In an arbitration proceeding against UBS Financial Services, Inc. of Puerto Rico (UBS-PR), the Law Offices of Robert Wayne Pearce, P. A. won a $600,000 plus interest award for one of the firm’s clients. A summary of Claimant’s allegations against 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-PR
The arbitration arose out of a series of misrepresentations and unsuitable recommendations by a UBS-PR financial advisor to Claimant that he purchase and then hold an excessive concentration of UBS-PR 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-PR 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.
THE RELEVANT FACTS
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 45 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-PR.
The UBS-PR Stockbroker has been Claimant’s primary broker at UBS-PR for many years. The stockbroker knows Claimant’s age, employment status, and financial condition. He knew that Claimant’s life savings were deposited with UBS-PR and in his hands. Claimant has been a passive investor and relied exclusively on his UBS-PR Stockbroker to make all of the investment decisions in his UBS-PR account. As a result of the financial advisor’s recommendations and decisions, Claimant’s UBS-PR account became highly concentrated (100%) in Puerto Rico bonds and what the UBS-PR 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-PR account, other than dividend reinvestments, for many years. However, in August 2012, the UBS-PR 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.” Claimant questioned the UBS-PR Stockbroker about the “fund” and whether it was a “safe” investment for him to make at that time. The UBS-PR 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-PR Stockbroker. Upon arrival, Claimant told the financial advisor he wanted to sell all of his investments in the account because he was very concerned about Puerto Rico’s economic future. The UBS-PR 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 UBS-PR 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, Claimant relied on the UBS-PR 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-PR account. In September 2013, Claimant attempted to contact the UBS-PR Stockbroker several times by telephone. However, each and every time Claimant called he was told the financial advisor was unavailable. Claimant was only able to exchange messages about the investments in his account through the UBS-PR Stockbroker’s assistant. His messages were always: Don’t worry, this is temporary, the market will recover, and hold on to all of your bonds and “funds.”
Claimant did not meet with the UBS-PR Stockbroker until February 13, 2014 and not until after he sent a letter demanding that the financial advisor sell all of the “funds” in his account. At the meeting, the UBS-PR 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-PR Stockbroker spoke of the Puerto Rico bonds and “funds” returning to the original purchase prices in terms of years instead of months. The financial advisor’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-PR Stockbroker’s office confused and depressed.
THE WRONGFUL CONDUCT
The “funds” that 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-PR 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-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 to encourage investors to hold on to the UBS Funds. Many UBS-PR 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.
UBS-PR WAS LIABLE FOR ITS REGISTERED “ASSOCIATED PERSONS” AND ITS OWN MISCONDUCT
UBS-PR is responsible for its own wrongs and vicariously liable for the acts and omissions of the UBS-PR financial advisor 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-PR financial advisor’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-PR is also directly liable for misrepresenting the UBS Funds, failing to supervise the UBS-PR financial advisor 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 adhered fundamental asset allocation principles and recommended 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.
THE AWARD
The arbitrators found in favor of Claimant and awarded him the following:
- Respondents are jointly and severally liable for and shall pay to Claimant
- compensatory damages in the amount of $600,000.00.
- Respondent UBSPR is liable for and shall pay to Claimant interest at the rate of 4% per annum from March 12, 2013, until paid.
- Respondent is liable for and shall pay to Claimant $250.00 as reimbursement for the non-refundable portion of Claimant’s initial claim filing fee previously paid to FINRA Dispute Resolution.
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 833-300-6983 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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