Articles Tagged with Puerto Rico

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.

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.

The Financial Industry Regulatory Authority (FINRA) Arbitration Panel has awarded damages to investors in the amount of $1.2 million in compensatory damages and cost of fees associated with the arbitration. The alleged claim was asserted against BBVA Securities of Puerto Rico, Inc. (BBVA Securities) and employees of the brokerage firm.

BBVA Securities is a brokerage firm in San Juan, Puerto Rico.

The Claimants asserted breach of fiduciary duty, unsuitable investments, churning and excessive trading, failure to supervise and gross negligence. These causes of actions related to allegedly unsuitable naked option trading strategy combined with the use of margin which caused losses in the investor’s accounts.

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.

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