Attorney Robert Wayne Pearce filed another claim against UBS Financial Services Incorporated of Puerto Rico (UBS Puerto Rico) and this time the claim was by an eighty (80) year old Puerto Rico resident who alleged he was tricked into making an over-concentrated investment in a variety of UBS Puerto Rico closed-end bond funds and told to hold them until they collapsed. A summary of the allegations the Claimant made against the Puerto Rico based brokerage firm is below. If you or any family member have heard similar misrepresentations and/or misleading statements from UBS Puerto Rico and its stockbrokers or found yourself with an investment account over-concentrated in closed-end bond funds, or if you borrowed monies from UBS Puerto Rico and used your investments as collateral for those loans, we may be able to help you recover your losses.
SUMMARY OF ALLEGATIONS MADE AGAINST UBS PUERTO RICO
I. PARTIES
The Claimant is an eighty (80) year old retired individual residing in San Juan, Puerto Rico. Respondent UBS Puerto Rico is a securities brokerage firm with one or more offices in Puerto Rico and is regulated by, inter alia, the Financial Industry Regulatory Authority (“FINRA”). UBS Puerto Rico developed, marketed and managed the investments at issue in this arbitration through individuals registered with FINRA as “Associate Members” and for whom it is vicariously liable for their acts, omissions and other misconduct described more fully herein.
II. SUMMARY
This arbitration arises out of a series of unsuitable recommendations by a UBS Puerto Rico financial advisor that Claimant purchase and then hold an excessive concentration of UBS Puerto Rico closed-end bond funds in his UBS Puerto Rico account. As a result, the Claimant’s investment portfolio was not diversified from not only an asset allocation standpoint but overly concentrated in securities issued in a single geographic area, i.e., Puerto Rico. The Respondent through its representatives also disseminated false and misleading information to Claimant about both the nature and risk of the securities and the investment strategy and securities in his account; i.e., that purchasing and holding a portfolio of only UBS Puerto Rico closed-end bond funds was a “safe,” “low risk,” and “conservative” investment strategy. The Respondent and its representatives not only violated the FINRA Code of Conduct and Puerto Rico securities laws but they also committed fraud, breached their fiduciary duties to Claimant and were negligent in advising him. UBS Puerto Rico also negligently failed to supervise its employees. As a result of Respondent and its representatives’ misconduct, the Claimant suffered substantial damages in an amount to be determined at the final arbitration hearing.
III. BACKGROUND
The Claimant is in his eightieth (80) year and a widower living alone in San Juan, Puerto Rico. Claimant’s education is in medicine. He graduated from Universidad Central Del Este de Santo Domingo with a Doctor of Medicine degree and worked for the Fondo del Seguro del Estado as a medical examiner for many years. Claimant currently depends upon social security, his pension, part-time work, and the income earned on savings deposited in his bank and brokerage accounts for his financial support. Consequently, preservation of his investment capital in his brokerage account is extremely important to generate the income necessary to pay his expenses and help support him, his children and grandchildren.
Claimant was introduced to the UBS Puerto Rico broker by a banker approximately 10 years ago. At that time, Claimant believed the stockbroker was an Oriental Financial Services, Corp. stockbroker. Sometime thereafter, the broker recommended that Claimant purchase a Sunlife annuity from him. The Claimant purchased and held that annuity for many years. Thereafter, the UBS Puerto Rico broker solicited Claimant to make other investments through him. However, Claimant had a long standing relationship with a Santander Securities and later Popular Securities broker and declined the stockbroker’s solicitations until last year.
In May 2013, the UBS Puerto Rico employee stockbroker, persuaded Claimant to give him the opportunity to review all of the securities positions in his Popular Securities portfolio. They discussed the substantial losses that Claimant had suffered as a result of his prior stockbroker’s recommendation of a Puerto Rico bank stock. The UBS Puerto Rico broker then pointed to Claimant’s investment in Puerto Rico Commonwealth Aqueduct & Sewer Authority (“PRASA”) bonds and said the ratings were lowered.[1] The stockbroker claimed that Claimant would suffer large losses if he continued to hold the PRASA bonds.
The UBS Puerto Rico employee used high-pressure sales tactics to solicit Claimant to open an account at UBS Puerto Rico, sell his annuity, withdraw his bank savings, and transfer assets in Claimant’s Popular Securities account to UBS Puerto Rico. First, the stockbroker told Claimant that his Sunlife annuity had matured. The broker then persuaded Claimant to sell his certificates of deposit (“CDs”) at Scotiabank de Puerto Rico (“Scotiabank”) and allow him to invest the proceeds at UBS Puerto Rico. The UBS Puerto Rico stockbroker also urged Claimant to transfer his entire Popular Securities account to UBS Puerto Rico, but Claimant refused due to his desire to maintain his relationship with his Popular Securities stockbroker. However, the broker was successful in persuading Claimant to transfer the PRASA bonds to UBS Puerto Rico.
Like most retirees, Claimant wanted to preserve his life savings and use them to produce income to pay his living expenses. Claimant told the UBS Puerto Rico broker that he only wanted him to make investments having a low degree of risk. The UBS Puerto Rico stockbroker assured Claimant that UBS Puerto Rico had investment “funds” that were not only “safe” and “low risk” investments but that they would increase his income as well.
The stockbroker claimed that the UBS Puerto Rico “funds” had an excellent track record and said that UBS management highly recommended them. He talked about how his own family and other influential persons invested in the “funds.”[2] The UBS Puerto Rico broker never mentioned there might be UBS Puerto Rico “conflicts of interest” in connection with those investments. The UBS Puerto Rico stockbroker never explained that the “funds” used “leverage” to make investments and generate income. He never told Claimant that the “funds” owned the same type of bonds that were in his Popular Securities account or that the “funds” owned bonds that were concentrated in a single geographic area – Puerto Rico. Nor did he ever mention to Claimant that it might be very difficult for him to sell any of the “funds” if he needed to in the future. Neither UBS Puerto Rico nor its employee ever provided Claimant with any prospectus, offering memorandum or other document fully explaining the nature, mechanics or risks of the so-called “funds.”
The UBS Puerto Rico stockbroker recommended that Claimant invest in the “funds” knowing that he already owned Puerto Rico bonds and that any additional investments in Puerto Rico bonds, directly or indirectly, would overexpose Claimant to all of the Commonwealth’s many political, fiscal, economic, and regulatory problems. He also knew the so-called “funds” carried far greater risk than Claimant’s annuity, CDs, and PRASA bonds. Yet, the broker claimed that the “funds” were “safe” and the type of “low risk” investments Claimant needed for his retirement. Claimant relied on the stockbroker’s advice and opened an account at UBS Puerto Rico, sold the annuity, sold the CDs, and transferred the PRASA bonds from Popular Securities to his new UBS Puerto Rico account. The UBS Puerto Rico employee assured Claimant that he would only select the “funds” that would be suitable investments for him and Claimant trusted him to do so!
In August 2013, the UBS Puerto Rico stockbroker solicited Claimant to transfer the rest of his investments to UBS Puerto Rico for him to manage. Again Claimant refused. However, Claimant mentioned he had another CD at Scotiabank, and the stockbroker persuaded Claimant to sell the CD and deposit the sales proceeds to purchase more “funds” with assurances that the “funds” were very “conservative” investments. The UBS Puerto Rico employee never told Claimant that the “funds” were collapsing at that time.
Thereafter, Claimant read an article in the newspaper and became concerned about his investment in the “funds.” He asked the UBS Puerto Rico broker about the article and the status of the “funds” he owned. The UBS Puerto Rico broker said there was a temporary market correction because at the moment there were more sellers than buyers but that the prices would rebound. When Claimant asked the stockbroker whether he should sell any of the “funds,” the broker said “no” and “mantenga sus inversiones,” i.e., “hold your investments” and “tienes que confiar que esto va a volver a subir de valor, tranquilo esto es momentáneo, i.e., “have faith that this will go back in value, be calm this is momentary.” Not only was the UBS Puerto Rico stockbroker insisting that Claimant “hold” the “funds” but he was telling him to transfer the rest of his savings to UBS Puerto Rico and buy more “funds.” Claimant was not pleased with that remark and told the UBS Puerto Rico broker to sell everything. Claimant was told for the first time he could not sell the “funds” at all!
IV. THE WRONGFUL CONDUCT
The “funds” that Claimant owned were actually three (3) of twenty-three (23) Puerto Rico closed-end mutual funds, namely, Puerto Rico Fixed Income Fund, Inc.; Puerto Rico Fixed Income Fund II, Inc.; and Puerto Rico Fixed Income Fund IV, Inc. (the “UBS Funds”). The network of UBS Funds was built over many years. The brokerage firm’s business plan was to dominate and control all aspects of the Puerto Rico credit market. UBS Puerto Rico 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 “funds,” and controlled the secondary market trading of the “funds.” The “funds” became the depository of many Puerto Rico bonds that UBS Puerto Rico purchased in connection with its underwriting business. UBS Puerto Rico used leverage to enhance the yields of the “funds” and attract investors. UBS Puerto Rico management pushed its brokers to sell and to encourage investors to hold on to the “funds.” Many UBS Puerto Rico brokers encouraged investors 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 “funds.” In 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.”
A. UBS PUERTO RICO AND ITS EMPLOYEES VIOLATED INDUSTRY RULES AND STANDARDS OF PROFESSIONAL CARE
The UBS Puerto Rico stockbroker not only told Claimant “to purchase” all of the UBS Funds but also “to hold” them when the Puerto Rico market was clearly stressed and Claimant’s portfolio was fully invested in Puerto Rico debt. The UBS Puerto Rico stockbroker’s actions were in violation of FINRA Rules of Conduct 2110, 2111 (f/k/a 2310) and 2120, which state:
2110. STANDARDS OF COMMERCIAL HONOR AND PRINCIPLES OF TRADE
A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
2111. SUITABILITY
(a) A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
* * *2120. USE OF MANIPULATIVE, DECEPTIVE OR OTHER FRAUDULENT DEVICES
No member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance.
In total, 100% of Claimant’s UBS Puerto Rico account was invested in Puerto Rico securities. The UBS Puerto Rico stockbroker’s recommendation in June 2013 and again in August 2013 that Claimant purchase a portfolio of securities concentrated in a single geographic area – Puerto Rico and then continue “to hold” them when the market became stressed was in breach of FINRA’s suitability rule, which has long been applied to recommended “investments” and “investment strategies” including “hold” recommendations.[3]
Further, UBS Puerto Rico and the UBS Puerto Rico stockbroker misrepresented the UBS Funds as “safe,” “conservative,” and “low risk” investments. The concentration, conflict, illiquidity, and leverage risks of the UBS Funds were high and never disclosed to Claimant. Thus, UBS Puerto Rico and the UBS Puerto Rico stockbroker’s actions not only violated the FINRA standards of commercial honor and principles of trade but also included the use of manipulative, deceptive and fraudulent devices.
B. UBS PUERTO RICO FAILED TO PROTECT ITS CLIENTS FROM SALES ABUSE
Pursuant to FINRA Rule 3010, UBS Puerto Rico was obligated to design and implement a reasonable system of supervision to assure compliance with Federal and Puerto Rico law as well as FINRA conduct rules and its own policies and procedures. UBS Puerto Rico knew that the UBS Funds were only suitable “as parts of a diversified portfolio.” Yet at no time did any supervisory or compliance personnel ever question the over-concentration of Puerto Rico securities in Claimant’s account. On information and belief, UBS Puerto Rico did not even have any computer exception reports designed to detect and prevent the over-concentration of Puerto Rico securities investments that occurred in Claimant’s and other UBS Puerto Rico client accounts and if it did, no supervisor ever looked at them or took any action to protect the clients of the brokerage firm. Nor did UBS Puerto Rico ever take any action to properly disclose and stem the flow of misinformation to clients about the UBS Funds.
C. UBS PUERTO RICO IS LIABLE FOR ITS EMPLOYEES AND ITS OWN MISCONDUCT
UBS Puerto Rico is responsible for its own wrongs and vicariously liable for the acts and omissions of the UBS Puerto Rico stockbroker and its 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. Respondent is vicariously liable for the UBS Puerto Rico stockbroker’s continuous dissemination of false and misleading information about the UBS Funds and mismanaging the Claimant’s account by recommending that Claimant purchase and then hold an overly concentrated and unsuitable portfolio of Puerto Rico securities. UBS Puerto Rico is also directly liable for misrepresenting the UBS Funds, failing to supervise the UBS Puerto Rico stockbroker and its other agents who managed Claimant’s account and for fraudulently concealing the illiquidity and the other misconduct described above. Had Respondent and its employees recommended and adhered to a diversified investment strategy, Claimant would not have been damaged. Accordingly, the Respondent violated and/or is vicariously liable for violations of the FINRA Code of Conduct and Uniform Securities Act of Puerto Rico and for 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.
V. DAMAGES
Claimant seeks rescission or alternatively compensatory damages in an amount to be proven at the hearing. The losses sustained by Claimant were the result of Respondent’s employees’ misconduct, including, the reckless disregard of prudent investment practices. A “well managed” account would have preserved Claimant’s investment capital and produced substantial income with little effort and less commissions. In addition to compensatory damages, Claimant also seeks lost opportunity damages, interest on his claim from the time it accrued, punitive damages in an amount to be determined by the Panel, and all other costs and expenses, including legal fees, incurred as a result of this proceeding.
CONTACT US FOR A FREE CONSULTATION ABOUT YOUR UBS PUERTO RICO CLAIM.
The Law Offices of Robert Wayne Pearce, P.A. understands the complexity of these closed-end bond funds and knows what is at stake in investment law disputes. Attorney Pearce constantly strives to secure the best possible result for your case. Mr. Pearce will provide a complete review of the details of your case and fully explain your legal options. The 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 over 40 years of experience in all kinds of securities, commodities and investment disputes, contact us 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 or in Boca Raton, Fort Lauderdale, Miami and West Palm Beach, Florida and elsewhere.
[1] The UBS Puerto Rico stockbroker never mentioned that between November 2012 and March 2013 most, if not all, Puerto Rico bond credit ratings had dropped to the same level.
[2] The UBS Puerto Rico stockbroker referred to the “influential persons” as smart investors not only purchasing the “funds” but who were taking out loans from UBS Puerto Rico to purchase more “funds.” The broker solicited Claimant to use the same strategy, but Claimant declined.
[3] The phrase “investment strategy involving a security or securities” used in this Rule is to be interpreted broadly and would include, among other things, an explicit recommendation to hold a security or securities.
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