Sonn|Erez Investigating Claims for Investor Losses in Puerto Rico’s Tax Free Bond Funds

Sonn Law Group is investigating claims regarding investors who invested in Puerto Rico’s tax free bond funds through UBS Puerto Rico, Santander Securities, Popular Securities, Merrill Lynch, Raymond James, and others. Residents of Puerto Rico invest in the island’s debt through closed-end mutual funds, for which UBS is the market leader. UBS Asset Managers of Puerto Rico manages more than a dozen closed-end funds, and co-manages several others with Popular Asset Management.

Puerto Rico tax free bonds took a hit in value in mid-September 2013 as some US money managers sold off bonds at losses, as concerns rose about Puerto Rico’s $70 billion debt load and weakening economy. For example, UBS’s Tax Free Puerto Rico Fund, Inc., had a net asset value of $5.130 on September 25, down from $6.73 on September 4, and $9.55 on January 31.

The losses were magnified because many investors owned the bonds through leveraged closed-end funds, which financial experts say magnifies the risks and potential losses. Leverage generally means using borrowed money to invest. The Tax Free Puerto Rico Fund II, for instance, has a leverage ratio of 53 percent, which means that for every dollar of customer assets it holds, it has roughly another dollar of assets bought with borrowed money, according to The New York Times. UBS’s other Puerto Rico funds are similarly leveraged, while the average leverage ratio on funds similar to UBS’s in the United States is approximately 22 percent, reports The New York Times.

In addition, many investors used margin or other loans to invest in Puerto Rico bonds and Puerto Rico-focused closed-end funds. That is, investors used borrowed money to invest in closed-end funds which, in turn, were using borrowed money – or leverage – to make investments. When the value of the investments dropped, investors then received margin calls, which forced them to liquidate their Puerto Rico bond or closed-end bond funds in a vicious cycle of compounded risk and loss.

The Puerto Rico mutual fund market differs from the United States fund market in several ways, including local tax implications and fund regulations. Qualifying Puerto Rico investors can benefit from investing in securities issued by Puerto Rico mutual funds because they are exempt from Puerto Rico and United States estate and gift taxes and may provide tax-exempt or tax-advantaged income, depending on the type of fund and its investment specifications. For this reason, Puerto Rico mutual funds are offered only to residents of Puerto Rico.

Investors who do not reside in Puerto Rico also may have experienced loses if they invested in Puerto Rico’s debt. Approximately 77% of U.S. municipal-bond mutual funds hold bonds sold by Puerto Rico, reports The Wall Street Journal.

Puerto Rico forecast a budget deficit of $820 million for the fiscal year ending next June 2014, and had a $2.2 billion gap in the middle of fiscal 2013, according to Bloomberg. In addition, Puerto Rico’s economy contracted 5 percent in July from a year earlier in its worst performance since 2010, according to Bloomberg. As a result, American mutual funds significantly have reduced exposure to Puerto Rico in recent months, and UBS and Wells Fargo have warned their brokers to refrain from recommending Puerto Rican debt to their clients, according to The New York Times.

If you invested in Puerto Rico debt and experienced investment losses, please call us at 844-689-5754 or complete our “contact form.” Sonn Law Group is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies.

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