Municipal Bonds

UBS Puerto Rico Branch Manager Had Warned that Brokers Were Pushing Improper Loan Practices

Published on: August 16, 2015 | by Shepherd Smith Edwards & Kantas, LLP

According to Reuters, internal correspondence records show that in 2012, a former branch manager at UBS Puerto Rico (UBS) warned the Swiss banking giant’s officials that its brokers were encouraging customers to get involved in improper loan practices. In a number of emails, Carlos Capacete, who was a branch manager at the time, wrote to at least two bank officers noting his suspicions of misconduct.

Reuters says that in the documents it reviewed, Capacete told regional manager Doel Garcia that he had encouraged Mariela Torres, a UBS Puerto Rico compliance director, to look into suspect loans. In another email, Capacete followed up with his inquiry to see if the loans had been investigated for possible misuse involving the bank’s credit lines.

Then, in yet another email, Capacete documented what he knew about the loans, which he believed were fraudulent, explained how he discovered the purported wrongdoing, and noted his efforts to notify Torres about the alleged misconduct. Capacete also wrote that a UBS attorney had told him that the firm had conducted an audit and found that his suspicions were wrong.

Despite this alleged audit, late last year UBS reached a $5.2 million municipal bond settlement with Puerto Rico’s Office of the Commissioner of Financial Institutions to resolve allegations of improper loan practices. The bank settled that case without denying or admitting to the charges. It did, however, consent to enhancing its supervision of several brokers whom regulators said may have steered clients toward improperly borrowing money to purchase more funds. UBS also terminated a broker for the same allegations and received an arbitration award of $2.5 million against it in an early case concerning the same broker.
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Edward Jones to Pay $20M to Resolve Municipal Bond Sales Overcharges

Published on: August 13, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Edward D. Jones & Co., the brokerage firm subsidiary of Jones Financial Companies, has consented to pay $20 million to resolve U.S. Securities and Exchange Commission allegations accusing the firm of overcharging clients by at least $4.6 million on new municipal bond sales. The regulator contends that the brokerage firm offered bonds at a higher price than what securities laws require.

Underwriters are supposed to sell new bonds at an initial offering price that was negotiated with the bond issuer. The SEC claims that instead of offering municipal bond sales to customers at the worked out a price, the firm allegedly brought the bonds into its own inventory and then later sold them at high prices. Also, said the Commission, in certain instances the bonds were offered to customers after they had already started to trade in the secondary market at higher prices than what was initially offered.

The regulator said that at the very least Edwards Jones was negligent with the overcharges and its behavior was “inconsistent” with the standards and written agreements that govern municipal underwriting. The SEC says it will continue its probe into the matter.
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UBS Ordered to Pay Over $2.5M to Retired Couple in Puerto Rico Bond Fraud Case

Published on: August 11, 2015 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services, Inc. and UBS Financial Services of Puerto Rico (collectively “UBS”) must pay over $2.5 million to Orlando Rodriguez Gonzales and Milagros Vila Maldonado for their investment losses related to the proprietary closed-end bond funds that they bought in Puerto Rico. The funds were sold to them by former UBS broker Jose Gabriel Ramirez, Jr., who is often referred to as “The Whopper.”

The San Juan, Puerto Rico couple, who are in their seventies, claim that they gave their liquid savings to UBS to invest. According to their complaint, the Whopper recommended they take out a $3 million loan and reinvest $2 million of that in the closed-end funds.

The result was that Gonzalez and Maldonado lost roughly $2.1 million in assets after the funds abruptly and swiftly dropped in value in 2013. Gonzalez and Maldonado filed a Financial Industry Regulatory Authority arbitration claim alleging breach of fiduciary duty, unsuitable investment, fraud, and negligence related to the Puerto Rico closed-end mutual funds.
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UBS Warns Investors to Stay Away from Puerto Rico Bond Funds

Published on: July 27, 2015 | by Shepherd Smith Edwards & Kantas, LLP

In a complete turnaround, UBS AG (UBS) is now telling clients to step away from Puerto Rico bond funds. Reuters reports that in a recent letter, the firm’s Puerto Rico arm told clients that they would be contacted shortly regarding alternative investments.

Reasons cited for the warning is that the funds can no longer be used as loan collateral in the wake of the U.S. territory’s financial woes. Puerto Rico is currently $72 billion in debt. Concerns over its economy were not eased when Governor Alejandro García Padilla recently asked the island’s debt holders for help in postponing bond payments and restructuring the Commonwealth’s debt.

Reuters also reported that in the letter to UBS customers – issued on July 13 – UBS said the firm would lower the collateral value given to every Puerto Rico closed-end fund share to zero. However, noted the news agency, despite the declaration of zero value for the funds’ shares, the brokerage firm continues to list share prices on its website.

UBS Puerto Rico’s decision to reject the funds as collateral shows just how high risk the firm now views these investments. According to Sam Edwards, a partner in Shepherd, Smith, Edwards & Kantas, who is currently representing dozens of Puerto Rico investors, “UBS came up with the scheme to use the Closed-End Funds as collateral for loans from UBS Bank since they were not eligible for margin loans. It was that leverage against already internally leveraged losses that causes some of the worst losses on the island. UBS is now pulling the plug on its own plan and effectively admitting this was a faulty idea and not only too risky for investors, but now, too risky for UBS, who designed the plan in the first place.”

Once again, the evidence appears to support that UBS is protecting itself at the expense of its customers.
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Puerto Rico Owes $5.4B of Bond Payments

Published on: July 23, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Puerto Rico owes investors $5.4 billion of bond payments in the next 12 months. A lot of this debt is for COFINA, which is sales tax debt, and securities that were sold by the Government Development Bank.

As a result of the upcoming payments and overall debt of the Commonwealth, Puerto Rico Governor Alejandro Garcia Padilla is continuing to press for a restructure of Puerto Rico’s $72 billion debt, which he claims the island cannot pay. Because Puerto Rico has over a dozen kinds of bonds with different security pledges, negotiations over this debt have proved challenging. While some general obligation bonds are protected by the constitution of the commonwealth, others are revenue-backed. Negotiations must move fast as roughly $1 billion is due in January.

This week, PREPA, Puerto Rico’s public power authority, criticized bondholders’ new offer to refinance billions of dollars in debt. The plan was drafted by 40% of the agency’s bondholders, including investors such as BlueMountain Capital and Franklin Advisors. It would divide roughly $8 billion of debt into two tranches.

One tranche would take the form of capital appreciation bonds, which would allow for payments to be deferred for years. Payment for the first tranche, holding about $5.7 billion of debt, would come with debt relief through 2019. Payments on the second tranche, which would hold $2.4 billion, would not have to be completed until 2035.
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OppenheimerFunds Says Puerto Rico Can Repay Its $72B Debt

Published on: July 16, 2015 | by Shepherd Smith Edwards & Kantas, LLP

OppenheimerFunds Inc. (OPY) is disputing Puerto Rico Governor Alejandro García Padilla’s contention that the island cannot pay back its $72 billion debt. The New York-based mutual fund company said that based on data about income growth, sales-tax collection, and unemployment, the U.S. territory’s economy can withstand repaying creditors.

According to Bloomberg data, as of July 9, OppenheimerFunds, which is the largest holder of Puerto Rico municipal bonds, had about $4.4 billion of uninsured obligations from the island. Aside from insured debt, re-refunded securities, and tobacco bonds, these obligations make up 13.8% of Oppenheimer’s municipal fund holdings.

As Puerto Rico bonds continue to lose value-data shows that this year alone Puerto Rico bonds suffered a 9.5% loss-OppenheimerFunds’ municipal funds also have suffered. Bloomberg reports that for 2015,the company’s state funds in Arizona, Virginia, Maryland, New Jersey, and North Carolina, which all hold Puerto Rico securities, sustained the largest losses among single-state, open-end muni funds.

When García Padilla asked for wide-ranging restructuring of the territory’s debt last month, OppenheimerFunds said it would defend the terms of the bonds it holds. The firm does not believe the territory’s fiscal health will get better even if some of Puerto Rico’s agencies file for bankruptcy protection.
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As Puerto Rico Asks Creditors for Concessions, S & P Downgrades the Territory’s Debt and Investors Get Ready for More Losses

Published on: July 1, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Puerto Rico Governor Alejandro García Padilla says that the U.S. territory cannot pay back its $72 billion debt without concessions from its creditors, including U.S. mutual funds and hedge funds. According to the Governor, the Commonwealth’s efforts to restructure its debt and cut spending have failed.

Following the Governor’s announcement, credit rater Standard & Poor’s Ratings Services downgraded Puerto Rico’s credit rating from CCC-plus to CCC-minus. The rating covers the island’s entire debt, including the debt of its Employees Retirement System and the Municipal Finance Agency.

García Padilla and Puerto Rico’s government development bank also issued a report backing his statements. The executive summary was written by Anne Krueger, a former World Bank Chief Economist and the International Monetary Fund’s first deputy managing director, as well as Ranjit Teja and Andrew Wolfe, who are both economists.

In their “Krueger Report,” the economists said that they found the territory’s debt to be unsustainable. Based on the report and Puerto Rico’s own analysis, García Padilla wants to defer debts so that Puerto Rico can continue to negotiate with creditors. Some payments could be deferred for up to five years. The Governor said, “This is not politics, this is math.”
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SEC Accuses Chicago Underwriters of Municipal Bond Offerings Fraud

Published on: June 20, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has filed enforcement actions against 36 municipal underwriting firms, most of them located in the Chicago area, for alleged violations involving municipal bond offerings. These are the first cases against underwriters brought under the Municipalities Continuing Disclosure Cooperation Initiative. Goldman Sachs & Co. (GS), Robert W. Baird & Co., J.P. Morgan Securities (JPM), Raymond James & Associates, Inc. (RJF), Morgan Stanley & Co. (MS), Citigroup Global Markets Inc. (C), Stifel, Nicolaus & Company, Inc. (SF), Piper Jaffray & Co. (PJC), Merrill Lynch, Pierce, Fenner & Smith Inc., and RBC Capital Markets, LLC were the firms ordered to pay the largest financial penalty of $500,000, respectively.

The program offers favorable settlement terms to municipal bond issuers and underwriters that voluntarily self-report violations to securities laws, including those involving omissions and material misstatements in muni bond offering documents. In these actions, the SEC contends that between ’10 and ’14, the firms violated federal securities law when they sold muni bonds.

These acts purportedly included using offering documents that omitted or included materially false statements regarding the bond issuers’ compliance with continuing disclosure duties. The firms also are accused of not doing a good enough job of detecting omissions and misstatements before making bond sales to customers.

Continuing disclosure allows muni bond investors to have access to annual financial reports and other data on a continual basis. The SEC said that the issuers’ failure to comply with the duties related to continuing disclosure posed a challenge to investors wanting that information.
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UBS Must Pay Investor $1M for Puerto Rico Bond Fund Portfolio

Published on: May 20, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority Panel (“FINRA”) has ordered UBS Financial Services Inc. of Puerto Rico and UBS Wealth Management (collectively “UBS”) to pay a client from Puerto Rico $1 million to repurchase the Puerto Rico portfolio of proprietary bond funds sold to him and many other Puerto Rico investors. According to the Panel’s decision, Mr. Burgos Rosado, a senior investor at age 66, lost $737,000 in the beleaguered closed-end funds.

He had opened his account with UBS in 2011 and invested the money he made from running a bodega for years. After Puerto Rico municipal bonds failed in 2013, the original $1.1 million he invested had fallen in value to less than $4,000. Just in September of that year, when news that the bond funds were failing en masse, Burgos Rosado reportedly approached UBS because his balance had dropped some $200,000. He was encourage to stay with his portfolio.

The FINRA panel noted that while investors typically assume their account’s risks after they’ve been given sufficient notice of the risks, the arbitrators did not think this applied in the case of Burgos Rosado, who does not speak fluent English and was clearly relying on the recommendation of his UBS advisor. Even after Burgos Rosado asked for documents in Spanish, the brokerage-firm reportedly issued his monthly statements and other information in English.

UBS Ordered to Pay Retired Investor $200,000 For Puerto Rico Bond Fund Losses

Published on: May 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority (“FINRA”) panel has ordered UBS Financial Services, Inc. and UBS Financial Services of Puerto Rico (collectively “UBS”) to pay an investor $200,000 for losses she sustained by investing in UBS’s Puerto Rico closed-end bond funds. This is the first known ruling from a FINRA arbitration panel in the hundreds of municipal bond fraud lawsuits filed by investors over the last few years.

The investor, Yolanda Bauza, invested money she obtained in a car accident settlement. In her Puerto Rico bond fraud case, Bauza alleged misrepresentations, securities fraud, and other wrongdoing. In addition to the $200,000 award, the arbitrators denied the firm’s request to remove information about the case from the public records of David Lugo and Carlos Gonzalez, two of the brokers who advised Bauza.

According to Sam Edwards, a partner with Shepherd, Smith, Edwards & Kantas, who is representing a number of Puerto Rico bond fund investors, “We are very pleased that FINRA’s arbitrators recognized what those of us representing the many thousands of investors in Puerto Rico and abroad have known for almost two years: UBS’s Puerto Rico bond funds were highly conflicted, very risky and completely misrepresented to investors. They were suitable for almost no investors. As a result, those who invested in these bond funds, like Ms. Bauza, should be fairly compensated.”