As with so many financial debacles that have harmed retail investors in the past, Wall Street’s insatiable greed is hard to miss. Unfortunately, this continues to be a recurring factor, no matter the investment vehicle nor the type of investor involved. And what is now unfolding in Puerto Rico will not only affect the island, but the U.S. mainland as well.
In this case, Wall Street firms encouraged Puerto Rico to go on a borrowing binge for which it is now beginning to pay a dear price. Why did Wall Street encourage Puerto Rico to borrow money? Greed.
According to the Wall Street Journal’s article published last week, Wall Street’s securities firms and related professionals profited in in the tune of approximately $1.5 billion from helping Puerto Rico issue most of its debt in the past five years. Ironically, hundreds of millions of dollars recently spent by Puerto Rico were directed to unwind a previously pitched “great idea” by the financial institutions: Interest rate swaps.
Unfortunately, we continue to see a common theme for Wall Street. Financial firms create a product, for which they profit handsomely (in underwriter fees and other fees). Next, the Firms profit again from the same product when they push and sell it to their customers (and profit even further by charging fees to their own customers). From our perspective as investors’ rights lawyers, it is disturbing to see Wall Street firms such as UBS profit from creating products and then profit again by using their own conservative/fixed income client base as a dumping ground for their products. Just in the last few years, we have seen UBS (and other Wall Street Firms) develop this troubling behavior with Auction Rate Securities, then with Structured Products, and now with Puerto Rican bonds. These are all pitched by Wall Street as safe investments and all have blown up a huge number of investors’ portfolios who were led to believe that these products were very safe.
We disagree with any suggestion that Wall Street underwriting activities (i.e., creating the product) and retail sales activities should be viewed independently. With respect to each of the examples mentioned above (Auction Rate Securities, Structured Products, and Puerto Rican bonds) firms such as UBS were well aware that their profit would be twofold: Profit from creating the product and profit from selling the product to investors. In fact, often times firms such as UBS push their sales force to recommend their own underwritten products to their own clients.
We also disagree with Wall Street and particularly UBS’s claim that these situations are due to “market events” and therefore UBS or Wall Street are not responsible to individual investors. It is undisputed that Wall Street firms preach the gospel that no one can predict the future in the investment world. But that is precisely why it is important to hire an investment firm who evaluates risk on an ongoing basis and uses allocation and diversification strategies to protect clients’ portfolios from unforeseen risks.
To suggest that the Wall Street firms had no obligation to position clients away from rising risks such as the Puerto Rican bond situation; and to suggest that Wall Street firms had had no obligation to position the portfolio free of leverage is the equivalent of saying that these firms really have no purpose other than to feed off of retail investors.
And, don’t be surprised if firms such as UBS pull out of Puerto Rico after leaving a trail of misery at both the Territory and the individual investor level. If this occurs, it would be comparable to locusts who invade, get fat by feeding off of and destroying the natural resources, and leave as fast as they came. While the Territory of Puerto Rico is not blameless in this situation (in terms of its willingness to take on debt use of the borrowed funds), Wall Street’s proclivity for constantly being at the scene of the crime and constantly denying any responsibility on either a Macro level or a Micro level is getting old.
The Puerto Rican bond situation is very significant to Puerto Rican investors. In Puerto Rico, investors have collectively suffered billions of dollars in losses this year and these losses “have dried the market for closed-end mutual funds, which currently have little or no liquidity.” The investor losses within Puerto Rico are so great that some are predicting it will negatively affect Puerto Rico’s economy – over and above the direct effect of Puerto Rico’s debt situation.
Investors in the Mainland U.S. are also being affected significantly by the Puerto Rican bond situation. This is due to the fact that Puerto Rico’s bonds are not subject to any local, state, or federal taxes in the United States. Since these products are attractive for fixed income investors, the situation is now affecting many mainland investors, especially from states such as California, Massachusetts, New York, and Illinois. According to the Wall Street Journal, the “Securities and Exchange Commission has asked Nuveen Asset Management for information regarding a March gathering between Puerto Rico government officials and about two dozen investment firms, people familiar with the matter say.” The bond funds with extra heavy concentrations of Puerto Rican bonds that were sold throughout the United States include: Franklin Double Tax-Free Income, Oppenheimer Rochester VA Municipal A, Oppenheimer Rochester MD Municipal A, Oppenheimer Rochester AZ Municipal A, Oppenheimer Rochester MA Municipal A, Oppenheimer Limited Term NY Municipal A, Oppenheimer PA Municipal A, Rochester Municipals A, Oppenheimer Rochester Michigan Muni A, Wells Fargo Advantage WI Tax-Free Inv, HighMark WI Tax-Exempt A, Oppenheimer NJ Municipal A, Oppenheimer Rochester AMT-Free NY Muni A, and Oppenheimer Rochester Ohio Municipal A.
At Vernon Litigation Group, we regularly warn investors to avoid investments which might become illiquid. Unfortunately, we have seen time and time again that illiquidity is one of the prime drivers of financial concerns for investors. From our law firm’s perspective, one of the worst financial situations to be in, is to own assets that are declining in value with no buyers or with impediments to sale them.
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, issues involving proprietary funds, carry trade, arbitrage, Puerto Rico Bonds, Puerto Rico Preferred Stock, Reverse Convertible Securities, Puerto Rico Conservation Trust Fund Notes, Puerto Rico Global Income Target Maturity Fund, 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.