Santander Securities Broker Switches Investors Into Unsuitable Closed End Funds
The Law Offices of Robert Wayne Pearce, P.A. filed yet another claim against Santander Securities, LLC (Santander). 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 Santander and its stockbrokers or found yourself with an account overconcentrated in closed-end bond funds, or if you borrowed monies from Santander 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 SANTANDER SECURITIESI. INTRODUCTION
This arbitration arises out of unsuitable transactions in Santander closed-end funds by a Santander financial advisor for the Claimants' Santander investment account. As a result of the Santander advisor's investment decision in June 2013, the Claimants' investment portfolio was reinvested and once again concentrated in securities issued in a single geographic area, i.e., Puerto Rico at a time when the Puerto Rico credit market was perilous. In recommending and making those investments, Santander and its registered representatives violated the FINRA Code of Conduct, breached their fiduciary duties to the Claimants, and were negligent in advising them. Santander also negligently failed to supervise its employees. Consequently, Santander and its representatives' misconduct caused the Claimants to suffer substantial monetary damages in an amount to be determined at the final arbitration hearing.II. THE RELEVANT FACTS
The Claimants were retired and only suitable for a diversified portfolio of conservative income producing investments to supplement their social security income. At all times, they relied solely on the advice of their Santander financial advisors for all investment decisions made in their Santander investment account.
The Santander stockbroker first contacted the Claimants in November 2010 and presented himself as their new Santander financial advisor. The Claimants prior financial advisor left Santander to become employed with Merrill Lynch in Puerto Rico. Shortly thereafter, the Claimants transferred out approximately $590,000.00 in cash and securities to their new account at Merrill Lynch. The Claimants left one Santander closed-end fund, the First Puerto Rico Tax-Exempt Fund, in their Santander account because they could not transfer the Santander closed-end fund to Merrill Lynch. The broker assured Claimants that their investment was safe, secure and in his hands. He also led Claimants to believe that he would monitor Claimants and protect their only investment remaining at Santander. The Claimants were passive investors and they let the Santander broker make the decisions with respect to the investments in their account. For several years, his advice was to simply "hold" the First Puerto Rico Tax-Exempt Fund.
The Claimants' Santander account was inactive until June 2013, when the broker exercised his de facto discretion over the Claimants' account and sold the Claimants' entire position in the First Puerto Rico Tax-Exempt Fund. Unfortunately, the Santander financial advisor utilized the sales proceeds to make three new purchases of speculative Santander closed-end funds, namely, First Puerto Tax Exempt Maturity Fund III, First Puerto Tax Exempt Maturity Fund IV, and First Puerto Tax Exempt Maturity Fund V, at that same time. He did not explain the reason for the "switch" or why Claimants should continue to invest in any of Santander's "leveraged" closed-end funds that owned bonds that were "concentrated" in the credit market of a single geographic area - "Puerto Rico." Nor did the Santander broker provide the Claimants with any prospectus, offering memorandum, or other document fully explaining the nature, mechanics, or risks of the Santander closed-end funds he decided to purchase for them.III. THE WRONGFUL CONDUCT
The wrongful conduct of Santander and its financial advisor includes but is not limited to, the purchases of three unsuitable Santander closed-end funds in June 2013 and his decision to hold them in Claimants' account when market conditions dictated otherwise. The Santander broker never discussed the new purchases with the Claimants beforehand and never explained the principles of asset allocation and diversification or the risk of overconcentration of Santander closed-end funds in the Claimants Santander investment account.
Although the Claimants' financial advisor exercised his discretion (without written authority) and undertook responsibility for the investments made in June 2013, he took no action to reduce the risk of volatility and principal loss by employing a proper asset allocation strategy, i.e., he did not diversify the Claimants' portfolio in order to reduce a "leveraged" and "concentrated" portfolio in the Puerto Rico credit market.
Instead, the Santander broker made three new purchases and held the Santander closed-end funds knowing that such investments exposed the Claimants to many of Puerto Rico's ongoing political, fiscal, economic, and regulatory problems. Remarkably, the broker purchased the three Santander closed-end funds just after the Puerto Rico credit markets were downgraded to one notch above "junk." Unfortunately, the Claimants relied upon Santander's advisor to manage their account and he did so in breach of his fiduciary duties and negligently. The broker's investment decision to make three new purchases and then hold the Santander closed-end funds was unsuitable and without any reasonable basis.
Santander, as a result of its employee's acts and omissions, violated industry rules and standards of professional care. In addition, Santander failed to supervise its employee and protect the Claimants from his sales abuse and violation of FINRA conduct rules. Santander and its broker's acts and omissions caused the Claimants to suffer substantial losses. Accordingly, Santander is liable for its employees and its own misconduct and Claimants' losses as more fully set forth below.A. The Claimants' Account Was Over-Concentrated in the Puerto Rico Credit Market
The investment portfolios of the three Santander closed-end funds (the "Santander Funds") were not diversified mutual funds. They were closed-end funds that were formed and managed by Santander and invested in the Puerto Rico credit market. The Santander Funds were "leveraged" and "over-concentrated" investments in a limited number of Puerto Rico bonds. The Puerto Rico investor market limitation, geographic concentration risk, illiquidity risk, and leverage risk made the Santander Funds speculative and therefore unsuitable investments for Claimants.B. The Puerto Rico Credit Market Was Perilous When The Santander Financial Advisor Purchased The Santander Funds
It was not the time to ignore sound investment principles when the Santander broker "switched" the Claimants' First Puerto Rico Tax-Exempt Fund units for First Puerto Tax Exempt Maturity Fund III, First Puerto Tax Exempt Maturity Fund IV, and First Puerto Tax Exempt Maturity Fund V units in June 2013. The only prudent decision he made was the sale of the First Puerto Rico Tax-Exempt Fund. His recommendation and decision to make three new purchases of Santander Funds in June 2013 was perilous.
There was no sign of relief for Puerto Rico as all three credit ratings agencies, Moody's, Fitch, and Standard and Poors, reduced their ratings of Puerto Rico debt to one notch above "junk bonds." All three agencies held a "negative" outlook for Puerto Rico's future. Officials in San Juan and Washington were adamant that a federal bailout was not on the table. The effort to raise taxes had run into political opposition. There was a mass exodus of young Puerto Ricans seeking employment on the mainland, which was an ominous sign for the future. Notwithstanding, the Santander broker made three new and unsuitable purchases of Santander Funds in June 2013; and he did so when the Puerto Rico credit market was on the verge of collapse. It appears the only reason for the three purchases in Claimants' account was the commissions he earned!C. Santander And Its Broker Violated Industry Rules and Standards of Professional Care
The Santander 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.* * *
Santander and its employee's actions not only violated the FINRA standards of commercial honor and principles of trade but also his decision to purchase three Santander Funds concentrated (100%) in a single geographic area - Puerto Rico - at a time when market conditions were perilous - was in breach of FINRA's suitability rule, which has long been applied to recommended "investments" and "investment strategies including "hold" recommendations."D. Santander Failed To Protect Its Clients From Sales Abuse
Pursuant to FINRA Rule 3010, Santander 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. Santander knew that the Santander 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 the Claimants' account. On information and belief, Santander did not even have any computer exception reports designed to detect and prevent the over-concentration of Puerto Rico securities investments that occurred in the Claimants and other Santander clients' accounts; and if it did, no supervisor ever reviewed them or took any action to protect clients of the brokerage firm.E. Santander Is Liable For Its Employees And Its Own Misconduct
Santander 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. Santander is vicariously liable for its employee's mismanagement of the Claimants' account by recommending that the Claimants overly concentrate and unsuitable portfolio of Puerto Rico securities without verbal or written authorization from the Claimants. Santander is also directly liable for failing to supervise its employee and its other agents who managed the Claimants' account. Had Santander and its employees adhered to fundamental asset allocation principles and recommended a diversified investment strategy, the Claimants would not have been damaged. Accordingly, Santander 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. 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.