Common Defenses UBS Will Use In FINRA Arbitration Claims Involving Puerto Rico Bond Fund Losses

In FINRA arbitration claims against UBS Financial Services for the losses in the proprietary municipal bond funds, the firm will present some common defenses to these claims.  The defense “playbook” will be similar to the ones used by Morgan Keegan and Charles Schwab when they had similar implosions in their proprietary bond funds in 2007 and 2008.  The first defense that will be made is the UBS clients who purchased funds like the Puerto Rico Fixed Income Fund II were sophisticated, knowledgeable investors.  The argument by UBS will be the investors in the Puerto Rico Fixed Income Funds knew the risks of the funds because they were either “wealthy” or “sophisticated.”

Fortunately, the suitability obligations UBS financial advisors have are not eliminated because a client has more substantial assets or prior investment experience.  Almost every single investor at full service brokerage firms have some prior investment experience.  Otherwise they would not be at a full service brokerage firm.  In addition, if the investor wasn’t looking for full service guidance and recommendations, he would not have chosen a firm like UBS to invest his or her assets but rather would have opened an account at a deep discount firm like Scottrade or ETrade.

A second common defense in securities fraud cases involving broker recommended mutual funds is the prospectus defense.  Firms like UBS argue prior to purchasing the Puerto Rico Fixed Income Funds investors were sent a detailed prospectus that lists all of the risks associated with the funds.  Fortunately, in handling over 100 cases against Morgan Keegan for a similar bond fund implosion, this defense is often rejected by FINRA arbitrators.

First, often there is no record of the investor receiving the prospectus. Second, marketing material and verbal representations by the UBS financial advisor can nullify the typically dire risk disclosures in a prospectus.  Third, many times the specific causes of the fund implosion were not disclosed OR disclosed in such generic terms it made it almost impossible for the investor to figure out what risks he was being subjected to when buying the municipal bond fund.  Finally, even if all risks were disclosed in the UBS Puerto Rico funds, the misrepresentation and omission issue is a separate and distance issue from the suitability issue (the recommendation and utilization of margin wasn’t suitable and appropriate for the client given his or her age, financial resources, actual investment objectives and other similar factors).

The third most common defense UBS will raise is the client failed to mitigate his or her losses.  The argument from UBS will be if the client thought the Puerto Rico funds were safe or secure or not subject to high risk, then at the first sign of trouble (i.e. investment losses) the client should have sold out of the funds and mitigated the losses.  This argument ignores the fact that under the Puerto Rico Uniform Securities Act there is no duty to mitigate losses. But more importantly, many of the UBS investors were told by the financial advisors to “stay the course” and not sell.  Also, because of the utilization of margin, the losses took place very quickly and not over an elongated time period.

These common defense will be presented by UBS in defending FINRA claims against its brokers as well as class action lawsuits involving the Puerto Rico funds.  To determine if you have a valid FINRA arbitration claim against UBS for losses in the Puerto Rico bond funds, please call our lawyer at 312.332.4200 or visit www.InvestmentFraud.PRO

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