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 man who has suffered more than $6 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 72-year-old man, who is the father of five, sold his company in 2006, and subsequently entrusted his retirement savings to UBS and its brokers, David Lugo and Jose Garcia. UBS recommended that the elderly man invest approximately $13.4 million in Puerto Rico debt, and compounded this risky, unsuitable concentration of securities by also recommending that the man use leveraged investment strategies, including an illicit UBS Bank loan, according to the Statement of Claim. Further, this is not an isolated incident of wrongdoing by Lugo, whose CRD reflects at least 7 other customer complaints of a similar nature.
UBS Puerto Rico was the primary underwriter of 23 CEFs with a total market capitalization of more than $5 billion. 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 NAY was determined by the managers of the fund. CEF prices can be at a discount or premium to the NAV. The majority of the UBS CEFs holdings are concentrated in Puerto Rico debt. These 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 elderly man had no interest in high risk or aggressive investments or strategies, yet Lugo and Garcia recommended that he invest approximately $13.4 million in Puerto Rico debt including bonds and CEFS. This dangerously concentrated the elderly man’s securities holdings in high risk Puerto Rico debt, which allegedly was compounded by UBS’ recommendation to finance much of the investments with loans from UBS and its related bank.
Lugo first recommended that the elderly man 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.
Lugo allegedly represented to the elderly man that the repo investment strategy was a safe opportunity to earn additional returns without adding additional capital. Lugo also represented to the elderly man that he could borrow at a low interest rate and earn significantly higher interest from the securities purchased using repo transactions or leverage. Lugo further represented to the elderly man that the only risks were higher interest rates, which Lugo said were unlikely. Lugo also allegedly said that he would monitor interest rates and that the securities could be liquidated if rates did rise. In fact, this highly leveraged and concentrated strategy exposed the elderly man’s account to a rampant and undisclosed degree of risk and put all the man’s equity in serious jeopardy.
Second, Lugo allegedly recommended that the elderly man engage in an illicit loan scheme wherein the man would borrow funds from UBS Bank secured by UBS Funds and invest the vast majority of the proceeds in UBS Funds. 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, Lugo’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. In fact UBS Bank and UBS/UBS-PR acknowledged the illicit nature of the loans by converting all UBS Bank loans to UBS-PR loans in late December 2013. UBS Bank and UBS-PR would not have engaged in this unprecedented action had the loans been legitimate and in accordance with Puerto Rico law.
By recommending the UBS Bank credit line to invest in UBS Funds, Lugo recommended the use of leverage to buy Funds that already were leveraged and as such involved two layers of leverage which compounded the level of risk. Like the repo transactions, using the UBS Bank credit line was a highly leveraged and concentrated strategy, which was not only very risky, but also left little room for error.
When the elderly man’s account values declined in August 2013, Lugo repeatedly recommended that the man continue to hold the securities in his accounts and refrain from selling any securities, according to the Statement of Claim. In September 2013, the UBS Funds declined dramatically, and the securities in one account were sold to meet margin requirements. The UBS CEFs were illiquid beginning in or about September 2013, and the elderly man was unable to sell his Funds at his discretion at the price published by UBS-PR. From January through September 2013, the elderly man’s accounts declined by more than $6 million due to Lugo’s reckless mismanagement of the accounts.
UBS and its brokers 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 elderly man’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 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.