Arbitration Claims Filed Over UBS Puerto Rico Bond Funds

UBS Financial Services faces a growing number of investor arbitration claims that allege the brokerage firm misrepresented the risk involved with Puerto Rico Municipal Bond Funds.  

Following the collapse of the Puerto Rico bonds sold by UBS, investors are pursuing financial fraud arbitration claims that seek recovery of losses due to UBS’s Puerto Rico subsidiary selling highly speculative proprietary funds without telling investors just how risky they were, indicating that the brokerage firm acted against the best interests of their customers.

According to allegations raised in many of the investor complaints filed recently, UBS pitched Puerto Rico bond funds as safe and secure, targeting the investments toward elderly people and others who rely on municipal bond funds for retirement.

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Puerto Rico municipal bonds funds have spiraled down into junk ratings as the country undergoes an economic crisis. UBS sold many bond funds that were allegedly over-invested in Puerto Rico muni bonds. Although the funds previously provided high yields and involved special tax benefits, UBS has been targeted for how it has handled the problem.

Many individual investors who suffered losses have hired financial fraud lawyers to pursue arbitration claims through the Financial Industry Regulatory Authority (FINRA), which is a non-governmental regulatory body that handles resolution of disputes between investors and stockbrokers and other financial firms. It was created in July 2007, as a successor to the National Association of Securities Dealers, to arbitrate stock broker fraud claims that can include charges of breach of contract, breach of fiduciary duty, negligence, misrepresentation, unauthorized trading and other claims that investments were improperly handled.

The Puerto Rico Municipal Bond index has lost 18% as of last week, and Fitch Ratings grades the nation’s municipal bonds as just above junk status. Losses from Puerto Rico bonds and securities have added up to $4.52 billion so far this year, as the country undergoes a continuing economic crisis.

One complaint filed with FINRA earlier this month alleges that the UBS bond funds were highly speculative because of Puerto Rico’s declining financial outlook. However, the claimant accuses UBS agents of recommending that the investor put more and more money into the funds, knowing they were volatile and knowing the money was for the claimants retirement. The claimant invested in the funds from 2005 through 2012. Eventually 50% of the claimant’s portfolio wound up in the Puerto Rico bond funds at the urging of UBS agents, the complaint alleges.

UBS Buyback Program Aims to Quell Critics

Last month, in the face of increasing criticism, UBS launched a buyback program for customers with Puerto Rico based closed-end funds. The repurchases would be at the net-asset value or lower and applies to holders of closed-end funds and those who have UBS Bank USA loans secured by Puerto Rico closed-end funds.

In May 2012, the SEC charged UBS’s Puerto Rico subsidiary with misleading investors, concealing a liquidity crisis, and masking its involvement in nearly two dozen closed-end mutual funds. The company agreed to settle the charges for $26.6 million after the SEC hit it with a cease-and-desist order.

However, Puerto Rico municipal bonds have continued to slide, and UBS and other investment firms are now facing a growing number of claims by former investors, as well as scrutiny from the SEC. An estimated 77% of U.S. municipal-bond mutual funds hold Puerto Rico bonds. UBS and at least two other fund managers are now under investigation by the Massachusetts Secretary of the Commonwealth.

The company has reportedly put one broker on administrative leave for allegedly telling clients to buy securities on credit. The bank says it is investigating lending practices among its Puerto Rico brokers. The company claims to represent half of the millionaires who live in Puerto Rico.


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