FINRA Arbitration & Investor Lawsuits Over UBS Puerto Rico Bond Funds
Many UBS clients who were burned in UBS proprietary closed end mutual funds are wondering how the recent SEC fine against UBS impacts their potential lawsuit or FINRA arbitration claim against the firm. The Securities and Exchange Commission investigation found company officials communicated misleading statements to investors, concealed a liquidity crisis, and masked its control of the secondary market for 23 proprietary closed-end mutual funds. The SEC has instituted contested administrative proceedings against UBS Puerto Rico’s vice chairman and former CEO Miguel A. Ferrer and its head of capital markets Carlos J. Ortiz. According to the SEC, UBS had control over the secondary market for the non-exchange traded UBS Puerto Rico Bond Funds. In what is a colossal, undisclosed conflict of interest, UBS manipulated this secondary market to influence share prices in the funds which affected UBS customers’ ability to sell their shares. This undisclosed conflict of interest, where the UBS trading desk effectively controlled the share price of these funds, indicated liquidity and stability in UBS Puerto Rico Bond Funds, when in fact, these highly leveraged funds were illiquid and volatile. UBS then dumped 75 percent of its own holdings in these funds in this secondary market, which pushed down the net-asset-vale by 15% in less than one month. This market manipulated was never disclosed to UBS customers and these blatant conflicts of interest, which had a material impact on the share price of these funds, was never disclosed to UBS customers. According to Robert Khuzami, the Director of the SEC’s Division of Enforcement, “UBS Puerto Rico denied its closed-end fund customers what they were entitled to under the law – accurate price and liquidity information, and a trading desk that did not advantage UBS’s trades over those of its customers.” In 2008 UBS sold the Puerto Rico Bond Funds as a stable and liquid product with high premiums to net asset value. At some point during the funds existence sales of the product began to decline and in order to maintain investor confidence UBS began purchasing shares from customers wishing to exit the market. During the spring of 2009 management at UBS determined the Puerto Rico Bond Funds inventory was a financial risk, the firm decided to reduce inventory by 75 percent to reduce risks and to “promote more rational pricing and more clarity to clients”.
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 liquidate 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.
Mr. Ferrer and Mr. Ortiz made misrepresentations and did not disclose numerous material facts about the Puerto Rico Bond Funds. Internally Ferrer was well aware of UBS funds’ supply and demand imbalance and did discuss it privately. He took the opposite position with UBS financial advisors and directed them to tell customers that the market was experiencing “low volatility” and providing “superior returns.” According to the SEC, Ferrer also repeatedly made misleading statements about Puerto Rico Bond Funds’ 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. We encourage victims who purchased the UBS related funds below to contact an attorney and discuss legal options before contacting the brokerage firm. To learn more, please contact our law firm at 312.332.4200
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