UBS Financial Services Inc. of Puerto Rico (UBS PR) has consented to pay $15 million to resolve the Securities and Exchange Commission’s claims related to the brokerage firm’s supervision of the sale of its closed-end Puerto Rico bond funds (CEFs). The SEC contends that UBS PR did not properly supervise ex-broker Jose Ramirez, who is accused of increasing his compensation by at least $2.8 million when he allegedly had customers improperly borrow funds to invest in Puerto Rico bond funds. UBS fired Ramirez last year.
The funds came from UBS Bank USA, which is a bank affiliated with UBS PR. Under bank and UBS rule, the funds from UBS Bank are not allowed to be used to carry or purchase securities. According to the SEC, not only was using the funds from the Bank a violation, investors were placed at risk of losses while Ramirez profited. The SEC has filed a separate complaint against the ex-UBS broker.
The regulator claims that Ramirez misled customers about how safe the CEFs were, as well as misrepresented the risks involved. He purportedly lied to his branch manager when he was asked about suspect transactions.
To avoid getting caught, Ramirez allegedly told customers to move money from their credit line to an external bank account before placing the funds into their brokerage account at UBS PR and then buying the CEFs. The CEFs, which were heavily invested in Puerto Rico bonds, dropped in value when the Puerto Rican bond market started to decline in the Fall of 2013. Customers then had a choice of either paying down part of the loans or risk liquidation of their investments.
The $15 million settlement will be put into a fund for investors who sustained losses when the funds dropped in value. The Commission’s order instituting a settled administrative proceeding claims that UBS PR did not have the systems and procedures to prevent or detect the misconduct that Ramirez was engaging in. Even though UBS PR was allegedly apprised at least twice that customers of Ramirez might be violating the loan policy, the brokerage firm’s policies did not provide for reasonable follow up. UBS PR also purportedly lacked a system to make sure that credit line proceeds that were moved out of firm accounts were not used to buy securities.
Also facing SEC charges are former UBS PR branch manager Ramiro L. Colon III, who is accused of inadequate supervision. As part of his settlement, Colon will pay a $25,000 penalty. He has been suspended for a year from serving in a supervisory role. The regulator said that Colon was notified that a customer of Ramirez might be using a credit line to buy the CEFs, but instead of investigating he believed Ramirez’s explanation and failed to follow up with the customer.
In another securities case, UBS PR will pay FINRA $18.5 million for its purported failure to supervise the sale of its CEFs. Of that money, $11 million will serve as restitution to 165 customers who suffered bond fund losses. The other $7.5 million is a fine. You can read more about that case here.
Hundreds of investors who bought CEFs from UBS have filed cases with FINRA. Our firm currently represents dozens of customers who are seeking to recover their losses in arbitration. A lot of these investors claim that UBS brokers persuaded them to buy the CEFs, concentrate much of their investible assets into them, and encouraged investors to use loans from UBS Bank. These loans were also used for buying additional CEFs. The result of this concentration and the use of extensive leverage caused some investors to lose everything. Others suffered equally catastrophic losses.
In Puerto Rico and the United States, contact Shepherd Smith Edwards and Kantas, LTD LLP today for a free, no obligation consultation concerning your investment account. Our Puerto Rico closed-end fund lawyers would like to talk to you.
The SEC Order in the UBS Case (PDF)