UBS Puerto Rico Made Unsuitable Recommendations To Pledge Closed-End Funds Against Bank Loans
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.SUMMARY OF ALLEGATIONS MADE AGAINST UBS PUERTO RICOI. INTRODUCTION
This arbitration arises out of a series of unsuitable recommendations by a UBS Puerto Rico financial advisor that Claimant purchase and then hold an excessive concentration of UBS Puerto Rico closed-end funds in a leveraged UBS Puerto Rico account. As a result, 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 through its representatives also disseminated false and misleading information to Claimant about both the nature, mechanics and risks of owning the closed-end funds and the leveraged investment strategy employing UBS Puerto Rico financing schemes in her account. The Respondent and its representatives not only violated the FINRA Code of Conduct but they also committed fraud, breached their fiduciary duties to Claimant and were negligent in advising her on how to safeguard her investment capital. UBS Puerto Rico also negligently failed to supervise its employees in connection with the management of Claimant's account. As a result of Respondent and its representatives' misconduct, the Claimant suffered substantial damages.II. THE RELEVANT FACTS
The claimant is a 43 year old married housewife raising two children in San Juan, Puerto Rico. Several years ago, her father sold his business and gifted each of his children, including his daughter, $5 million dollars. The claimant deposited the gift in her UBS Puerto Rico account. Up until that point in time, she had very little investment experience and a very small account. The claimant relied exclusively upon her UBS Puerto Rico broker for investment advice and management of the investments in her account.
Shortly after the gift was deposited, the claimant met with her broker to discuss her goals and financial needs and receive recommendations for the investment of the gift she received from her father. The claimant made it clear to her broker that she only wanted him to invest in "safe income producing investments" in her UBS Puerto Rico account; i.e. she told her broker that she wanted investments that would be guaranteed (i.e., preserve her principal) and produce income.
The broker acknowledged her goals and needs and recommended what he described as "seguros, de bajo riesgo, y fondos mutuos conservadores," i.e., "safe, low risk, and conservative mutual funds." He told her that the bonds in the so-called "fondos mutuos," i.e., "mutual funds" "estan garantizados por la constitución de Puerto Rico," i.e., "they are guaranteed by the Puerto Rico constitution." There was no detailed discussion about the nature, mechanics or risks of the proposed investments in the UBS Puerto Rico closed-end funds that he recommended, and neither UBS Puerto nor the broker ever provided the claimant with a prospectus or offering memorandum relating to the closed-end funds. The claimant followed her broker's advice and allowed him to purchase over $4 million of UBS Puerto Rico closed-end funds.
Shortly after the broker purchased the so-called "mutual funds" for the claimant's account, she decided to purchase a new residence. The claimant told her broker that she would need to raise approximately $1.2 million in cash to purchase the new home. The broker told her that he could arrange for special financing through either a line of credit or what he described as a "repo" transaction. The claimant followed her broker's recommendation and agreed to open a line of credit and then enter into the "repo" transaction.
Approximately two years later, the claimant told her broker that she needed to pay off a business loan. The broker recommended she use her line of credit through UBS Puerto Rico's bank affiliate at a very low interest rate. He told her that the so-called "mutual funds" in her account would be collateral for the credit line. There was no discussion about the risk of pledging those investments as collateral for the loan, there was no mention of "margin calls," and he said nothing about the risk of leveraging already leveraged investments in Puerto Rico bonds through the so-called "mutual funds." As always, the claimant followed her broker's recommendation and borrowed approximately $450,000 to pay off the business loan.
In or about June 2011, the claimant told her broker that she wanted to purchase an apartment and needed approximately $840,000. The broker reminded the claimant that she had a line of credit for that purpose and that she should use her credit line because the interest rate was so low. Once again, there was no discussion about the risk of pledging her investments as collateral for the additional loan, there was no mention of margin calls or forced liquidations without any prior notice, and he said nothing about the risk of leveraging already leveraged investments in Puerto Rico bonds through the so-called "mutual funds." As always, the claimant followed her broker's recommendation and withdrew an additional $840,000 to purchase the apartment.
The claimant and the broker rarely met to discuss her investments in her UBS Puerto Rico account. On occasion, the broker telephoned or sent by mail some investment recommendations, and the claimant did whatever he advised her to do. The claimant did not become concerned about any of the activity in her account until the Spring of 2013, when accountant had prepared financial statements for her family and noticed the value of the investments at UBS Puerto Rico had dropped approximately $800,000 from the prior year. The claimant and her husband contacted the broker and demanded a full accounting and explanation of the reason for the decline.
In August 2013, the broker met with the claimant and her husband at her husband's business offices. The broker brought with him a summary of the account activity and an account statement but not the audit report the claimant had requested. The broker apologized and assured her no assets were missing from her account and she had not lost any money on any of her investments. He said he believed the decline related to redemptions in the repo account and promised to get her the report and full explanation of what happened.
At that same August meeting, the claimant also questioned the broker about the Puerto Rican economy and bond market because she heard that Puerto Rico bonds would be declared "chatarra," i.e. "junk." The claimant quizzed her broker on what was going on and whether her investments were still "safe" investments to own. He told her, among other things: "la economía está bien, tenemos una economía subterránea fuerte," i.e., "the economy is good, we have a strong underground economy;" "tiene inversiones sólidas," i.e., "you have solid investments;" "no se preocupe," i.e., "not to worry;" "nunca se convertirán en bonos chatarra," i.e., "they will never become junk bonds;" and "están garantizados por la constitución de Puerto Rico," i.e., "they are guaranteed by the Puerto Rico constitution." The claimant asked her broker whether she should sell the so-called mutual funds, and the broker said, "no!" "mantenga sus inversiones," i.e., "hold your investments;" "no venda, " i.e., "don't sell;" "no puede reemplazar el ingreso," i.e., "you cannot replace this income;" and "sus inversiones están seguras porque están garantizados," i.e., "your investments are safe because they are guaranteed."
During the August meeting, the broker never mentioned that the prices of the so-called "mutual funds" had already dropped. He expressed no concern about her account in light of the fact that it was leveraged and held leveraged investments in the closed-end funds. Instead, the broker minimalized the importance of the declines in the ratings of the Puerto Rico bonds by the major credit rating agencies, namely Moody's, Standard and Poors, and Fitch. He said nothing about the speculative nature of the investments due to the illiquidity, leverage, and geographic limitations of the investments. Moreover, he was silent about the risk of holding an excessive and leveraged concentration of Puerto Rico securities in the account. Unfortunately, the claimant relied upon her broker's advice, held her investments, and paid the price.
In September 2013, the claimant received a telephone call from her broker with bad news. UBS Puerto Rico had made a "margin call." For the first time, the broker explained that when the amount of the loan is greater than the value of the account, the claimant would receive a "margin call." He told her that the value of the so-called mutual funds had dropped unexpectedly - over fifty percent (50%) in one month. Initially, the broker told the claimant that she had a margin call and needed to deposit $400,000 in her account immediately or UBS Puerto was going to sell the so-called "mutual funds" in her account and she would lose over a million dollars. Shortly thereafter, the claimant received a letter from UBS Puerto Rico telling her that she needed to pay the entire line of credit, over $1.3 million, in full, before mid October 2013. Fortunately, the claimant's parents had the financial ability to post additional collateral and avoid the forced liquidation of all of the claimant's holdings in the account at fire sale prices.III. THE WRONGFUL CONDUCT
The "funds" the claimant owned were eight (8) of twenty-three (23) Puerto Rico closed-end funds, namely, Puerto Rico Fixed Income Fund, Inc.; Puerto Rico Fixed Income Fund II, Inc.; Puerto Rico Fixed Income Fund IV, Inc.; Puerto Rico Fixed Income Fund V, Inc.; Puerto Rico Investors Tax-Free Fund II, Inc.; Puerto Rico Investors Tax-Free Fund V, Inc.; Puerto Rico Investors Tax-Free Fund VI, Inc.; and Tax-Free Puerto Rico Fund II, Inc. (the "UBS Funds"). UBS Puerto Rico used leverage to enhance the yields of the "UBS Funds" and attract investors, and UBS Puerto Rico management pushed its brokers to sell and then to encourage investors to hold on to the "UBS Funds." Many UBS Puerto Rico brokers encouraged investors like the claimant to take out loans and unwittingly double the leverage risk they were exposed to. It has been estimated that 9 out of 10 investors in Puerto Rico own these "UBS Funds." In late 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."
Contrary to the broker's representations, these were very speculative investments due to the excessive concentration in Puerto Rico bonds, illiquidity, and leverage employed by the managers of the so-called "mutual funds." The broker not only told the claimant to purchase all of the UBS Funds in her account, but also to take out loans instead of selling the UBS Funds and then "to hold" the UBS Funds when the Puerto Rico bond market was clearly stressed. The broker's recommendations were in violation of FINRA Rules of Conduct 2110, 2111 (f/k/a 2310) and 2120, which govern standards of commercial honor and principles of trade, suitability, and use of manipulative, deceptive or other fraudulent devices.
The most egregious violation occurred in August 2013 when the broker told the claimant to "hold" a leveraged portfolio of UBS Funds concentrated in a single geographic area - Puerto Rico - after the market became stressed. This was a clear breach of FINRA's suitability rule, which has long been applied to recommended "investments" and "investment strategies" including "hold" recommendations.
UBS Puerto Rico was obligated to implement a system of supervision to assure compliance with Federal and Puerto Rico law, as well as FINRA conduct rules. However, at no time did any supervisory or compliance personnel ever question the over-concentration of Puerto Rico securities in the client's account. In addition, UBS Puerto Rico did not take any action to properly disclose and stem the flow of misinformation to clients about the UBS Funds.IV. UBS PUERTO RICO IS LIABLE FOR ITS EMPLOYEES AND ITS OWN MISCONDUCT
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. 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.