In an arbitration proceeding against UBS Financial Services, Inc. (UBS) and UBS Financial Services, Inc. of Puerto Rico (UBS-PR), the Law Offices of Robert Wayne Pearce, P. A. won a $1.45 million plus interest award for one of the firm’s clients last week. A summary of Claimant’s allegations against UBS and UBS-PR are set forth below. If you or any family member received similar unsuitable recommendations from UBS-PR and its stockbrokers or found yourself with an account overconcentrated in Puerto Rico municipal bonds and/or closed-end bond funds, or if you borrowed monies from UBS and used your investments as collateral for those loans, we may be able to help you recover your losses. Contact our office for a free consultation about your case.
SUMMARY OF ALLEGATIONS MADE AGAINST UBS AND UBS-PR
The arbitration arose out of a series of unsuitable investment recommendations made by a UBS-PR and a UBS financial advisor that our client purchase and hold an excessive concentration of UBS-PR closed-end bond funds in a leveraged UBS-PR account. Because of the financial advisors’ unsuitable recommendations, our client’s investment was not diversified from an asset allocation standpoint and also from a concentration standpoint, as the portfolio was overconcentrated in a single geographic area, namely, Puerto Rico.
UBS and UBS-PR, through their representatives, disseminated false and misleading information to our client about both the nature and risk of owning the closed-end bond fund and the leveraged investment strategy employing UBS and UBS-PR financing schemes through UBS Bank.
UBS, UBS-PR and its employees not only violated the FINRA Code of Conduct, but they also committed fraud, breached their fiduciary duties to our client, and were negligent in advising her on how to safeguard her investment capital. Both UBS and UBS-PR also negligently failed to supervise its employees in connection with managing our client’s account. Our client suffered substantial damages.
THE RELEVANT FACTS
Claimant was a 45 year old married housewife raising two children in San Juan, Puerto Rico. She had very little investment experience and a very small account. Claimant relied exclusively upon her UBS financial advisor for investment advice and management of the investments in her UBS-PR account.
Claimant met with her stockbroker to discuss her goals and financial needs and receive recommendations for the investment of the gift she received from her father. She told her stockbroker that she only wanted him to invest in safe income producing investments in her UBS-PR account. Claimant told her stockbroker that she wanted investments that would be guaranteed (i.e., preserve her principal) and produce income.
Her UBS financial advisor acknowledged her goals and needs and recommended what he described as seguros, de bajo riesgo y fondos mutuos conservadores, i.e., safe, low risk, and conservative mutual funds. He told her that the bonds in the so-called fondos mutuos, i.e., mutual funds were estan garantizados por la constitución de Puerto Rico, i.e., they are guaranteed by the Puerto Rico constitution. There was no detailed discussion about the nature, mechanics or risks of the proposed investments in the UBS Puerto Rico closed-end funds that he recommended. Neither UBS‑PR nor the UBS financial advisor ever provided Claimant with a prospectus or offering memorandum relating to the closed-end funds. Contrary to the stockbroker’s representations, these were very speculative investments due to the excessive concentration in Puerto Rico bonds, illiquidity and leverage employed by the managers of the so-called conservative mutual funds. Claimant followed her financial advisor’s advice and allowed them to purchase over $4 million of UBS-PR closed-end funds.
Shortly after the UBS financial advisor purchased the so-called conservative mutual funds in Claimants account, she decided to purchase a new residence. Claimant told her stockbroker that she would need to raise approximately $1.2 million in cash to purchase the new home. The stockbroker told her that he could arrange for special financing through either a line of credit or what he described as a repo transaction. Claimant followed her UBS financial advisors recommendation and agreed to open a line of credit and then enter into the repo transaction.
Approximately two years later, Claimant told her stockbroker that her husband needed to pay off a business loan. The UBS stockbroker recommended she use her line of credit through UBS-PRs bank affiliate, UBS Bank (USA). He told her that the so-called conservative mutual funds in her account would be collateral for the credit line. There was no discussion about the risk of pledging those investments as collateral for the loan. There was no mention of margin calls. He said nothing about the risk of leveraging already leveraged investments in Puerto Rico bonds through the so-called conservative mutual funds. As always, Claimant followed her stockbroker’s recommendation and borrowed approximately $450,000 to help her husband pay off his business loan.
In or about June 2011, Claimant told her UBS financial advisor that she wanted to purchase an apartment and needed approximately $840,000. He reminded Claimant that she had a line of credit for that purpose and that she should use her credit line because the interest rate was so low. Once again, there was no discussion about the risk of pledging her investments as collateral for the additional loan. There was no mention of margin calls or forced liquidations without any prior notice. Once again, the UBS financial advisor said nothing about the risk of leveraging already leveraged investments in Puerto Rico bonds through the so-called conservative mutual funds. As always, Claimant followed her stockbroker’s recommendation and withdrew an additional $840,000 to purchase the apartment.
Claimant and her UBS financial advisor rarely met and discussed her investments in her UBS-PR account. On occasion, the financial advisor telephoned or sent by mail some investment recommendations and she did whatever he advised her to do. Claimant did not become concerned about any of the activity in her account until the Spring of 2013. At that time, her accountant reported a decline in the value of the investments she owned. The accountant had prepared financial statements for her family and noticed the value of the investments at UBS-PR had dropped approximately $800,000 from the prior year. Claimant and her husband contacted the UBS financial advisor and demanded a full accounting and explanation of the reason for the decline. The financial advisor promised to investigate and provide them with a full report when they returned from their vacation.
On August 9, 2013, the UBS financial advisor met with Claimant and her husband at her husbands business offices. The financial advisor brought with him a summary of the account activity and an account statement but not the audit report Claimant had requested. He apologized and assured her no assets were missing from her account and she had not lost any money on any of her investments. He said he believed the decline related to redemptions in the repo account. The UBS financial advisor promised to get her the report and full explanation of what happened.
At that August meeting, Claimant also questioned the UBS financial advisor about the Puerto Rican economy and bond market. She heard that Puerto Rico bonds would be declared chatarra, i.e. junk. Claimant quizzed the UBS financial advisor on what was going on and whether her investments were still safe investments to own. He told her, among other things: la economía está bien, tenemos una economía subterránea fuerte, i.e., the economy is good, we have a strong underground economy; tiene inversiones sólidas, i.e., you have solid investments; no se preocupe, i.e., not to worry; nunca se convertirán en bonos chatarra, i.e., they will never become junk bonds; and están garantizados por la constitución de Puerto Rico, i.e., they are guaranteed by the Puerto Rico constitution. Claimant asked her stockbroker whether she should sell the so-called “conservative mutual funds.” The UBS financial advisor said, no! mantenga sus inversiones, i.e., hold your investments; no venda, i.e., don’t sell; no puede reemplazar el ingreso, i.e., you cannot replace this income; and sus inversiones están seguras porque están garantizados, i.e., your investments are safe because they are guaranteed. The UBS financial advisor never mentioned that the prices of the so-called conservative mutual funds had already dropped. He expressed no concern about her account in light of the fact that it was leveraged and held leveraged investments in the closed-end funds. The UBS financial advisor minimalized the importance of the declines in the ratings of the Puerto Rico bonds by the major credit rating agencies, Moodys, Standard and Poors, and Fitch ratings. He said nothing about the speculative nature of the investments due to the illiquidity, leverage and geographic limitations of the investments. He was silent about the risk of holding an excessive and leveraged concentration of Puerto Rico securities in the account. Unfortunately, Claimant relied upon the stockbroker’s advice, held her investments and paid the price.
In September 2013, Claimant received a telephone call from her UBS financial advisor with bad news. UBS-PR had made a margin call. For the first time, the stockbroker explained that when the amount of the loan is greater than the value of the account that Claimant would receive a margin call. He told her that the value of the so-called mutual funds had dropped unexpectedly over fifty percent (50%) in one month. [1] Initially, the UBS financial advisor told Claimant that she had a margin call and needed to deposit $400,000 in her account immediately or UBS-PR was going to sell the so-called conservative mutual funds in her account and she would lose over a million dollars. Claimant panicked and called her father about what the UBS financial advisor had just told her for the first time. Shortly thereafter, Claimant received the letter from UBS-PR telling her that she needed to pay the entire line of credit, over $1.3 million, in full, before October 15, 2013. Fortunately, her parents had the financial ability to post additional collateral and avoid the forced liquidation of all of Claimants holdings in the account at fire sale prices.
THE WRONGFUL CONDUCT
The funds that Claimant owned were eight (8) of twenty-three (23) Puerto Rico closed-end funds, namely, Puerto Rico Fixed Income Fund, Inc.; Puerto Rico Fixed Income Fund II, Inc.; Puerto Rico Fixed Income Fund IV, Inc.; Puerto Rico Fixed Income Fund V, Inc.; Puerto Rico Investors Tax-Free Fund II, Inc.; Puerto Rico Investors Tax-Free Fund V, Inc.; Puerto Rico Investors Tax-Free Fund VI, Inc.; and Tax-Free Puerto Rico Fund II, Inc. (the UBS Funds). The network of UBS Funds was built over many years. The brokerage firms business plan was to dominate and control all aspects of the Puerto Rico credit market. UBS-PR was a consultant to the Government Development Bank of Puerto Rico and the government of the Commonwealth of Puerto Rico, underwriter of Puerto Rico bonds, issuer of the UBS Funds, and controlled the secondary market trading of the UBS Funds. The UBS Funds became the depository of many Puerto Rico bonds that UBS-PR purchased in connection with its underwriting business. UBS-PR used leverage to enhance the yields of the UBS Funds and attract investors. UBS-PR management pushed its brokers to sell and then to encourage investors to hold on to the UBS Funds. Many UBS-PR brokers encouraged investors like Claimant to take out loans and unwittingly double the leverage risk they were exposed. It has been estimated that 9 out of 10 investors in Puerto Rico own these UBS Funds. In late August 2013, a series of downgrades of Puerto Rico credit markets, bad news, excessive concentration, and margin calls predictably resulted in the collapse of the house of cards; i.e., the UBS Funds.
UBS-PR AND UBS WERE BOTH LIABLE FOR THEIR REGISTERED “ASSOCIATED PERSONS” AND THEIR OWN MISCONDUCT
UBS-PR and UBS were both found responsible for their own wrongs and vicariously liable for the acts and omissions of the UBS financial advisor and their other employees, agents, registered representatives or associated persons who engaged in the misconduct described herein under the doctrine of respondeat superior and/or principles of actual, apparent and implied agency. Respondents were liable for the advisors continuous dissemination of false and misleading information about the UBS Funds and mismanaging the Claimants account by recommending that Claimant purchase and then hold an overly concentrated and unsuitable portfolio of Puerto Rico securities. UBS-PR and UBS were also liable for misrepresenting the UBS Funds, failing to supervise the financial advisor and its other agents who managed Claimants account and for fraudulently concealing the illiquidity and the other misconduct described above. The Respondents violated and/or are vicariously liable, jointly and severally, for violations of the FINRA Code of Conduct, common law fraud, constructive fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, negligent management, negligent supervision of its employees, and fraudulent concealment of its misconduct. Had Respondents and their employees recommended and adhered to a diversified investment strategy, Claimant would not have been damaged.
THE AWARD
The arbitrators found in favor of Claimant and awarded her the following:
- Respondents are jointly and severally liable for and shall pay to Claimant compensatory damages in the amount of $1,142,000.00 plus interest at the rate of 4.25% per annum, accruing from the date of service of the Award until the Award is paid in full.
- Pursuant to the Puerto Rico Uniform Securities Act, 10 L.P.R.A. Sec. 890{a)(2), Respondents are jointly and severally liable for and shall reimburse Claimant the sum of $249,212.00, representing attorneys’ fees incurred by Claimant in this matter.
- Respondents are jointly and severally liable and shall reimburse Claimant the sum of $29,580.00, representing costs incurred by Claimant in this matter.
- Respondents are jointly and severally liable and shall reimburse Claimant the sum of $28,873.00, representing expert witness fees incurred by Claimant this matter.
CONTACT US FOR A FREE CONSULTATION ABOUT YOUR CLAIM.
The Law Offices of Robert Wayne Pearce, P.A. understands what is at stake in Puerto Rico municipal bond and closed-end bond fund disputes and works hard to secure the best possible result for your case. Mr. Pearce provides a complete review of your case and fully explains your legal options. The entire firm works to ensure that you have all of the information necessary to make a sound decision before any action is taken in your case.
For dedicated representation by a law firm with substantial experience in all kinds of securities, commodities and investment disputes, contact the firm by telephone at 561-338-0037 or toll free at 800-732-2889 or via e-mail. We may also be able to arrange a meeting with you at offices located in San Juan, Puerto Rico and Boca Raton, Florida and elsewhere if we believe you have a viable case.
[1] He blamed the price drop on events in the United States municipal bond market and said nothing about Puerto Rico and all of its political and economic problems impact on its credit ratings and consequently its bond prices.
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