han realizado reclamaciones a sus casas de corretaje bajo el reclamo que las pérdidas que han sufrido han sido de tal magnitud que se han perdido en una gran parte o de manera completa, sus ahorros de retiro. Estos inversionistas reclaman que las casas de corretajes les vendieron fondos de bonos como unos seguros, estables, como inversiones que producirían ingresos garantizados. Sin embargos, estos fondos de bonos no solamente han sido un riesgo crediticio concentrado en los valores de Puerto Rico sino que también, en el caso de los fondos de apalancamiento (leverage funds) de UBS, utilizaron sobre un 53% en apalancamiento exacerbando así las pérdidas. A manera comparativa, en cuanto a los fondos de bonos municipales en los Estados Unidos solamente se permite  utilizar alrededor de la mitad del apalancamiento utilizado por UBS.

The steep decline in prices of Puerto Rican bonds has caused local investors substantial investment losses in assets that many are claiming were sold to them as safe and secure bonds.  According to a New York Times article, Puerto Rico’s woes stem from the fact that its 3.7 million residents have approximately $87 billion of debt outstanding (about $23,000 of debt for every man, woman, and child) and spiraling pension costs.  Further, Puerto Rico has experienced a rapidly declining population and double-digit unemployment causing the debt to be left behind to a smaller and poorer population to shoulder the debt burden.

Bond losses have been so great that Puerto Rico has been effectively shut out of the bond market and is now financing its operations with bank credit and other short-term measures that are unsustainable.  The commonwealth’s bonds are widely held by local mutual funds issued by Puerto Rico’s largest brokerage firms including UBS Puerto Rico, Popular Securities, Inc., and Santander Securities, Corp.  If the situation continues to worsen some fear that Puerto Rico will need some sort of federal action and bailout, an action without precedent.

Investor loss estimate tied to the bond fund sell-off have reached hundreds of millions of dollars.  However, an accurate tally of the total damages is impossible at this time.  Some investors have begun filing claims against their brokerage firm claiming that the losses have substantially or completely wiped out their retirement savings.  These investors have claimed that their brokerage firm sold the bond funds as safe, stable, income producing investments.  However,  the bond funds not only had concentrated credit risk in Puerto Rican securities but also, in the case of the UBS leveraged funds, employed leverage of over 53%, exacerbating the losses.  Comparatively, municipal bond funds domiciled in the United States are allowed to use only about half as much leverage as employed by the UBS funds.