Pursuing $1.4 Million in Multiple Claims of Puerto Rican Bond Sales by RBC

Vernon Litigation Group Joins Legal Team Pursuing $1.4 million in Multiple FINRA Arbitration Claims of Puerto Rican Bond Sales by RBC

The Atlanta based law firm of Dovin Malkin and Ficken has filed multiple FINRA arbitration claims against RBC Capital Markets LLC (“RBC”) relating to the sale of Puerto Rican bonds by the West Palm Beach office of RBC. Dovin Malkin and Ficken has now joined forces with Florida based law firm of Vernon Litigation Group to expand nationally the investigation of RBC’s wrongdoing in connection with its bond sales and underwriting practices.

The pending FINRA arbitration claims include a New Jersey couple planning for retirement as well as Georgia physicians focused on college educations for their children. According to the claims, the inappropriate over-concentration of Puerto Rican bonds reached troubling levels in the fixed income portfolios of these clients and resulted in significant damages to accounts earmarked for retirement and college expenses.

Investigation into Two Events

Vernon Litigation Group is now nationally investigating the confluence of two events which may have resulted in widespread wrongdoing at RBC with respect to attracting fixed income clients and then overselling those clients fixed income products such as Puerto Rican bonds. Each component of this investigation is detailed below.

The first cause of this alleged pattern of over-concentration may lie in the fact that RBC was one of the underwriters for Puerto Rican bonds. A bond underwriter is a company (such as RBC) that administers the issuance and distribution of bonds from issuers such as Puerto Rico. In other words, the underwriter gets paid to make sure the public buys the bond when it is initially issued. In fact, in a March 2014 Bloomberg article, it was reported that Puerto Rico “[g]rappling with a shrinking economy, paid banks led by Barclays Plc., Morgan Stanley and RBC Capital Markets $28.1 million in underwriting fees when it sold $3.5 billion of bonds on March 11….”

RBC Underwrote COFINA Establishes Motivation

As an example, RBC underwrote the Puerto Rico Sales Tax Financing Corporation (also known as “COFINA” for Corporación del Fondo de Interés Apremiante), which is a government-owned corporation. Although COFINA was funded by a dedicated sales tax fund separate and apart from the Commonwealth’s General Fund, RBC was well aware that COFINA does not have a debt service reserve fund. In other words, COFINA bonds were tied to the economy, which was particularly weak in Puerto Rico and the sales tax at issue was subject to a high level of evasion. This underwriting relationship establishes both a motivation by RBC to over concentrate portfolios in Puerto Rican bonds and establishes that RBC was well aware of the problems in Puerto Rico – which makes any over-concentration by RBC in its clients’ accounts especially despicable.

In fact, as a result of this underwriting relationship, RBC would have known that Puerto Rico’s economy had been in a recession since 2006 when generous tax breaks granted to manufacturers by the U.S. Congress all expired. RBC would have also known that prior to that time, corporations had been exempt from paying taxes on profits generated on the island. The tax incentives initially caused corporations to move to the island, which boosted the economy. With the expiration of the tax incentives, corporations began leaving Puerto Rico, raising unemployment levels and causing many to move away from the island. The decline in the overall working population in turn lowered the tax revenue base. Puerto Rico and its agencies made up the lost revenue by more than doubling their borrowing since 2004. Consequently, Puerto Rico’s government has run large operating deficits for at least the last ten fiscal years. So much so in fact that Peter Hayes, chair of BlackRock’s Municipal Bond Market Committee, on May 9, 2012, stated in an interview with Learn Bonds that he would avoid bonds issued by Puerto Rico because “the credit risk…outweighed the benefits of extra yield.”

Over-Concentration of Puerto Rican Bonds

The second potential cause being investigated for this alleged pattern of over-concentration of Puerto Rican bonds in RBC fixed income clients’ accounts involves a troubled New Jersey bond firm known as J.B. Hanauer, which was purchased by RBC around the time of the financial crisis. Many J.B. Hanauer financial advisors presented themselves as fixed income experts who could help clients avoid the risks of the stock market. Vernon Litigation Group is now investigating whether these Hanauer brokers continued to target risk-averse investors by pitching themselves as fixed income investment experts after transferring their licenses to RBC.

Chris Vernon, of Vernon Litigation Group, has experience with the J.B. Hanauer culture through prior FINRA arbitration against J.B. Hanauer before it was folded into RBC. As with the pending RBC cases, which notably involve former J.B. Hanauer financial advisor Samuel Koltun, Mr. Vernon pursued claims on behalf of an investor who was seeking steady, safe fixed income but who was improperly sold a concentrated portfolio of high-risk bonds. In the J.B. Hanauer arbitration, Vernon obtained an award for his client that included not only compensatory damages but also significant punitive damages as well as arbitral authority to pursue attorney’s fees in a post-arbitration court proceeding.

An example of this concern regarding J.B. Hanauer sales practices being carried over to RBC can be seen in the now pending claims filed by Dovin Malkin and Ficken against RBC. As mentioned above, the RBC financial advisor involved in the pending RBC cases is Samuel Koltun (CRD# 1739664). Koltun now has six disclosures in his publicly available regulatory report maintained by FINRA. According to FINRA, disclosures include customer complaints and regulatory actions. According to the FINRA disclosure summary on Koltun, he has three customer disputes reported in 2015 while employed by RBC (including the pending claims filed by Dovin Malkin and Ficken). And, as suspected, Koltun had 2 customer disputes and a regulatory issue (suspension and fine by FINRA f/k/a NASD) while with J.B. Hanauer before transferring his license to RBC.

Bond Prices Lack Transparency and Efficiency

Bond conflicts of interest are often greater than stocks due to the way they are sold to clients – usually out of a firm’s inventory. Bond prices lack the “transparency” or “efficiency” of stock prices – which creates a bigger conflict of interest and greater opportunity for brokerage firms such as RBC to take advantage of its own clients. Arguably, bond-buying is more of a black box than even car or home buying. High risk bonds can be especially dangerous for retail investors because the perception created by the brokerage industry that bonds are usually purchased as a stable vehicle that provides stable income, rather than a riskier investment in a stock in hopes that it will rise in value. What is confusing for the investment public is the fact that bonds backed by financially strong governments or by large, well-run corporations are arguably not much riskier than U.S. Treasury notes, but are not adequately distinguished from much riskier bonds issued by weaker governments or corporations without a healthy balance sheet.

In the pending cases and in additional client representation resulting from the national investigation, Vernon Litigation Group intends to pursue RBC for not only compensatory damages but punitive damages as well, consistent with Supreme Court precedent.

Contact Us to Protect Your Investments

Vernon Litigation Group represents clients in courtroom litigation, mediations, and arbitrations throughout the United States. Our lawyers have collectively represented thousands of investors in FINRA and other securities arbitration and litigation claims nationwide and recovered millions of dollars from financial institutions, both large and small. Please contact us to discuss your rights if you have suffered significant losses in your RBC fixed income accounts as a result of investments in Puerto Rico bonds or similar investments. For more information, visit our website at or contact Vernon Litigation Group by phone at (239) 319-4434 or by e-mail at to speak with an attorney at Vernon Litigation Group.

Here are some other brokers and firms that are currently being investigated for similar infractions involving Puerto Rican bond sales in the United States:

Paul David Mante

Samuel Koltun

Robert Dennison

Paul Blum

The GMS Group

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