UBS Puerto Rico Bond Funds Fraud Information

RESULTS OF OUR INVESTIGATION Findings: On behalf of clients, we have investigated the practices of UBS Financial Services Inc. of Puerto Rico in selling proprietary, closed end municipal bond funds.  We have concluded the firm and its agents engaged in three primary activities in violation of the Puerto Rico Uniform Securities Act…

UBS Has Sold Approximately $9.8 Billion of Puerto Rican Sovereign Debt

A) Unsuitable Investment Recommendations and Misrepresentations and Omissions: UBS financial advisors made unsuitable investment recommendations to thousands of residents of Puerto Rico since 2008.  The firm’s financial advisors sold approximately $9.8 billion in Puerto Rico debt in the last five years alone, much of it in the firm’s own proprietary mutual funds.   As a preliminary matter, the recommendations of the funds themselves were unsuitable and inappropriate in many instances.  Many of the funds listed below were leveraged funds.  For example, the Tax Free Puerto Rico Fund II has a leverage ratio of 52.8%.  This means for every dollar of customer assets it holds, it has roughly another dollar of assets bought with borrowed money.  This sort of leverage was common for the Puerto Rico bond funds sold by UBS brokers.  In many instances, the risks associated with these sorts of leverage ratios were not made clear to UBS clients in Puerto Rico.  While UBS will argue in FINRA arbitration claims and lawsuits the risks were disclosed in the prospectus of these funds, most clients don’t read these documents and rely upon the “low risk” representations made by the firm’s financial advisors at the firm’s five branch offices. In addition to the unsuitable nature of the recommendations themselves, many UBS financial advisors recommended clients take out lines of credit to purchase additional shares of the leveraged funds.

Clients Took Out Loans on Their Homes and UBS Brokerage Account Assets

The solicitation by UBS brokers to take out credit to purchase shares from a suitability perspective is highly problematic.  The credit loans were often taken on client homes or brokerage account assets.  More egregiously, some financial advisors recommended clients’ misstate the purpose of the loans on UBS forms in order to hide it from their supervisors.  The resulting loans on top of the leveraged nature in the funds resulted in credit or margin calls that caused UBS clients to sell funds at the worst possible time (or in rarer circumstances, liquidate other holdings to meet the margin calls).  By opening lines of credit and disbursing loans to clients, the company may have violated loan procedures required by the Federal Deposit Insurance Corp. In most instances, the utilization of credit or margin was grossly unsuitable.  Many of the clients who took loans out to purchase the funds were either elderly, retired, conservative or simply didn’t want to subject their investments to magnified risks of borrowed funds.  In addition, the financial advisor and firm had a clear conflict in recommending credit or margin in the form of additional commissions and fees to be earned on the purchases and direct payments on part of the credit interest charged.  As noted by FINRA in 2012: “margin loans can be highly profitable for your brokerage firm. They may also be highly profitable for your broker. Your broker may receive fees based on the amount of your margin loans. This may take the form of a percentage of the interest you pay on an ongoing basis.”  In many instances, the recommendation of credit or margin loans to purchase additional shares of the UBS proprietary funds was grossly unsuitable for UBS clients in Puerto Rico and subjects the firm to liability under the Puerto Rico Uniform Securities Act. There were also inherent conflicts of interest UBS faced in these recommendations.  Because UBS served as the investment advisor, underwriter and mutual fund manager on these transactions (along with the bank on the margin loans), there were direct conflicts of interest that led to the losses taking place.  Many brokerage firms in the past have refused to create and market their own in-house, proprietary mutual funds due to the inherent conflicts of interest associated with the sales of these products.

UBS Financial Services Puerto Rico Manipulated Open Bond Markets

B) Fraudulent Market Manipulation: From 2008 on, UBS Financial Services made misleading statements to investors, concealed a liquidity crisis, and masked its control of the secondary market for 23 proprietary closed-end mutual funds listed below.  According to our investigation, the firm knew about a significant supply and demand imbalance in its funds and discussed the weak secondary market for these funds internally. However, UBS Puerto Rico misled investors and failed to disclose that it controlled the secondary market, where investors sought to sell their shares in the funds. UBS Puerto Rico significantly increased its inventory holdings in the closed-end funds in order to prop up market prices, bolster liquidity, and promote the appearance of a stable market. However, UBS Puerto Rico later withdrew its market price and liquidity support in order to sell 75 percent of its closed-end fund inventory to unsuspecting investors. The scheme was orchestrated by various agents of UBS, including UBS Puerto Rico’s vice chairman and former CEO Miguel A. Ferrer and its head of capital markets Carlos J. Ortiz.  We believe agents of UBS Puerto Rico denied its closed-end fund investors accurate price and liquidity information, and a trading desk that did not place UBS’s trades over those of its customers. According to our investigation, starting in 2008, UBS Puerto Rico solicited thousands of retail investors by promoting the closed-end funds’ market performance (see below for a complete list of these funds) and continuously high premiums to net asset value (up to 44%) as the result of supply and demand in a competitive and liquid secondary market. When investor demand began to decline, UBS Puerto Rico sought to maintain the illusion of a liquid market by buying shares into its own inventory from customers who wished to exit the market. Despite a falling market, UBS Puerto Rico continued to sell shares by conducting primary offerings in order to grow its closed-end fund business. Throughout this period, UBS Puerto Rico failed to disclose the true state of the market to investors. Unfortunately, UBS Puerto Rico’s parent firm determined in the spring of 2009 that UBS Puerto Rico’s growing closed-end fund inventory represented a financial risk to the firm, and directed the firm to reduce its inventory by 75 percent to reduce that risk and “promote more rational pricing and more clarity to clients . . . [so] prices transparently develop based on supply and demand.”

To accomplish the reduction, UBS Puerto Rico executed a plan dubbed “Objective: Soft Landing” in one document, which included:

  • Undercutting numerous marketable customer sell orders to “eliminate” those orders and liquidating UBS Puerto Rico’s inventory first, preventing customers from selling their shares.
  • Not disclosing that UBS Puerto Rico was drastically reducing its inventory purchases.
  • Soliciting customers to sell recently purchased primary offering shares back to the closed-end fund companies, so UBS Puerto Rico could then sell closed-end funds to those customers from its highest inventory positions.

UBS Puerto Rico also increased solicitation efforts to Puerto Rican families and investors to further reduce its inventory while making misrepresentations and failing to disclose UBS Puerto Rico’s withdrawal of secondary market support. It was these actions that created a “death spiral” and have led to the massive losses that continue through October of 2013. Mr. Ferrer made misrepresentations and did not disclose numerous material facts about the closed-end funds. For example, although Ferrer was well aware of the supply and demand imbalance and privately discussed UBS Puerto Rico’s growing inventory and support of the market, he caused UBS Puerto Rico to conduct new primary closed-end fund offerings while directing financial advisors to represent to customers that the market was experiencing “low volatility” and providing “superior returns.” Ferrer also repeatedly made misleading statements about closed-end fund market prices and touted that the funds would always trade at high premiums to net asset value, even while UBS Puerto Rico was substantially reducing its inventory and causing huge investor losses.

Carlos Ortiz of UBS Puerto Rico Deceived Investors by Overstating Closed-End Funds Valuations

According to our investigation, Ortiz falsely represented that closed-end fund shares were priced based on supply and demand, while in reality he and the firm concealed the inventory increases and rarely changed prices, allowing UBS Puerto Rico to promote the façade of a liquid, stable market. As UBS Puerto Rico was reducing its inventory in 2009, Ortiz touted increased closed-end fund secondary market liquidity and superior price performance to investors at a UBS investor conference. At the same time, Ortiz was executing UBS Puerto Rico’s inventory reduction scheme that involved “eliminating” marketable customer sell orders to dump UBS Puerto Rico’s inventory first, putting UBS Puerto Rico’s interests ahead of their customers’ orders.  We believe these actions directly violated the Puerto Rico Uniform Securities Act.

UBS Management Failed to Supervise the Sale of High Risk Bond Funds by UBS Puerto Rico Financial Advisors

C) Failure To Supervise: We believe UBS failed to supervise multiple senior managers as well as the financial advisors who sold the high risk, extremely speculative leveraged closed end funds.  According to FINRA Conduct Rules, leveraged investment products and the utilization of leverage or credit leads to heightened duties and responsibilities with respect to supervision.  Effective supervision requires affirmative steps to ensure investors are aware of all of the risks.  Clearly effective supervision requires firms to ensure market prices of closed end funds are not artificially inflated or a scheme is not being hatched to dump slumping shares onto the unsuspecting public. Recent Developments: While UBS recently launched an “internal investigation” into the activity, we believe the firm will seek to keep the results of these investigations private in the discovery process. The firm also recently placed one broker on “administrative leave for the nearly identical activities we uncovered in our investigation on behalf of burned UBS clients. Claims Made Under What Authority: Under the Puerto Rico Securities Act, investors who have been defrauded are entitled to a specific, statutory remedy.  But liability must first be established.  Under the Puerto Rico Securities Act, Section 851, “It shall be unlawful for any person, relative to the offer, sale or purchase of any securities, directly or indirectly.

UBS Has Given Misleading Information to Clients In Order to Conceal Investment Fraud

1)  To employ any device, scheme, or artifice to defraud; 2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; 3)  To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person; 4) To issue, circulate, or publish any material, printed or through electronic means, containing false representation of a material fact, or omitting information concerning a necessary material fact, so that the information which is issued, circulated or published, leads to an error, or 5)  To issue, circulate, or publish any material, or make any written statement, unless the name of the person who issues, circulates or publishes or makes the aforesaid, and the fact that it is that person who issues, circulates, publishes or makes the statement, Is clearly indicated in that same communication.”

Under Section 853 of the Puerto Rico Securities Act, “It shall be unlawful for any person, directly or indirectly: With the purpose of creating the false or deceptive appearance of the active negotiation of securities, or a false or deceptive impression regarding the existence of a market for specific securities:

1) To carry out any transaction regarding securities which does not involve a change in the owner of the title deed of the aforesaid, or a) To file any order or orders for the purchase or sale of securities with the knowledge that the order or orders are substantially of the same size, or substantially done at the same time and substantially have the same price for the sale or purchase of the securities, and that these have been made or will be made by or for the same person or for any other person affiliated to the aforesaid.

b) To carry out, alone, or with one or more persons, a series of transactions regarding any securities, creating an active, actual or apparent negotiation concerning said securities to increase or decrease their price, for the purpose of inducing the purchase or sale of said securities by others. The remedy for violations of the Puerto Rico Uniform Securities Act under Section 890 is as follows: Any person who offers or sells a security by means of a false statement of a material fact or omitting to state a material fact needed to prevent that any statement made, in the light of the circumstances under which it was made, leads to misunderstanding (the buyer not  knowing of the falsehood or omission), and does not support the burden of proof that he did not know , and in exercising reasonable prudency could not have known of the falsehood or omission, shall be liable to the person who buys the security, who may file suit to recover the price paid for the securities, in addition to the interest at the rate applicable to judicial awards as provided by the regulations approved to such effects the Financing Board created by §§ 2001 et seq. of Title 7, starting on the date in which the payment, costs and reasonable Attorney’s fees were made less the sum of any income received on, upon the tender of the security, or for damages if he no longer owns the security. Damages are the amount that would be recoverable upon returning the security, less its price when the buyer disposed of it plus interest at the rate applicable to judicial awards as provided through regulation approved to such effects by the Financing Board created by §§ 2001 et seq. of Title 7, as of the date of such security was disposed of.

Our Clients Have Incurred Investment Losses between 45%-50% in Puerto Rico Fixed Income Fund, Puerto Rico Investors Tax Free Fund, Puerto Rico Investors Tax Free Fund, PR Investors Bond Fund and Tax Free PR Fund.

Funds At Issue: The funds at issue are the Puerto Rico Fixed Income Funds I – VI; Puerto Rico Mortgage Backed & US Govt. Fund; Tax-Free Puerto Rico Funds I and II; Tax-Free Puerto Rico Target Maturity Fund; Puerto Rico AAA Portfolio Target Maturity Fund; Puerto Rico AAA Portfolio Bond Funds I and II; and Puerto Rico GNMA & U.S. Gov. Target Maturity Fund. UBS Trust Company serves as co-manager for Puerto Rico Investor’s Tax-Free Funds I – VI, Puerto Rico Tax-Free Target Maturity Fund I and II, and Puerto Rico Investors Bond Fund I. Conclusion: We believe agents of UBS Financial Services Inc. of Puerto Rico made unsuitable investment recommendations, engaged in fraud, failed to supervise financial advisors and manipulated the market of UBS proprietary closed end funds.  These activities have potentially subjected the firm to liability to thousands of clients.



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