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 $4.25 million in compensatory damages plus interest at 6.25% from February 28, 2014 and costs of $170,000 for one of the firm’s clients last month. A summary of our clients’ 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 loan collateral, we may be able to help you recover your losses. Contact our office as soon as possible for a free consultation about your case. Time is of the essence!
INTRODUCTION
This arbitration arose out of a series of unsuitable recommendations by a UBS-PR and UBS financial advisor that our clients purchase and then hold an excessive concentration of Puerto Rico Bonds and UBS-PR Closed-End Funds. As a result, our clients’ investment portfolios were not diversified from not only an asset allocation standpoint but also overly concentrated in securities from a single geographic area – Puerto Rico. The excessive concentration in Puerto Rico securities and leverage strategy implemented made the accounts highly speculative, which was inconsistent with not only our clients’ investment objectives but also the UBS-PR and UBS financial advisor’s representations. UBS and UBS-PR, through their representatives, disseminated false and misleading information to our clients about the nature, mechanics and risks of owning leveraged and concentrated positions in Puerto Rico Bonds and UBS-PR Closed-End Funds and the investment strategy employed in their accounts.
In so doing, the UBS, UBS-PR, and their representatives not only violated the Puerto Rico Uniform Securities Act (“PRUSA”), but also committed fraud, breached their fiduciary duties to our clients, breached their contracts and the FINRA Code of Conduct, and were negligent in advising our clients on how to safeguard their investment capital. UBS-PR and UBS negligently failed to supervise its employees in connection with the management of our clients’ accounts. As a result, our clients suffered substantial damages.
BACKGROUND
Our clients (the Claimants), a husband and wife, were both retired individuals, 61 and 53 years of age. They have been married for 26 years with three children. Our client owned and operated a 100 year old family business until he sold the business and retired. The profit from that sale was the source of their retirement savings and entrusted to their UBS-PR and UBS registered financial advisors to preserve their capital and generate income to support them during their retirement.
During the relevant period, our client and his family maintained at least seven UBS-PR accounts, including, individual, joint, corporate and a trust account for the benefit of him and/or his family. Claimants’ uniform instruction to their stockbroker was to invest in “inversiones seguras” or “safe investments” in their UBS-PR accounts and generate the income the family needed to support their lifestyle. Claimants relied primarily upon their stockbroker for investment advice and management of all of the investments in their UBS-PR accounts in accordance with their instructions. However, on at least two occasions, our client met with the Chairman of the Board and Chief Executive Officer of UBS-PR and of its Puerto Rico affiliate companies and also Chairman of the Board of each of the 23 UBS-PR Closed-End Funds, and discussed the Puerto Rico Bonds and UBS-PR Closed-End Bond Funds in his family’s accounts. Unfortunately, all of the UBS-PR representatives misrepresented the risks of the investments and investment strategy implemented in our clients’ accounts.
Our clients were told by their stockbroker that the investments in their accounts were “conservadoras,” (i.e., “conservative”). The UBS-PR representatives told Claimants that the Puerto Rico General Obligation bonds (“GO Bonds”) and Sales Tax and Financing Authority bonds (“Cofina Bonds”) were “garantantizados,” (i.e., “guaranteed”) to be paid by the Commonwealth of Puerto Rico (the “Commonwealth”). The Cofina Bonds were described as “el estándar de oro” and “blindados,” (i.e., “the gold standard” and “bulletproof”). The stockbroker had also purchased what were described to Claimants as “fondos mutuos conservadores, seguros, y de bajo riesgo,” (i.e., “safe, low risk, and conservative mutual funds”). The stockbroker also told Claimants that the bonds in the so-called “fondos mutuos” were either backed by the U.S. government or “garantantizados por Puerto Rico,” (i.e., “guaranteed by Puerto Rico,”) which was false and/or misleading. The UBS-PR representative told our client the so-called “fondos mutuos” were so safe that he had his aunts fully invested in them. But, the so-called “fondos mutuos” were not really typical mutual funds; they were leveraged, illiquid closed-end bond funds concentrated in a single geographic area (Puerto Rico) and suitable for only the most aggressive bond investors.
Over the years, the stockbroker offered financing opportunities to our client. He offered lines of credit at interest rates lower than banks whenever our clients needed to make large withdrawals for purchases. According to the stockbroker, our clients would profit from the difference in the high interest paid on the bonds by the government and the low interest charged on their variable line of credit through UBS Bank (USA) that was collateralized with the pledged shares of the UBS-PR Closed-End funds in their UBS-PR accounts. He assured them that the strategy was safe and used all of the time by banks to make money when interest rates were low. The only risk the stockbroker mentioned was that they would need to stop using the strategy if and when interest rates rose in the future. There was no discussion about the risk of leverage or what could happen in the account if the bond and funds prices declined.
Our clients let the stockbroker manage their accounts and periodically received verbal reports from him that all was well. He never expressed any concerns about economic or political issues developing within the Commonwealth, not even after our clients approached him in September and October 2012 about concerns they had about owning Puerto Rico Bonds and Puerto Rico Closed-End Bond Funds.
In September and October 2012, Claimants discussed with their stockbroker concerns they had about the family’s accounts in light of the Puerto Rico economy and credit market. Our clients thought that they should be liquidating all of their positions in Puerto Rico securities. In response to Claimants’ inquiry, the stockbroker told Mr. Blanco and his family, among other things: “tienen inversiones sólidas,” (i.e., “you have solid investments,”) “no se preocupen porque los bonos están garantizados” (i.e., “not to worry because the bonds are guaranteed”). Claimants specifically asked their stockbroker whether they should stop the bond investment strategy and sell the so-called mutual funds. The broker said, “no!,” “mantengan sus inversiones,” (i.e., “hold your investments,”) “no vendan,” (i.e., “don’t sell,”) and he explained “los bonos podrán fluctuar de valor, pero ustedes continuarán recibiendo sus intereses y todo su principal al vencimiento,” (i.e., “the bonds may fluctuate in value, but you will continue to receive your interest and all of your principal at maturity,”) and “sus inversiones están seguras porque están garantizadas,” (i.e., “your investments are safe because they are guaranteed”).
The UBS-PR representative insisted that our client hold the GO Bonds and Cofina Bonds along with the UBS-PR Closed-End Bond Funds known as Puerto Rico GNMA & U.S. Government Target Maturity Fund Inc.; Puerto Rico AAA Portfolio Target Maturity Fund Inc. (“PRAAAPTMF”); Puerto Rico AAA Portfolio Bond Fund Inc. (“PRAAAPBF”) and Tax Free Target Maturity Fund Inc. (“TFTMF”) because the bonds owned by these funds were “garantizados” (i.e., “guaranteed,”) by the United States or Puerto Rico, which was not true! He described the Cofina Bonds as “el estándar de oro,” (i.e., “the gold standard”) and “blindados,” (i.e., “bulletproof”) which was also false!!
The stockbroker immediately sold shares of Puerto Rico Fixed Income Fund II (“PRFIF II”) and Tax Free Puerto Rico Fund II (“TFPRF II”) and indicated he would continue to sell shares of the other UBS-PR Closed-End Bond Funds “poco por poco” (i.e., “little by little,”), “para mantenerse bajo el radar” (i.e., “to stay under the radar”).
The stockbroker and the UBS-PR representative said nothing about the speculative nature of the Puerto Rico Bonds and UBS-PR Closed-End Funds due to the illiquidity, leverage and geographic concentration of the investments. Aside from a very small percentage of U.S. denominated securities purchased primarily in 2012, the investments in Claimants’ accounts were leveraged and over-concentrated 99% in one geographic area – Puerto Rico. The UBS-PR representatives were silent about the risk of holding an excessive and leveraged concentration of Puerto Rico Bonds and UBS-PR Closed-End Funds in Claimants’ accounts. Further, they never once mentioned that the UBS research department had issued a series of reports with warnings about holding concentrated positions in Puerto Rico securities in January 2012 and thereafter. Unfortunately, our clients relied upon their stockbroker’s advice and did not liquidate all of their Puerto Rico investments as they wanted. Due to the illiquidity and lack of demand for the funds, they were only able to sell half and paid the price.
By September 2013, a series of downgrades of Puerto Rico credit markets, over six years of recession, excessive concentrations of Puerto Rico securities, excessive leverage, and margin calls in UBS-PR clients’ accounts combined with the UBS-PR Closed-End Funds having to forcefully liquidate billions worth of Puerto Rico bonds in a very short span when their prices were declining in order to maintain the funds’ required 2:1 leverage ratios, ultimately putting enormous additional downward pressure in the price of Puerto Rico bonds, predictably resulted in the collapse of the “house of cards;” i.e., a collapse of the Puerto Rico Bonds and UBS-PR Closed-End Funds. In a two-month span, the market value of most Puerto Rico Bonds declined 25% while many of the UBS-PR Closed-End Funds declined 50% or more.
However, the collapse of the Puerto Rico credit market did not deter the stockbroker with respect to the investment strategy in Claimants’ accounts. He told our client and his family that they “no deberían estar asustados,” (i.e., “should not panic”) and “no vendan,” (i.e., “not sell”) any more of their Puerto Rico Bonds or UBS-PR Closed-End Funds. He told our clients that all of the Puerto Rico Bonds and the remaining UBS-PR Closed-End Funds were “seguros,” (i.e., “safe”) and to “mantenerlos,” (i.e., “hold them”) through “durante la corrección del mercado,” (i.e., “the market correction”) because “los precios de los bonos de Puerto Rico y de los fondos se recuperarían,” (i.e., “the prices of Puerto Rico Bonds and funds would rebound”). At the very worst, the stockbroker stated that Claimants’ GO Bonds and Cofina Bonds would be paid in full upon maturity. But our client had heard enough from his stockbroker and began seeking other advice. Shortly thereafter, our client moved the family’s accounts away from the stockbroker’s control to another brokerage firm.
The stockbroker repeatedly misrepresented through February 2014 that the investments were safe because the Puerto Rico Bonds owned by Claimants, directly and indirectly through the UBS-PR Closed-End Funds, were “guaranteed” to be paid by the Commonwealth. Unfortunately, our clients relied upon their stockbroker’s misrepresentations and continued to “hold” all of the remaining Puerto Rico Bonds and UBS-PR Closed-End Funds and as a direct result of their reliance on inappropriate advice and unsuitable recommendations lost millions of dollars.
UBS-PR AND UBS WERE BOTH LIABLE FOR THEIR REGISTERED “ASSOCIATED PERSONS” AND THEIR OWN MISCONDUCT
UBS-PR and UBS were responsible for their own wrongdoings and vicariously liable for the negligent acts and omissions of the stockbroker and the UBS-PR representative, 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 UBS-PR and UBS were vicariously liable for their financial advisors’ continuous dissemination of false and misleading information about the Puerto Rico Bonds and the UBS-PR Closed-End Funds and mismanaging Claimants’ accounts by recommending that they purchase and then hold a leveraged, overly concentrated, and unsuitable portfolio of Puerto Rico securities. UBS-PR and UBS were also directly liable for misrepresenting the UBS-PR Closed-End Funds, failing to supervise their financial advisors and other agents who managed Claimants’ accounts, and for fraudulently concealing the illiquidity and the other misconduct described above. Had Respondents and their employees recommended and adhered to an unleveraged diversified investment strategy, our clients would not have been damaged. Accordingly, the Respondents violated and/or were vicariously liable, jointly and severally, for violations of PRUSA, the FINRA Code of Conduct, common law fraud, constructive fraud, negligent misrepresentation, breach of fiduciary duty under Puerto Rico law, breach of contract, negligent management, negligent supervision of its employees, and fraudulent concealment of its misconduct.
THE AWARD
The arbitrators found in favor of our clients and awarded them the following:
- With respect to Respondent’s Motion for Directed Verdict, which the Panel deemed to be a Motion to Dismiss, the Panel has decided as follows:Based on the application of the statute of limitations, pursuant to New York Law, FINRA Rules and Puerto Rico Law, Rules and/or court opinions, Claimants’ claims occurring prior to August 31, 2011, are hereby denied due to the application of the six-year statute of limitations, except as to any claim under a cause of action for breach of contract, for which Claimants’ claims occurring prior to August 31, 2002, if any, are hereby denied, as the fifteen year statute of limitations applies.
- Respondents are jointly and severally liable for and shall pay to Claimants the sum of $4,250,000.00 in compensatory damages.
- Respondents are jointly and severally liable for and shall pay to Claimants interest on the above-stated sum at the rate of 6.25% per annum from February 28, 2014, through and including payment of this Award.
- Respondents are jointly and severally liable for and shall pay to Claimants the sum of $170,000.00 in costs.
- Respondents are jointly and severally liable for and shall reimburse Claimants the sum of $375.00, representing the non-refundable portion of the claim-filing fee previously paid to FINRA Office of Dispute Resolution by Claimants.
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.
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