Claim Filed Against UBS/UBS Puerto Rico

Sonn Law Group and Aldarondo & Lopéz Bras recently filed a claim against UBS Financial Services, Inc. and UBS Financial Services Inc. of Puerto Rico on behalf of an elderly couple who suffered approximately $2.4 million in losses stemming from bonds and closed-end funds invested in Puerto Rico debt (“CEFs”). Aldarondo & Lopéz Bras is a separate law firm only licensed to practice law in Puerto Rico. The couple’s UBS Financial Advisor allegedly not only recommended that the couple invest the majority of their liquid assets in UBS Funds, but also recommended that the couple reinvest the dividends from the Funds, and use the Funds to secure a credit line from UBS Bank which was used to invest in more UBS Funds. The couple currently owes approximately $3 million on the credit line. This investment strategy was not only highly risky, but also implicitly or explicitly illegal in its use of UBS Bank loans.

UBS Puerto Rico was the primary underwriter of 23 CEFs with a total market capitalization of more than $5 billion. The UBS Family of Funds, included: Tax-Free Puerto Rico Fund, Inc.; Tax-Free Puerto Rico Fund II, Inc.; Tax-Free Puerto Rico Target Maturity Fund, Inc.; Puerto Rico AAA Portfolio Target Maturity Fund, Inc.; Puerto Rico AAA Portfolio Bond Fund, Inc.; Puerto Rico AAA Portfolio Bond Fund II, Inc.; Puerto Rico GNMA & U.S. Government Target Maturity Fund, Inc.; Puerto Rico Mortgage-Backed & U.S. Government Securities Fund, Inc.; Puerto Rico Fixed Income Fund, Inc.; Puerto Rico Fixed Income Fund II, Inc.; Puerto Rico Fixed Income Fund III, Inc.; Puerto Rico Fixed Income Fund IV, Inc.; Puerto Rico Fixed Income Fund V, Inc.; and Puerto Rico Fixed Income Fund VI, Inc.

CEFs differ from traditional open-end mutual funds in that open-end funds offer and redeem shares at the fund’s net asset value (“NAV”). The UBS CEFs are not traded on an exchange or quoted on any quotation service and are only available to Puerto Rico residents. UBS Puerto Rico has been the only or dominant secondary market dealer or liquidity provider for the UBS CEFs.

The Statement of Claim alleges that the husband, a 75-year-old retiree from humble beginnings, worked his way up in a large company. His wife is a 71-year-old retiree, and they have three children. When the husband retired, he received $1.45 million from the sale of his interest in the company, and he placed this with other retirement funds in two CDs. In 2004, the husband met their UBS Financial Advisor. The husband allegedly told the UBS Financial Advisor that he wanted to invest conservatively while generating income for himself and his family. The husband also wanted to preserve his retirement savings, and told the UBS Financial Advisor that he previously placed the moneys and had not invested before.

The elderly couple had no interest in high risk or aggressive investments or strategies, yet their UBS Financial Advisor allegedly recommended that they invest approximately $4 million in Puerto Rico debt including bonds and CEFS. This dangerously concentrated the couple’s irreplaceable retirement savings in high risk Puerto Rico debt. In addition, the couple’s UBS Financial Advisor allegedly selected and recommended each CEF and Puerto Rico bond that the couple purchased. In so doing, the UBS Financial Advisor engaged in a pattern of unauthorized trading. The couple’s accounts were non-discretionary accounts. In other words, the UBSFinancial Advisor was required to obtain their authorization prior to each transaction. The couple’s UBS Financial Advisor in fact failed to obtain their required authorization prior to each trade and such trades were unauthorized, according to the Statement of Claim.

The couple’s UBS Financial Advisor compounded the situation by allegedly recommending two separate, speculative and unsuitable leveraged strategies. The UBS Financial Advisor first recommended that the couple purchase Puerto Rico bonds by engaging in repurchase and/or reverse repurchase transactions (“repo”), according to the Statement of Claim. A repo involves the sale of securities with an agreement for the seller to buy back the securities at a later date at a repurchase price which is higher and includes interest. In effect, the seller is the borrower and the buyer is the lender in what amount to a secured loan with interest. Eventually, the repo transactions were converted to a margin account. The couple had never engaged in repo transactions before and have never previously invested on margin or with the use of leverage.

The couple’s UBS Financial Advisor also allegedly recommended that the couple engage in an illicit loan scheme wherein the couple borrowed funds from UBS Bank secured by the UBS CEFs, and then used the borrowed money to invest in more UBS CEFs. This strategy was illicit, because the UBS Funds are not marginable and the strategy was a blatant circumvention of Regulation T of the Federal Reserve Board (“Reg-T”), which prohibits the use of margin in connection with the Funds. Further, Their UBS Financial Advisor’s alleged recommendation to use a UBS Bank loan was illicit, because it violated UBS/UBS-PR policy against using non-purpose loans from UBS Bank to invest in any securities, amongst other things. Additionally, UBS Bank was not licensed to do conduct business in Puerto Rico and any recommendation by a UBS/UBS-PR broker to borrow money from UBS Bank was implicitly or explicitly illegal, according to the Statement of Claim.

On multiple occasions, the couple’s UBS Financial Advisor allegedly recommended against paying off or reducing the margin loan and UBS Bank credit line, because the couple could invest the funds in UBS CEFs and Puerto Rico bonds that generated higher yields. Their UBS Financial Advisor also repeatedly recommended against selling the investments because the couple “would be losing money.” In addition, their UBS Financial Advisor allegedly recommended that the couple reinvest all of the dividends they received from the UBS CEFs.

When the couple’s accounts declined in August 2013, their UBS Financial Advisor recommended that the couple continue to hold the securities in their accounts and refrain from selling any securities, according to the Statement of Claim. The couple’s UBS Financial Advisor allegedly represented to the couple that the decline in their holdings was temporary, and that the securities would continue to pay interest and dividends regardless of market conditions.

From August through December 2013, the UBS CEFs and Puerto Rico bonds in the couple’s accounts declined dramatically, and Puerto Rico bonds were sold to meet margin calls. The couple ultimately suffered losses of approximately $2.4 million, and currently owes approximately $3 million on the credit line.

The couple’s UBS Financial Advisor allegedly failed to adequately disclose the illiquid nature of the UBS CEFs, the risks associated with the leverage used by the UBS CEFs, the risk of a reduction in the dividend payments of the Funds, the risks of concentrating the couple’s retirement savings in speculative Puerto Rico debt, and the credit risks associated with the UBS CEFs due to Puerto Rico’s dismal financial and economic situation amongst other things, according to the Statement of Claim.

Dozens of other investors have retained Sonn Law Group and Aldarondo & Lopéz Bras to pursue claims against the firms who sold the investments to them. While UBS dominates the island’s market through its UBS Family of Funds, some of which are co-managed with Popular Securities, Banco Santander (Santander Securities), Merrill Lynch, Raymond James, Oriental Bank and others also sold investments linked to Puerto Rico’s municipal debt. Claims for investment losses against UBS and other brokerage firms must be arbitrated through the Financial Industry Regulatory Authority (“FINRA”), the largest dispute resolution forum in the securities industry.

If you invested in UBS CEFS, were a client of UBS, or obtained a loan from UBS Bank, and have experienced financial losses, please call us at 866-507-2640 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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