Municipal Bonds

Puerto Rico Paid Wall Street Securities Firms $1.4B in $61B of Bond Sales

Published on: November 23, 2013 | by Shepherd Smith Edwards & Kantas, LLP

As most investors in Puerto Rican bonds are aware, the territory is billions of dollars of debt and the ratings on many of the bonds the Commonwealth has issued have recently fallen. As a result the value of many Puerto Rican municipal bonds has plummeted over the last few months. Still, even with falling ratings and prices and a looming crisis for the Puerto Rican government, Wall Street firms continue to help the territory borrow money.

Reportedly, Puerto Rico and its public agencies have sold $61 billion of bonds in 87 deals since 2006. With these deals the island paid these US securities firms, their attorneys, and others approximately $1.4 billion. Also, the financial firms were able to charge higher underwriting fees for Puerto Rican municipalities than what they imposed on US cities and states when they were in trouble.

According to the Wall Street Journal the territory has paid approximately $764 million in fees to underwriters, credit raters, attorneys, and insurers in the last seven years while backstopping a lot of the bonds. Citigroup (C) and UBS (UBS) received over half this money for underwriting. And just this August, Morgan Stanley (MS) was a lead underwriter when Puerto Rico’s electric power authority sold $673 million in bonds.

Municipal Bond News : SEC Offers Small Entity Compliance Guide, MSRB Puts Out Video on Issuance Process, CFTC Offers SEF Regulatory Guidance, & Lawmakers Consider SIPC Reforms

Published on: November 21, 2013 | by Shepherd Smith Edwards & Kantas, LLP

SEC Issues Small Entity Compliance Guide

The Securities and Exchange Commission has put out a small entity compliance guide that explains the new forms and rules involved with the municipal advisers registration regime. Issued in September, the rules and forms implement the Dodd-Frank Act’s Section 975, which mandates that municipal advisers register with the regulator.

Permanent registration dates start the first of next year through October 31, 2014. If an adviser joins up after this time, it will have to apply to register under the permanent regime before engaging in any activities.

Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt

Published on: November 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, hedge funds are starting to bet big on municipal debt by demanding high interest rates in exchange for financing local governments, purchasing troubled municipalities’ debt at cheap prices, and attempting to profit on the growing volatility (in the wake of so many small investors trying to get out because of the threat of defaults). These funds typically invest trillions of dollars for pension plans, rich investors, and college endowments. Now, they are investing in numerous muni bond opportunities, including Puerto Rico debt, Stanford University bond, the sewer debt from Jefferson County, Alabama, and others.

Currently, hedge funds are holding billions of dollars in troubled muni debt. The municipal bond market includes debt put out by charities, colleges, airports, and other entities. (Also, Detroit, Michigan’s current debt problems, which forced the city into bankruptcy, caused prices in the municipal bond market to go down to levels that appealed to hedge funds.)

Hedge fund managers believe their efforts will allow for more frequent trading, greater government disclosures, and transparent bond pricing and that this will only benefit municipal bond investors. That said, hedge fund investors can be problematic for municipalities because not only do they want greater interest rates than did individual investors, but also they are less hesitant to ask for financial discipline and better disclosure.

Why did UBS Financial Advisors Recommend Puerto Rico Muni Bonds to Elderly and Retired Investors?

Published on: November 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of the Puerto Rico Bond Crisis, our securities fraud lawyers cannot help but wonder why advisors of UBS Financial Services of Puerto Rico, Inc. (UBS) recommended that retiree and conservative investors get involved with municipal bonds that had close to junk ratings. Now, many of these investors are coming forward to pursue securities claims against the firm.

According to Forbes, merely assessing Puerto Rico muni bonds via Fitch, Moody’s and Standard & Poor’s should have caused any good financial adviser to make sure that the junk bonds were only recommended to sophisticated clients that could afford the risks. Also, signs that Puerto Rico’s debt was only growing worse have been around for years.

Still, during the last decade, UBS managed to package $10 billion of closed-end bond funds full of risky Puerto Rican bonds that were highly leveraged and sold them to many retired and conservative investors. Now, customers want to know, how could UBS have overlooked the US territory’s unfunded liabilities, serious budget deficits, strict cash flow limitations, and slowed economic growth?

Puerto Rican Labor Groups Want the US Territory to Sue UBS over the Bond Debacle

Published on: October 28, 2013 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services, Inc. and its Puerto Rican divisions (UBS) continue to feel the heat in the Puerto Rico Bond crisis, as labor groups in the US territory call on its government to file a bond fraud claim against the bank. They are claiming that the financial firm “tricked” the Puerto Rican government into issuing products that they knew would fail.

Also, lawmakers from the New Progressive Party want the government to investigate UBS’ practices in Puerto Rico. Already Rep. Ricardo Llerandi Cruz is asking for a Capital Inquiry into the firm, while Rep. Ángel Muñoz Suárez announced he would file a bond fraud case with the Securities and Exchange Commission.

Meantime, Carlos Ubiñas, the CEO of UBS Puerto Rico, maintains that the firm is not accountable for “market events.” Issuing a statement, Ubiñas said that the loss in the Puerto Rico bonds’ value has more to do with the market and the lingering questions about the US Commonwealth’s credit.

FINRA Arbitration Panel Issues $1.2M in Awards in Case Against BBVA Securities of Puerto Rico, Inc.

Published on: October 25, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a FINRA arbitration case filed by claimants Felix Bernard-Diaz, Julian Rodriguez and Luz Rodriguez against BBVA Securities of Puerto Rico, Inc., Jorge Bravo, Rafael Colon Ascar, Julio Cayere, and Sonia Marbarak, a Financial Industry Regulatory Authority Panel has awarded $1.2M to the claimants. The Rodriguezes and Felix Bernard-Diaz asserted unsuitable investments, breach of fiduciary duty, gross negligence related to an allegedly unsuitable naked option trading strategy, excessive trading, margin use, and churning.

The respondents denied the accusations and asserted a number of affirmative defenses. They also asked for the CRD files of two of the respondents, Bravo and Marbarak, to be expunged. Last year, respondent Cayere sought bankruptcy protection. The arbitrators did not issue a determination against him.

The FINRA panel said Ascar and BVA were liable, severally and jointly. Now, the respondents must pay Bernard-Diaz $635K in damages and $15K in expenses. The Rodriguezes were awarded $547K in damages and $15K in costs.

Puerto Rican Bond Crisis Places Oppenheimer Funds at Risk

Published on: October 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to Investment News, along with the much publicized-UBS Puerto Rican Bond Funds, the municipal bond funds of OppenheimerFunds appear to have also been hit by Puerto Rico’s financial problems. The Oppenheimer Rochester Virginia Municipal Bond Fund (ORVAX), valued at $125 million, is down by over 15%, which places it last in the lineup of single-state municipal bond funds.

Such losses could prove an unpleasant surprise for investors in Virginia. The media publication blames the fund’s poor performance on the huge bet is placed on the Puerto Rican bond funds, which have not done very well in the wider municipal bond market because of the territory’s financial issues and the bonds’ low rating.

Investment research firm Morningstar Inc. says that the single-state municipal bond funds with over 25% of assets in the beleaguered bonds are The Oppenheimer Rochester North Carolina, Massachusetts, Arizona, and Maryland funds, with each fund down through last week by over 11%. A median single-state municipal bond fund usually holds no more than 2.38% of assets in the bonds from Puerto Rico.

Massachusetts Regulator Makes Puerto Rican Municipal Debt-Related Inquiries to UBS, FIdelity, and Oppenheimer

Published on: October 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Massachusetts Securities Division has written inquiry letters to UBS Financial Services (UBS), Massachusetts Mutual Life Insurance Co.’s Oppenheimer Funds, and Fidelity’s FMR Co. Inc. about the sales of Puerto Rican municipal debt obligations that were made investors in the state.

The regulator wants to know exactly to what extent these customers were exposed to the bonds’ risks, whether they were adequately warned of the risks involved, and if the bonds were correctly priced. The debt obligations were usually sold via mutual funds.

The bond funds at issue are heavily invested in Puerto Rican-backed municipal bonds and many were very highly leveraged. Due to tax and benefits and favorable yields, a lot of state-specific municipal bond funds in Massachusetts, and other states, are heavily concentrated in Puerto Rican debt. For example, close to 17% of the Oppenheimer Rochester Massachusetts Municipal Fund’s assets ($69M) are in Puerto Rico debt. These bonds are often low rated (BBB or lower) and carry significant risks.

US Treasury Doesn’t Intend to Provide Aid Over Puerto Rico Bond Fund Debacle, Says Spokesperson

Published on: October 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Hope that the US Treasury will save ailing Puerto Rico bonds does not appear to be warranted. According to a spokesperson for the department, who did not wish to be named, the Treasury will not be providing help to the US territory over the municipal bond fund debacle.

However, reports Fox News, the federal government is expected to provide incentives to enhance Puerto Rico’s failing economy. Right now, Puerto Rico’s debt, which is mostly in mutual funds, is at about $70 billion. That’s close to 2% of the $3.7 trillion municipal bond market. This is significantly higher than Detroit’s $18 billion debt that forced that city to file for municipal bankruptcy earlier this year.

Yet even as Puerto Rico’s debt continues to grow, it won’t be allowed to file for Chapter 9 bankruptcy because like US states, territories cannot seek such protection. That said, officials in Puerto Rico maintain that it isn’t bankrupt yet.

Puerto Rico Municipal Bonds

Published on: October 9, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The securities attorneys with Shepherd Smith Edwards & Kantas are investigating claims of investors who purchased Puerto Rico municipal bonds. Many of the largest brokerage firms that operate in Puerto Rico, including UBS, Banco Popular, and Banco Santander, have been selling huge amounts of securities which directly or indirectly were supposed to be investments in Puerto Rico municipal bonds. Those bonds have been viewed as attractive investments by many investors for years as a result of their tax incentives and relatively high yield.

Interest paid by municipal bonds issued by Puerto Rico is exempt from taxation of any type in the United States. This is a significant incentive over municipal bonds issued by United States government entities, which are typically only exempt from Federal income tax, and would still be considered income by state and/or local income taxes. (The exception for the State and local taxes is that most states exempt their own issuances from income taxes, but tax municipal bonds issued by other states.) Additionally, municipal bonds issued by Puerto Rico have, for years, carried relatively high-interest rates. Those high rates, coupled with the preferential tax treatments, have made it easy for brokers to convince their clients, particularly in Puerto Rico, to invest heavily in these securities.

However, even as early as 2009 there were strong indications, as well as publicly available information, that these bonds were in trouble. In 2009, Puerto Rico’s governor declared a state of fiscal emergency. At the time, the territory carried approximately $47 billion in debt and was already bordering on junk-bond/high-risk credit ratings. Yet at the same time, Puerto Rico’s economy shrank by roughly 5.5% in the same year, marking huge challenges for Puerto Rico’s ability to support such a level of debt.