The claimant is a 43 year old married housewife raising two children in San Juan, Puerto Rico. Several years ago, her father sold his business, gifting his daughter, $5 million dollars, which she deposited in her UBS Puerto Rico account. At that point in time, she had very little investment experience and a very small account. The claimant relied exclusively upon her UBS Puerto Rico broker for investment advice and management of the investments in her account.
Shortly after the gift was deposited, the claimant met with her UBS Puerto Rico broker to discuss her financial goals and to receive investment recommendations. The claimant made it clear to her UBS Puerto Rico broker that she only wanted him to invest in safe, income producing investments in her UBS Puerto Rico account.
The stockbroker recommended what he described as safe, low risk, and conservative mutual funds, even telling the claimant that the bonds are guaranteed by the Puerto Rico constitution. There was no discussion about the nature or risks of the proposed investments in the UBS Puerto Rico closed-end funds, and neither UBS Puerto nor its employee ever provided the claimant with a prospectus or offering memorandum. Following her UBS Puerto Rico stockbroker’s advice, the claimant allowed him to purchase over $4 million of UBS Puerto Rico closed-end bond funds.
Soon after, the claimant told her UBS Puerto Rico stockbroker that she would need approximately $1.2 million in cash to purchase the new home. The stockbroker told her that he could arrange for special financing through either a line of credit or what he described as a “repo” transaction. The claimant again followed her broker’s recommendation and agreed to open a line of credit and enter into the “repo” transaction.
Approximately two years later, the claimant told her UBS Puerto Rico stockbroker that she needed to pay off a business loan. He recommended she use her line of credit through UBS Puerto Rico’s bank affiliate at a very low interest rate, telling her that the so-called “mutual funds” in her account would be collateral for the credit line. There was no discussion about the risk of pledging those investments as collateral for the loan, there was no mention of “margin calls,” and he said nothing about the risk of leveraging already leveraged investments in Puerto Rico bonds through the so-called “mutual funds.” As always, the claimant followed her broker’s recommendation and borrowed approximately $450,000 to pay off the business loan.
In or about June 2011, the claimant told her broker that she wanted to purchase an apartment and needed approximately $840,000. The broker proposed that she should use her credit line because the interest rate was so low. Yet again, the claimant followed her UBS Puerto Rico stockbroker’s recommendation and withdrew an additional $840,000 to purchase the apartment.
In the Spring of 2013, when accountant had prepared financial statements for her family and noticed the value of the investments at UBS Puerto Rico had dropped approximately $800,000 from the prior year.
The UBS Puerto Rico stockbroker met with the claimant, bringing with him a summary of the account activity and an account statement but not the audit report the claimant had requested. The broker apologized and assured her no assets were missing from her account and she had not lost any money.
At that same August meeting, the claimant also questioned the broker about the Puerto Rican economy and bond market because she heard that Puerto Rico bonds would be declared junk. The UBS Puerto Rico stockbroker told her to hold the investments and not to sell because they are “guaranteed.” Instead, the broker minimalized the importance of the declines in the ratings of the Puerto Rico bonds by the major credit rating agencies. Moreover, he was silent about the risk of holding an excessive and leveraged concentration of Puerto Rico securities in the account. Unfortunately, the claimant relied upon her broker’s advice, held her investments, and paid the price.
In September 2013, the claimant received a telephone call from her broker with bad news. UBS Puerto Rico had made a margin call, explaining that when the amount of the loan is greater than the value of the account, the claimant would receive a margin call. He told her that the value of the so-called mutual funds had dropped unexpectedly – over 50% in one month! Initially, the broker told the claimant that she needed to deposit $400,000 in her account immediately or UBS Puerto was going to sell the so-called mutual funds in her account and she would lose over a million dollars. Shortly thereafter, the claimant received a letter from UBS Puerto Rico telling her that she needed to pay the entire line of credit, over $1.3 million, in full! Fortunately, the claimant’s parents had the financial ability to post additional collateral and avoid the forced liquidation of all of the claimant’s account holdings at fire sale prices.
The claimant owned eight (8) of twenty-three (23) Puerto Rico closed-end funds, namely, Puerto Rico Fixed Income Fund; Puerto Rico Fixed Income Fund II; Puerto Rico Fixed Income Fund IV; Puerto Rico Fixed Income Fund V; Puerto Rico Investors Tax-Free Fund II; Puerto Rico Investors Tax-Free Fund V; Puerto Rico Investors Tax-Free Fund VI; and Tax-Free Puerto Rico Fund II. Many UBS Puerto Rico stockbrokers encouraged investors to take out loans and unwittingly double the leverage risk they were exposed to. Contrary to the UBS Puerto Rico stockbroker’s representations, these were very speculative investments due to the excessive concentration in Puerto Rico bonds, illiquidity, and highly leveraged investments. The UBS Puerto Rico employee not only told the claimant to purchase all of the UBS Funds in her account, but also to take out loans instead of selling them and even to hold the UBS Funds when the Puerto Rico bond market was clearly stressed. The UBS Puerto Rico stockbroker’s recommendations were in violation of FINRA Rules of Conduct 2110, 2111 (f/k/a 2310) and 2120, which govern standards of commercial honor and principles of trade, suitability, and use of manipulative, deceptive or other fraudulent devices.
UBS Puerto Rico was obligated to implement a system of supervision to assure compliance with Federal and Puerto Rico law, as well as FINRA conduct rules. However, at no time did any supervisory or compliance personnel ever question the over-concentration of Puerto Rico securities in the client’s account. In addition, UBS Puerto Rico did not take any action to properly disclose and stem the flow of misinformation to clients about the UBS Funds.
UBS Puerto Rico is responsible for its own wrongs and vicariously liable for the acts and omissions of its stockbroker. Accordingly, UBS Puerto Rico violated and is vicariously liable for violations of the FINRA Code of Conduct and Uniform Securities Act of Puerto Rico and for common law fraud, constructive fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, negligent management, negligent supervision of its employees, and fraudulent concealment of its misconduct.
For dedicated representation by a law firm with over of experience in all kinds of investment-related disputes, a firm that knows how to handle these Puerto Rico bond fund cases, contact us by telephone at 561-338-0037 or toll free at 800-732-2889 or via e-mail. We are able to arrange a meeting with you at offices located in San Juan, Puerto Rico and Boca Raton, Florida.
Robert Wayne Pearce
Robert Wayne Pearce of The Law Offices of Robert Wayne Pearce, P.A. has been a trial attorney for more than 40 years and has helped recover over $125 million dollars for his clients. During that time, he developed a well-respected and highly accomplished legal career representing investors and brokers in disputes with one another and the government and industry regulators. To speak with Attorney Pearce, call (800) 732-2889 or Contact Us online for a FREE INITIAL CONSULTATION with Attorney Pearce about your case.
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