Last year the Securities and Exchange Commission (SEC) charged UBS Financial Services Inc. of Puerto Rico with making misleading statements to investors, concealing a liquidity crisis, and masking its control of the secondary market for 23 proprietary closed-end mutual funds. UBS settled the charges, but Financial Institutions Commissioner Rafael Blanco says that it is impossible to know exactly how much money has been lost by local Puerto Rican investors.
If the story sounds familiar to you, it should. This time UBS was pushing risky Puerto Rican Municipal Bonds on its customers, but UBS has followed this same course of misconduct before, hiding risks from its customers, while touting investments as “safe” and looking out for its own financial interests.
AUCTION RATE SECURITIES
In 2008, UBS settled charges brought by the SEC and regulators in Massachusetts and New York, who alleged that UBS had known that the auction rate securities market was collapsing, but it hid that information and continued to hype the investments as high quality securities that could be readily sold on the secondary market, pushing its brokers to sell them to UBS customers. As the principal underwriters of the securities, UBS profited while its customers learned that their money was tied up in illiquid investments they were unable to unload.
“100% PRINCIPAL PROTECTED” LEHMAN NOTES
The same year it settled the Auction Rate Securities regulatory cases, UBS was repeating the same pattern – but this time UBS was touting Lehman Brother’s unsecured notes to its own customers as “100% Protected” at the same time that Lehman Brothers was undergoing one of the biggest financial meltdowns in history. While UBS raked in the profits and quietly sold off its own Lehman debt, its customers were left at the back of the line in the bankruptcy court with Lehman’s other unsecured investors, holding notes that often were worth just pennies on the dollar on the secondary market. FINRA brought regulatory charges against UBS, which were settled in 2011.
PUERTO RICO MUNICIPAL BONDS
According to a press release issued by the SEC, UBS determined in 2009 that UBS Puerto Rico’s growing closed-end fund inventory represented a financial risk, and directed the firm to reduce its inventory by 75 percent. To accomplish the reduction, UBS Puerto Rico executed a plan dubbed “Objective: Soft Landing,” which included:
- Undercutting its own customers’ sell orders to liquidate UBS Puerto Rico’s inventory first.
- Not disclosing that UBS Puerto Rico was drastically reducing its inventory purchases.
- Increasing solicitation efforts to further reduce its inventory while making misrepresentations and failing to disclose UBS Puerto Rico’s withdrawal of secondary market support.
However, this time UBS Puerto Rico’s customers didn’t just lose the money that they had invested – many of them lost a lot more. UBS recommended that its customers use leverage to invest in these funds. When these 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 even found themselves owing money to UBS!
We are especially concerned for investors with margin in their accounts that are affected by the Puerto Rican bond situation because they could be wiped out before Puerto Rican bonds even have a chance to stabilize and recover. UBS and the other brokerage firms who led their clients down this path should be made to pay for their reckless advice.
Vernon Litigation Group’s investigations and advocacy on behalf of investors have been featured in AARP magazine, Forbes and Barron’s. In addition to its investigation into UBS’s recommendations of margin to its customers in Puerto Rico, Vernon Litigation Group is looking into, among other things, proprietary funds, carry trade, arbitrage, Banco Popular, Merrill Lynch, Oriental Financial, Puerto Rico Bonds, Puerto Rico Preferred Stock, Reverse Convertible Securities, Puerto Rico Conservation Trust Fund Notes, Puerto Rico Global Income Target Maturity Fund, Western Bank, and Santander Securities.
Currently, this crisis extends to the following funds:
Tax-Free Puerto Rico Fund, Tax-Free Puerto Rico Fund II, Tax-Free Puerto Rico Target Maturity Fund, Puerto Rico AAA Portfolio Target Maturity Fund, Inc., Puerto Rico AAA Portfolio Bond Fund, Puerto Rico AAA Portfolio Bond Fund II, Puerto Rico GNMA & U.S. Government Target Maturity Fund, Puerto Rico Mortgage-Backed & U.S. Government Securities Fund, Puerto Rico Fixed Income Fund, Puerto Rico Fixed Income Fund II, Puerto Rico Fixed Income Fund III, Puerto Rico Fixed Income Fund IV, Puerto Rico Fixed Income Fund V, Puerto Rico Fixed Income Fund VI, Puerto Rico Short Term Investment Fund, Multi-Select Securities Puerto Rico Fund, UBS IRA Select Growth & Income Puerto Rico Fund, Puerto Rico Investors Family of Funds, Puerto Rico Investors Tax-Free Fund, Puerto Rico Investors Tax-Free Fund II, Puerto Rico Investors Tax-Free Fund III, Puerto Rico Investors Tax-Free Fund IV, Puerto Rico Investors Tax-Free Fund V, Puerto Rico Investors Tax-Free Fund VI, Puerto Rico Tax-Free Target Maturity Fund, Puerto Rico Tax-Free Target Maturity Fund II, Inc., and Puerto Rico Investors Bond Fund I.