At the law firm of Vernon Litigation Group, we believe that finding your best solution depends on the facts of your individual case. This article outlines the strategies we recommend for four of the most common situations involving Puerto Rican bonds.
But first, a quick recap. Nineteen of the closed-end Puerto Rican bond funds sold by UBS Financial Services Inc. of Puerto Rico brokers lost $1.66 billion during the first nine months of last year. However, losses were not suffered across the board by all such funds.
The biggest losers were UBS Puerto Rico funds (sold almost exclusively to Puerto Rican residents) with extremely large holdings of Puerto Rican muni bonds. In order to maintain certain tax advantages for Puerto Rican retail investors, these funds were required to hold at least 67% of their assets in Puerto Rico assets, including Puerto Rico municipal bonds. The 67% requirement was done away with in 2013, but unfortunately, that was too late for the owners of some of the most highly concentrated funds. To date, the funds that have suffered the largest losses were concentrated in the bonds of two issuers – the Employees Retirement System of the Government of the Commonwealth of Puerto Rico and its Instrumentalities and the Puerto Rico Sales Tax Financial Corp.
Puerto Rico has taken steps to reassure the market about its economic stability and the safety of its bonds. Those actions have led to some bonds (and the funds invested in those bonds) regaining value. Unfortunately, this does not help investors who have already lost their entire Puerto Rican bond investment as a result of margin calls. This is the first category of investors:
- The Total Loss. As we reported in an earlier article, in many cases UBS recommended that customers use leverage to invest in these funds. When the funds began to collapse due to falling bond prices and investor (and UBS) liquidations, many of the customers who had purchased the funds on margin lost their entire investment in the funds. Some even found themselves owing money to UBS and had to liquidate other investments. For these customers, the stabilization efforts and increased fund values come too late. Their best chance at recovering some or all of their losses is a claim against UBS for its reckless investment advice.
Late last year, UBS announced a program to repurchase from investors some of the shares in its closed-end bond funds. To date, the buyback has been limited to only some UBS customers and to only some of the funds. Even if the criteria are met, repurchase of shares in some funds may have been limited by caps that prohibit the repurchase of more than 25 percent of outstanding shares over the life of the investment, since some funds were closer to the 25% limit than others before the repurchase offer. So what if you sold your shares back to UBS but still lost money on the investment?
- The Partial Loss. Those customers whose shares were repurchased may still have a claim against UBS for their additional losses, provided that they did not sign a release. Investors who received only a partial recovery on their losses may have a claim against UBS that survived the repurchase.
What about investors who still own Puerto Rican bonds, bond funds, and/or municipal bond funds sold primarily to mainland US residents that include some Puerto Rican bonds in their mix? For these investors, the answer may not be so simple. As noted above, the value of Puerto Rican bonds is regaining some value due to increased confidence in the government’s efforts to address issues in the local economy. But does that mean that the risk of issuer loss has passed for these investors? Unfortunately, no, they may still lose their investment if appreciation stalls or the values begin to drop again.
- Geographically Diversified Municipal Bond Funds. Many bond ETFs sold on the mainland include some Puerto Rican bonds. As we discussed in a previous article, some of these funds include fairly high concentrations of Puerto Rican bonds, large enough to have caused their values to dip during the initial crisis. By selling now, investors can avoid the ongoing risk of holding these funds (and, depending on whether there are significant realized losses, may negate the need for an attorney). If the value has already recovered, there may not be sufficient losses to support a potential claim. Owners who decided to stay in these funds should (1) periodically check the fund’s holdings for concentrations (exposure to risk) and (2) keep a close eye on the value shown on the monthly statements.
- The Unrealized Loss. For many Puerto Rican Bonds and funds, the value is starting to come back. By selling now (if liquid), investor losses may be realized, but investors can avoid the future risks of holding these funds. If the realized losses are significant, investors should consult an attorney about pursuing a claim. Owners who decide to hold these bonds and bond funds remain exposed to significant risks.
We hope that this overview will help you to evaluate your individual situation and help you avoid making a decision based on the one-size-fits-all advice that you may be hearing. If you think that you have a claim involving Puerto Rican bonds or bond funds or if you have suffered significant losses from another type of investment, please contact the lawyers of Vernon Litigation Group. Vernon Litigation Group represents investors throughout the U.S. from offices located in Naples, Florida.