UBS Puerto Rico
A catastrophic collapse of life savings such as many investors in Puerto Rico bonds have been experiencing does not just happen on its own. There are inevitably a number of different parties that are involved, often to varying degrees. For most affected investors, the main party is UBS Financial Services Incorporated of Puerto Rico (“UBS Puerto Rico”). UBS Puerto Rico is a broker-dealer, meaning that it is a company in the business of buying and selling securities for clients, either by pairing together individuals looking to buy a particular security with a seller looking to sell that same security, and thus acting as a broker, or by buying and selling securities to investors out of its own portfolio, thus acting as a dealer. As a broker-dealer, UBS Puerto Rico is required to, and has, registered with the Financial Industry Regulatory Authority (“FINRA”), which is the regulator of broker-dealers in the United States and its territories. However, UBS Puerto Rico is licensed to operate solely within Puerto Rico.
Without delving into the legal issues involved, some of which have been discussed in previous posts and some of which will be addressed in subsequent ones, a broker-dealer can be legally liable for losses that its clients suffer under some circumstances. These situations can either because applicable laws and regulations covering broker-dealers in the United States require broker-dealers to properly supervise their brokers, and put in place various compliance systems to make sure the brokers are doing what they are supposed to be doing. Liability can also exist simply if the employees of the broker-dealer act improperly, even if the broker-dealer had no knowledge that it was going on, under legal theories such as respondeat superior.
UBS Financial Services Incorporated
UBS Puerto Rico is also a subsidiary of UBS Financial Services Incorporated, which is a broker-dealer licensed by FINRA in the rest of the United States. A subsidiary means that UBS Financial Services Inc. owns all of the outstanding shares of stock in UBS Puerto Rico, so that UBS Puerto Rico is completely owned by UBS Financial Services Inc. Very few clients who purchased Puerto Rico Bonds appear to have done so through UBS Financial Services Inc. However, many if not all of the individual brokers employed and registered to sell securities through UBS Puerto Rico were simultaneously registered to sell securities through UBS Financial Services Inc. Depending on the particular facts involved, this association may be sufficient to impose direct liability on UBS Financial Services Inc.
UBS Financial Services Inc., as the owner of UBS Puerto Rico, also appears to have been dictating many of the decisions and investment practices of UBS Puerto Rico which ultimately affected many investors. For example, publicly available information indicates that UBS Financial Services Inc. was requiring UBS Puerto Rico to unload huge amounts of the shares in UBS Puerto Rico’s proprietary Puerto Rico Bond funds, in order to get the potential risk on the company down. As a result, UBS Puerto Rico was forced to take a number of measures to try to sell many shares in these funds to investors, potentially selling these investments to investors who would not have otherwise bought them, or by causing a current investor to be unable to sell shares that he or she wanted out of.
UBS Bank USA
UBS Bank USA was also involved for many investors. UBS Bank USA is an industrial bank based out of Utah which is registered with, and regulated by, the Federal Deposit Insurance Corporation and the Utah Department of Financial Institutions. It is a wholly owned subsidiary of UBS AG, the main UBS company based out of Zurich, Switzerland. Many of the clients of UBS who purchased these Puerto Rico Bonds and bond funds were encouraged to borrow money from UBS to make even larger investments. In order to accomplish that, brokers of UBS Puerto Rico often turned to UBS Bank USA to extend loans to these clients that would then be invested in even more Puerto Rico Bonds.
UBS Employees
Of course, none of these companies do anything without individual people involved at some point. UBS Puerto Rico was managed by Miguel A. Ferrer, the senior officer of the company in Puerto Rico. Carlos J. Ortiz was the head of UBS Puerto Rico’s non-exchange-traded closed-end fund desk. The SEC alleged that both of these individuals violated the securities laws and misled investors about the risks involved in owning shares in UBS Puerto Rico bond funds. Ultimately, an administrative law judge declined to impose penalties on either executive as a result of the SEC case. However, this decision does not prevent courts or arbitrators from potentially awarding investors money judgments against either individual as a result of their conduct.
Finally, there are a number of individual brokers who have been implicated at this point. Many of these brokers, including Carlos Rodriguez, David Lugo, and Wilson Colbergtrigo, were big producers for UBS Puerto Rico and managed the assets of many different clients. Many if not most investors would not have purchased Puerto Rico bonds or UBS Puerto Rico bond funds but for the recommendation of their broker. Such recommendations, particularly when coupled with allegations that the brokers recommended purchases of Puerto Rico bond funds up to and including 100% of a client’s account, or allegations that brokers recommended client’s borrow more money to invest even more funds, could result in significant individual liability on the brokers as well.