The Law Offices of Robert Wayne Pearce, P.A. filed yet 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 a series of unsuitable recommendations by UBS Puerto Rico financial advisors that Claimant purchase and hold an excessive concentration of Puerto Rico securities in her individual account and Individual Retirement 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 her accounts. 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 her. UBS Puerto Rico also negligently failed to supervise its employees. Finally, Respondent has fraudulently concealed this and other misconduct relating to her 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.
II. THE RELEVANT FACTS
Claimant is over 62 years of age. She is unmarried and lives alone in San Juan, Puerto Rico. She is a Clinical Psychologist currently earning a modest income.[1] Claimant is also dependent upon income earned on an inheritance from her parents that was deposited in her UBS Puerto Rico brokerage accounts: an individual brokerage account and retirement account. During the relevant period two individuals served as her UBS Puerto Rico stockbrokers.
In 2002 and 2003, Claimant inherited what she understood to be bonds and mutual funds from her parents’ UBS PaineWebber accounts when they passed away. Based on her conversations with her stockbrokers, she believed the investments to be safe investments that would generate the income she needed for her support. Claimant was always a passive investor and always listened to her stockbrokers. She did not transact any business in her account on her own.
Claimant did not know the true nature, mechanics or risk of the investments that she had inherited and held in her account. She thought she actually owned bonds that would always pay interest until they matured. Neither UBS Puerto Rico nor her UBS Puerto Rico Stockbrokers ever gave her a full explanation of what type of investments she owned in her UBS Puerto Rico accounts. They generally referred to the investments as “fondos de bonos,” i.e., “bond funds.” Claimant did not understand that the investments in her account were closed-end funds and what she actually owned was shares of the closed-end funds (like shares of common stock) that only paid dividends at the manager’s discretion. She did not know that the so-called bond funds were leveraged investments. Nor did she know that they were illiquid and might not be able to be sold when she needed money for her support in some emergency. Claimant did not understand that the so-called bond funds were very risky investments.
In October of 2011, Claimant received a document from UBS Puerto Rico requesting that she confirm some account information. She didn’t understand the purpose of the document but saw the words “aggressive/speculative” on the document and immediately called one of her UBS Puerto Rico stockbrokers. Claimant questioned him about the document and why those words appeared. She made it clear she was a “conservative” investor who wanted investments that would not fluctuate in order to preserve her investments. Claimant told him that the investments in her accounts represented almost everything she owned. She reminded him that she could not afford to lose principal in the account that was generating the income she needed for her support. The UBS Puerto Rico stockbroker assured Claimant that he understood what she wanted and that this was a clerical mistake that would be corrected.
At that time, Claimant also wanted her UBS Puerto Rico stockbroker’s opinions on every bond and bond fund in her account. She wanted to know if they were indeed “conservative” investments that would not fluctuate in value and continue to provide the income she needed. They reviewed each and every security held in the accounts. They discussed each of the so-called bond funds. The UBS Puerto Rico stockbroker claimed that each of the so-called bond funds had an “excellent track record” and that UBS Puerto Rico management highly recommended them.[2] The UBS Puerto Rico stockbroker also told Claimant that the bonds and so-called bond funds were “protegidos por el gobierno,” i.e., “protected by the government.”[3] The stockbroker told Claimant that the Puerto Rico bonds and the so-called bond funds were exactly what she wanted and needed; i.e., they were suitable investments.
Approximately two months later, Claimant received a confirmation that the information on the prior form was changed. She believed the information on the new form was consistent with what she believed her objectives and tolerance for risk to be in connection with her accounts. The key information on the Confirmation was as follows:
Investment – Produce Current Income
Annual Income – $48,000
Objectives –
Net Worth – $350,000
Knowledge of Investments – Very Little Knowledge
Risk/Return – Lower Fluctuations
Percentage of Investable – More than 80%
Objectives – Maintain Capital
Assets held at UBS –
Risk Profile – Conservative
And so, UBS Puerto Rico and the UBS Puerto Rico stockbroker clearly understood Claimant’s low risk tolerance; in UBS Puerto Rico’s own words: the client “seeks to maintain principal, with low risk and volatility to the account overall, even if that means the account does not generate significant income or returns and may not keep pace with inflation.”
In March 2013, Claimant heard some rumblings about Puerto Rico bonds in the media and contacted her UBS Puerto Rico Stockbrokers. They told her “no se preocupe,” i.e., “not to worry;” “no venda,” i.e. “don’t sell,” because all of the Puerto Rico bonds and the bonds in the so-called bond funds that she owned “están protegidos por el gobierno de Puerto Rico,” i.e., “they are protected by the Puerto Rico government.” They told Claimant that there had only been small temporary fluctuations in value but she would not lose any of the income or principal from the Puerto Rico bonds and so-called bond funds because they were “protected by the government.”
At that time, Claimant also discussed the large loan balance as a result of withdrawals for income (primarily when she was unemployed). The loan balance had increased to over $231,000 and she was paying a significant amount of interest to UBS Puerto Rico, approximately $750 every month. Claimant was working again and she told her UBS Puerto Rico Stockbrokers that she was not comfortable owing so much money to UBS Puerto Rico. She wanted to pay off the loan but the UBS Puerto Rico Stockbrokers discouraged her from doing so. They kept her telling her that the income she earned on the funds was greater than the interest she paid on the loan. Nevertheless, she insisted that some of the bonds or so-called bond funds in her account be sold and the loan be paid off in full. The UBS Puerto Rico stockbroker told her that she must hold onto the balance of the so-called bond funds because they were “safe” investments that generated a large amount of income. After a month of discussions with her UBS Puerto Rico stockbrokers, one bond and approximately $206,000 of the UBS Puerto Rico Funds were sold to pay off the loan and the balance was retained in the so-called bond funds as the UBS Puerto Rico Stockbrokers insisted she do so.[4]
By June 2013, all that was left in Claimant’s two accounts was investments in the Puerto Rico Investors Tax Free Fund, Puerto Rico Fixed Income Fund III, Puerto Rico Fixed Income Fund IV, and Blackrock MuniYield Fund. She held on to the so-called bond funds because the UBS Puerto Rico Stockbrokers told her to do so.
In October 2013, Claimant learned that the value of the so-called bond funds in her account had declined substantially. She contacted her stockbrokers for an explanation. The UBS Puerto Rico stockbroker attempted to cover up his unsuitable recommendations by blaming the municipal bond market in general and events in the United States such as the Detroit bankruptcy for the price decline. The UBS Puerto Rico stockbroker was silent about the economic and political crisis in Puerto Rico and the looming junk bond credit rating for Puerto Rico. He went out of his way to steer her away from his bad advice to concentrate and hold Puerto Rico closed-end funds in her account and blame others for his negligence. Today all of those so-called bond funds are worth more than 50% less than they were when the UBS Puerto Rico stockbroker told her not to sell but to “hold” them. Claimant has been told that she cannot sell them.
III. THE WRONGFUL CONDUCT
The so-called “bond funds” that Claimant owned at one time or another were actually five (5) of twenty-three (23) Puerto Rico closed-end funds (the “UBS Funds”), namely, Puerto Rico Investors Tax Free Fund, Inc.; Puerto Rico Fixed Income Fund III, Inc.; Puerto Rico Fixed Income Fund IV, Inc.; Puerto Rico Tax Free Target Maturity Fund II, Inc.; Puerto Rico AAA Portfolio Target Maturity Fund, Inc.; and Puerto Rico GNMA & U.S. Gov’t Target Maturity Fund. All of the investment portfolios of the UBS Funds were concentrated in Puerto Rico bonds.
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 Stockbrokers’ recommendations that Claimant “switch” and then “to hold” the balance of the UBS Funds in her account after she paid off the loan, a point in time when the risk of loss was at its greatest in the life of the accounts, 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 continuous misrepresentations that the UBS Funds were “safe,” “conservative,” and “low risk” investments to Claimant were in violation of FINRA Conduct Rules 2110 and 2120. 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 “switch” and then to “hold” the UBS Funds. Further, the bonds in the “UBS Funds” were not all “constitutionally protected.”[5] 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.
In June 2013, 99% of Claimant’s accounts remained invested in “fixed income” securities and approximately 75% of those investments were concentrated in the single geographic area – Puerto Rico! The UBS Puerto Rico Stockbrokers’ recommendation that Claimant “hold” an excessively concentrated portfolio of securities in a single geographic area – Puerto Rico, was in breach of FINRA Conduct Rule 2111, the suitability rule, a rule that has long been applied to recommended “investment strategies” including “hold” recommendations.[6]
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 the UBS Puerto Rico stockbrokers 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 Stockbrokers’ continuous dissemination of false and misleading information about the UBS Funds and mismanaging the Claimant’s account by recommending that Claimant switch 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 Stockbrokers 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.
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] In 2008 and 2009, Claimant loaned money to a friend. During the period 2009 through 2011, Claimant was unemployed. The UBS Puerto Rico stockbroker persuaded her to withdraw funds from a collateralized loan account with a UBS Puerto Rico affiliate rather than to sell investments in her account to generate the funds she needed to loan her friend and support herself.
[2] At no time did the UBS Puerto Rico stockbroker mention to Claimant that it would be very difficult for him to sell any of the so-called bond funds. He never told her that senior management had always been telling the sales force to dissuade investors from selling any shares in the so-called bond funds. Those facts were fraudulently concealed from Claimant.
[3] The UBS Puerto Rico stockbroker 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.
[4] The UBS Puerto Rico Stockbrokers never told her that they received compensation credits for all of their clients who maintained loan balances. Fortunately, Claimant didn’t listen to her UBS Puerto Rico Stockbrokers and paid off the loan because her losses and the size of her claim against UBS Puerto Rico would have been far greater than it is at this time.
[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.
[6] 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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