The Law Offices of Robert Wayne Pearce, P.A. filed another 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 received similar misrepresentations and/or 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. Contact our office for a free consultation about your case.
I. INTRODUCTION
This arbitration arises out of misrepresentations and unsuitable recommendations by a UBS Puerto Rico financial advisor to Claimant that he purchase and then hold an excessive concentration of UBS Puerto Rico closed-end bond funds in his account. The Respondent through its representatives made false representations and misleading statements to Claimant about both the nature and risk of the closed-end bond fund and the investment strategy. As a result, the Claimant’s investment portfolio was not diversified from not only an asset allocation standpoint but also overly concentrated in securities issued in a single geographic area, i.e., Puerto Rico. 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. The Respondent and its representatives’ misconduct caused the Claimant to suffer substantial damages in an amount to be determined at the final arbitration hearing.
II. BACKGROUND
The Claimant is 73 years old and living alone in San Juan, Puerto Rico. He retired from the Veterans Administration pharmacy department. Thereafter, he went back to work part-time as a Pharmacist to supplement his income. He has worked as a Pharmacist for over 40 years. He currently supports himself with his Veterans Administration pension, part-time employment income and dividends from his securities account earned on securities in his account at UBS Puerto Rico.
The stockbroker has been the Claimant’s primary broker at UBS Puerto Rico for many years. He knows the Claimant’s age, employment status, and financial condition. The stockbroker knew that the Claimant’s life savings were deposited with UBS Puerto Rico and in his hands. Claimant has been a passive investor and relied exclusively on his UBS Puerto Rico Stockbroker to make all of the investment decisions in his UBS Puerto Rico account. As a result of the UBS Puerto Rico stockbroker’s recommendations and decisions, the Claimant’s UBS Puerto Rico account became highly concentrated (100%) in Puerto Rico bonds and what the stockbroker described as “fondos,” i.e., “funds” or “fondos mutuos,” i.e., “mutual funds.” Claimant has never been given a full explanation of the nature, mechanics or risks of only owning Puerto Rico bonds and “funds” in his account.
There was little activity in Claimant’s UBS Puerto Rico account, other than dividend reinvestments, for many years. However, in August 2012, the UBS Puerto Rico stockbroker solicited Claimant to sell his investment in the Puerto Rico Fixed Income Funds, Inc. and to purchase the Puerto Rico Fixed Income Fund V, Inc. because it would supposedly increase the amount of income Claimant would receive by investing in a different “fund.”[1] Claimant questioned the stockbroker about the “fund” and whether it was a “safe” investment for him to make at that time. The stockbroker assured Claimant that it was a “very conservative” and “low risk” investment and just like the other “funds” in his retirement account.
In March of 2013, Claimant became concerned about the status of his account. The recent change in the government whereby the Popular Democratic Party took control was especially troublesome to him. He was concerned that the Popular Democratic Party would turn everything into junk, including the bonds in his account. Claimant noticed that the value of his accounts had dropped and set up an appointment to meet with the UBS Puerto Rico stockbroker. Upon arrival, Claimant told the stockbroker he wanted to sell all of his investments in the account because he was very concerned about Puerto Rico’s economic future. The stockbroker told Claimant, among other things: “te volviste loco,” i.e., “you are crazy;” “no se preocupe, i.e., “not to worry;” “nunca se convertiran en bonos de chatarra, i.e., “they will never become junk bonds;” “no venda,” i.e., “don’t sell;” “esta pagando interes alto,” i.e., “it’s paying high interest;” and “no puede reemplazar el ingreso,” i.e., “you cannot replace this income.” The stockbroker never said anything about the continuing decline in the ratings of the Puerto Rican bond by the major credit rating agencies, Moody’s, Standard and Poors, and Fitch ratings. He said nothing about the speculative nature of the “funds” due to the illiquidity, leverage and geographic limitations of the investments. He remained silent about the risk of holding an excessive concentration of Puerto Rico securities in the account. As always, the Claimant relied on the UBS Puerto Rico stockbroker for investment advice who did exactly what he told him to; that is, he held all of the Puerto Rico bonds and “funds” in his UBS Puerto Rico account.
In September 2013, Claimant attempted to contact the UBS Puerto Rico stockbroker several times by telephone. However, each and every time Claimant called he was told the stockbroker was unavailable. Claimant was only able to exchange messages about the investments in his account through the stockbroker’s assistant. The UBS Puerto Rico stockbroker’s messages were always: Don’t worry, this is temporary, the market will recover, and hold on to all of your bonds and “funds.”
The Claimant did not meet with UBS Puerto Rico stockbroker until February 13, 2014 and not until after he sent a letter demanding that the stockbroker sell all of the “funds” in his account. At the meeting, the stockbroker continued to speak highly of the Puerto Rico bonds and “funds.” He continued to tell Claimant that the decline in the value of the “funds” was not permanent and that the prices of all of the Puerto Rico bonds and “funds” would rebound. The only difference was that now the UBS Puerto Rico stockbroker spoke of the Puerto Rico bonds and “funds” returning to the original purchase prices in terms of years instead of months. The stockbroker’s assistant told Claimant that if he sold the Puerto Rico bonds and “funds” he would have even greater losses than what appeared on the account statement. Claimant left the UBS Puerto Rico stockbroker’s office confused and depressed.
III. THE WRONGFUL CONDUCT
The “funds” that the Claimant owned in August 2012 were ten (10) of twenty-three (23) Puerto Rico closed-end funds, namely, PR Fixed Income Fund V Inc., Puerto Rico Fixed Income Fund IV, Inc., Puerto Rico Fixed Income Fund VI Inc., Puerto Rico GNMA & US Government Target Maturity Fund Inc., Puerto Rico Fixed Income Fund II Inc., Puerto Rico Fixed Income Fund III Inc., Puerto Rico AAA Portfolio Target Maturity Fund Inc., Puerto Rico AAA Portfolio Bond Fund Inc., Tax Free Puerto Rico Fund Inc., and Tax Free Puerto Rico Target Maturity Fund Inc. (the “UBS Funds”). The UBS Puerto Rico 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 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 Puerto Rico purchased in connection with its underwriting business. UBS Puerto Rico used leverage to enhance the yields of the UBS Funds and attract investors. UBS Puerto Rico management pushed its brokers to sell and to encourage investors to hold on to the UBS 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 the UBS 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. The UBS Puerto Rico stockbroker not only recommended that Claimant “purchase” all of the UBS Funds but also to “hold” on to them when the Puerto Rico credit market was clearly stressed.
The 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.
UBS Puerto Rico and its stockbroker continuously misrepresented the UBS Funds as “safe,” “conservative,” and “low risk” investments to Claimant. The concentration, conflict, illiquidity, and leverage risks of the UBS Funds were high and never disclosed to Claimant when the UBS Puerto Rico stockbroker made recommendations to “purchase” and then to “hold” the UBS Funds. Thus, UBS Puerto Rico and its 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.
Claimant only owned what UBS Puerto Rico described as “fixed income” securities. Further, his account was one hundred percent (100%) invested in Puerto Rico. The UBS Puerto Rico stockbroker’s recommendation in August 2012 that Claimant switch funds concentrated in a single geographic area – Puerto Rico and then the stockbroker’s demand that Claimant continue to “hold” them when he requested liquidation in March 2013 were in breach of FINRA’s suitability rule, which has long been applied to recommended “investments” and “investment strategies,” including “hold” recommendations.[2]
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.
UBS Puerto Rico is responsible for its own wrongs and vicariously liable for the acts and omissions of its 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 its stockbroker and its other agents who managed Claimant’s account and for fraudulently concealing the illiquidity and the other misconduct described above. Had UBS Puerto Rico and its employees adhered fundamental asset allocation principles and recommended a diversified investment strategy, Claimant would not have been damaged. Accordingly, the UBS Puerto Rico 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.
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 works hard to secure the best possible result for your case. Attorney 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.
[1] It appears the amount of income to Claimant only increased $2,500 whereas the stockbroker received at least $8,500 in commissions on both sides of the transaction.
[2] 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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