The Law Offices of Robert Wayne Pearce, P.A. filed its first claim against UBS Financial Services Incorporated of Puerto Rico (UBS Puerto Rico). A summary of the allegations the Claimant made against the Puerto Rico based brokerage is below. If you or any family member heard similar misrepresentations and misleading statements from UBS Puerto Rico and its stockbrokers or found yourself with an account overconcentrated 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 individual 70 years of age, retired and residing in San Juan, Puerto Rico. The 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 below.
II. INTRODUCTION
This arbitration arises out of a series of unsuitable recommendations by UBS Puerto Rico financial advisor that Claimant hold an excessive concentration of Puerto Rico securities in his UBS Puerto Rico account. 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 and its representatives continuously disseminated false and misleading information to Claimant about both the nature and risk of both the investment strategy and securities in his account; i.e., that holding Puerto Rico bonds and “bond funds” was a “safe” strategy because they were “constitutionally protected” by the Puerto Rico Constitution. The Respondent and its representatives not only committed fraud but breached their fiduciary duties to Claimant and they were negligent in the advice provided to him. UBS Puerto Rico also negligently failed to supervise its employees. Finally, Respondent has fraudulently concealed this and other misconduct relating to his investments from the Claimant until recently. 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. THE RELEVANT FACTS
In May of 2009, the UBS Puerto Rico broker and Claimant met and she reviewed all of the securities positions in his portfolio at another Puerto Rico based brokerage firm. They discussed the substantial losses that he had suffered as a result of his prior stockbroker’s recommendation of a large number of stocks issued by Puerto Rico banks. The Claimant was concerned about the unrealized losses in his account. Like most retirees, he wanted to preserve his savings and use them to produce some income and grow them enough to keep up with inflation. The Claimant told the UBS Puerto Rico broker he only wanted to invest in stocks and bonds having a low degree of risk. The UBS Puerto Rico broker was quick to point out all of his former brokers’ errors and assured him that she would not make the same mistakes.
The Claimant listened to the UBS Puerto Rico broker and her investment advice and agreed to open a UBS Puerto Rico account. She completed the new account opening documents and marked “current income” and “capital appreciation” as Claimant’s investment objectives because he was seeking both generation of income and the reasonable growth of principal. The UBS Puerto Rico broker characterized Claimant’s risk profile as “moderate” which according to UBS Puerto Rico, meant that he was a person who “seeks potential returns with the lower risk of loss of principal.”
The Claimant wanted UBS Puerto Rico and the UBS Puerto Rico broker’s opinions on every stock, bond and mutual fund in his account. They met again and reviewed each and every security held in the account transferred to UBS Puerto Rico. They discussed at length what the UBS Puerto Rico broker described as the “fondos de bonos,” i.e., “bond funds” that had been purchased for Claimant by his former UBS Puerto Rico broker. She claimed the “bond funds” had an excellent track record and said that UBS Puerto Rico management highly recommended them.[1] The UBS Puerto Rico broker told Claimant that these were the best investments in his account for generating the income and the growth he needed to keep up with inflation. The UBS Puerto Rico broker told Claimant that the bonds and “bond funds” were “protegidos constitucionalmente,” i.e., “constitutionally protected.” The UBS Puerto Rico broker told him that all Puerto Rico bond holders, including the “bond funds,” would continue to be paid all of their interest and that when the bonds came due they would be paid in full.[2] The UBS Puerto Rico broker told Claimant that the Puerto Rico bonds and “bond funds” were ideal retirement investments and must not be sold. In fact, she recommended that he take out a loan and purchase more of them.[3]
The UBS Puerto Rico broker gave her opinions and made her recommendations knowing that the Claimant’s investment portfolio was concentrated in a single geographic area – Puerto Rico and that he was overexposed and vulnerable to all of its many political, fiscal, economic and regulatory problems. By 2009, Puerto Rico was in its third year of recession. It had accumulated a deficit of over $3.2 billion that it had financed by issuing more bonds every year. Its pension system had been underfunded since inception and was falling apart. Governor Fortuño outlined an austerity plan to cut spending by slashing the government payrolls by more than 30,000 workers when the unemployment rate was just under 12% in Puerto Rico. The economy in Puerto Rico was in terrible condition; consequently, Claimant was exposed to a great risk of loss from the inception of his new account relationship.
Claimant relied on the UBS Puerto Rico broker’s advice and did not sell any of the Puerto Rico bonds or any of the “bond funds” in his account. They met and spoke over the phone periodically over the next four years. Each time they met they reviewed all of the positions in his account and she made recommendations. The UBS Puerto Rico broker continuously advised Claimant to hold all of the Puerto Rico bonds and “bond funds” in his account. The UBS Puerto Rico broker repeated over and over there is “no need to worry” about the bonds and “bond funds” because they were “constitutionally protected.” As a result of the UBS Puerto Rico broker’s advice, the Claimant’s investments remained concentrated in a single geographic area – Puerto Rico!
In the Summer 2013, the Claimant heard on the radio that investors should prepare because Puerto Rico bonds might become “bonos chatarra,” i.e., “junk bonds.” He was concerned and asked the UBS Puerto Rico broker about how she was going to protect his account. The UBS Puerto Rico broker told him that there was nothing to be worried about because all of the Puerto Rico bonds and the bonds in the “bond funds” that he owned “están garantizados por la Constitution de Puerto Rico,” i.e., “they are guaranteed under the Constitution.” She reminded him that he would not lose any of his principal or any of his income from the Puerto Rico bonds and “bond funds” even if they were downgraded because they were “constitutionally protected.” The UBS Puerto Rico broker told Claimant that he would get paid before any of the Puerto Rico government employees got paid their salaries. When he asked her directly whether he should sell any of the bonds or “bond funds,” she said “no” and “mantenga sus inversiones,” i.e., “hold your investments.” Thereafter, the UBS Puerto Rico broker recommended Claimant purchase more Puerto Rico securities, this time UBS Puerto Rico Multi-Select funds.
IV. THE WRONGFUL CONDUCT
The so-called “bond funds” that Claimant owned were actually four (4) of twenty-three (23) Puerto Rico closed-end mutual funds (the “UBS Funds”), namely, Puerto Rico Fixed Income Fund III, Inc.; Puerto Rico Investors Tax Free Fund V, Inc.; Puerto Rico Investors Tax Free Fund VI, Inc.; and Puerto Rico AAA Portfolio Bond Fund, Inc. The investment portfolios of the UBS Funds were concentrated in Puerto Rico bonds.
In 2009, the UBS Funds total market capitalization was approximately $9 to $10 billion. UBS Puerto Rico had acted as managing underwriter in the initial public offerings of the shares to UBS Funds and controlled the secondary market for them. They could only be offered and sold to residents of and corporations domiciled in Puerto Rico. Consequently, the UBS Funds were very illiquid and risky investments for retirees on such a small island.
The UBS Funds leveraged their respective investment portfolios by financing approximately one half of their total assets. The leverage permitted the UBS Funds to purchase and hold securities with an aggregate market value equivalent to approximately two hundred percent (200%) of their aggregate net worth which increased the risk of loss to owners of the UBS Funds, like Claimant.
The UBS Puerto Rico broker not only told Claimant “to hold” all of his Puerto Rico bonds and the UBS Funds but to buy more Puerto Rico issued securities. The UBS Puerto Rico broker’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.
The UBS Puerto Rico broker’s recommendation that Claimant “hold” an excessively concentrated portfolio of securities in a single geographic area – Puerto Rico, was in breach of FINRA’s suitability rule, a rule that has long been applied to recommended “investment strategies” including “hold” recommendations.[4] In total, over 92% of Claimant’s account was invested in Puerto Rico securities. Further, the Puerto Rico bonds and bonds in the “UBS Funds” were not all “constitutionally protected.”[5] And so, the UBS Puerto Rico broker’s actions not only violated the FINRA standards of commercial honor and principles of trade but included the use of manipulative, deceptive and fraudulent devices.
Further, 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. At no time did any supervisory or compliance personnel ever question the over-concentration of Puerto Rico securities in Claimant’s account or take any action to stem the flow of misinformation to clients about the extent of protection of the Puerto Rico Constitution to bondholders. On information and belief, UBS Puerto Rico did not even have any computer exception reports designed to detect and prevent the type of misconduct that occurred in Claimant’s and other UBS Puerto Rico client accounts.
UBS Puerto Rico is responsible for its own wrongs, and under the doctrine of responde at superior and/or principles of actual, apparent and implied agency, the Respondent is liable for the acts and omissions of the UBS Puerto Rico broker and its other employees, agents, registered representatives or associated persons who engaged in the misconduct described herein. Respondent is liable for the UBS Puerto Rico broker’s continuous dissemination of false information about the Puerto Rico bond and UBS Funds in Claimant’s account, recommending that Claimant hold an overly concentrated portfolio of Puerto Rico securities, mismanaging the Claimant’s account. UBS Puerto Rico is directly liable for failing to supervise the UBS Puerto Rico broker 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 agents recommended and adhered to a diversified investment strategy, Claimant would not have been damaged. Accordingly, the Respondent violated FINRA’s Code of Conduct and committed common law fraud, constructive fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, negligent management, negligent supervision of its employees, and fraudulent concealment.
V. DAMAGES
Claimant is seeking compensatory damages in an amount to be proven at the hearing. The losses sustained by Claimant were the result of Respondent’s misconduct, including, its financial advisors’ reckless disregard of prudent investment practices. In addition to these 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 CLAIM.
The Law Offices of Robert Wayne Pearce, P.A. understands what is at stake in UBS Puerto Rico closed-end bond fund disputes and is working hard to secure the best possible result for your case. Mr. Pearce provides a complete review of your case and fully explains all of 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 and knowledge 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 or in Boca Raton, Fort Lauderdale, Miami and West Palm Beach, Florida and elsewhere.
[1] At no time during this initial meeting did the UBS Puerto Rico broker mention to Claimant that it would be very difficult for him to sell any of the “bond funds.” She never told him that there was a market imbalance with more sellers than buyers. And she certainly never told him that senior management had been telling the sales force to dissuade investors from selling any shares in the “bond funds.” Nor did she tell him that UBS Puerto Rico had been selling all of its shares in the “bond funds.” Those facts were fraudulently concealed from the Claimant.
[2] The UBS Puerto Rico broker may have been referring to untested provisions in the Puerto Rico Constitution namely, Article VI, Sections 2 and 6 (the “Constitutional Debt Priority Provisions”) which arguably only afforded some protection to Puerto Rico “General Obligation” bondholders with respect to the debt service, only. This issue has never been addressed by the Supreme Court of Puerto Rico.
[3] Claimant signed the loan agreements presented by the UBS Puerto Rico broker but did not take out any loan to purchase any securities despite the UBS Puerto Rico broker’s repeated solicitations.
[4] 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.
[5] In 2013, only a small percentage of the bonds in Claimant’s portfolio, the Puerto Rico General Obligation Bonds, might have been protected by this untested constitutional provision. The others were not even arguably covered by Puerto Rico’s Constitution.
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