UBS Class Action Lawsuit Filed Over Puerto Rico Mutual Funds

A $5 million class action lawsuit has been filed against UBS on behalf of older investors, which alleges that the brokerage firm knew that Puerto Rico bond-based mutual funds “ticking time bombs.”  

The complaint was filed in the U.S. District Court for the Southern District of New York on May 5, seeking class action status for any investors over the age of 50 who were sold mutual funds sponsored by UBS Financial Services and Banco Popular de Puerto Rico, which consisted of Puerto Rico bond funds that have since fallen to the status of junk bonds.

The UBS class action alleges that older investors were specifically targeted, in an attempt to convince them to invest in funds that relied heavily on Puerto Rico bonds, which were known to be risky and likely to fail. The company allegedly even urged older investors to take out loans to purchase the bonds, with an estimated $500 million in loans taken out to buy the Puerto Rico bonds.

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“This combination of high leverage and exposure to high-risk debt securities made the funds ticking time bombs,” the lawsuit claims.

The case joins a growing number of similar investor lawsuits and arbitration claims over the Puerto Rico bond funds, which all involve allegations that the brokerage firm misrepresented the risk involved with Puerto Rico Municipal Bonds.

According to allegations raised by investors, 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.

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.

UBS Puerto Rico municipal bond investors suffered losses of at least $1.66 billion during the first three quarters of 2013, and that was before they were downgraded to “junk” status in February. The downgrade came after the island territory failed to address fiscal problems that include $70 billion in debt.

In addition to class action lawsuits brought against UBS on behalf of investors, hundreds of individual arbitration claims have been filed with the Financial Industry Regulatory Authority (FINRA). In fact, FINRA was so flooded with complaints that it temporarily halted the ability to file Puerto Rico bond fund arbitration complaints so it could hire enough arbiters to handle the massive caseload. The stay was lifted in mid-April.

FINRA notes that almost all of the claimants to date reside in Puerto Rico and the agency indicates that its procedures call for cases to generally be venued where the claimant resides. The organization says it does not intend to change that policy for the Puerto Rico bond fund cases. This has required FINRA to hire more arbitrators who are available to go to Puerto Rico to decide the claims.

FINRA is a non-governmental regulatory agency that handles all disputes between investors and stockbrokers or 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.


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