UBS Faces Legal Battle Over Failing Puerto Rico Bond Funds with Local Investors

As the value of proprietary closed-end bond funds invested created by a UBS AG unit (UBS) in Puerto Rico continue to drop, the financial firm and its 132 financial advisers find themselves facing what is expected to be a protracted legal battle with local investors who want their money back. The value of the Puerto Rico bond funds sank after over $10 billion were sold to investors. UBS is also contending with allegations that a number of its brokers persuaded clients to purchase the bond funds and bonds on a credit line and margin.

The UBS Puerto Rico funds are comprised of 14 close-end funds that were sold through UBS Financial Services Inc. of Puerto Rico’s registered representatives and brokers. As tension over the broader municipal bond market hit the US commonwealth, the net asset value of the funds became eroded, falling from an initial price of $10 to roughly $3 for some of the funds.

Unlike closed-end municipal bond funds domiciled in the US—these are only allowed to have leverage as high as 30% of the assets in the fund—the Puerto Rico bond funds’ leverage can reach as high as 50% of total assets (55%, under certain conditions). Such leverages can only make any losses greater.

Now, UBS Puerto Rico bond fund investors are turning to securities fraud lawyers to help them recoup their losses. According to Bloomberg News, investor accounts of what happened are very similar: Clients invested heavily in the funds, many of them were near retirement or retirees, some invested all of their portfolio in the bond funds and Puerto Rican municipal securities, and UBS financial representatives touted local and federal tax benefits for Puerto Rican investors. There were even investors that used a credit line or borrowed on margin to purchase individual Puerto Rico bonds and the closed-end funds from UBS. Many securities lawyers are questioning whether the UBS brokers that made the sales were adequately supervised or if the investments were even appropriate for some customers.

The Puerto Rico bond fund debacle comes over a year after the SEC sanctioned UBS Financial Services Inc. of Puerto Rico over its sales practices involving municipal securities. The firm paid $26.6 million over SEC allegations that in ’08 and ’09 its ex-CEO and its capital markets head made omissions and misrepresentations of material facts about the pricing and market liquidity of UBS Puerto Rico non-exchange traded closed-end funds.

UBS is not the only financial firm embroiled in the Puerto Rico bond fund crisis. Banco Santander (SAN.MC) and Banco Popular also sold municipal bond notes there.

At Shepherd, Smith, Edwards, and Kantas, LTD LLP, our Puerto Rico bond fund lawyers are investigating and filing securities claims for investors that purchased these municipal bonds from UBS, Banco Santander, or Banco Popular. Contact our securities fraud law firm today.

UBS facing legal fight over Puerto Rico bond funds gone south, Investment News, October 3, 2013

Puerto Rico’s bond losses hit local investors, Reuters, September 29, 2013

More Blog Posts:
Securities Headlines: UBS to Pay $4.5M Over Unregistered Assistants, $6M Ponzi Scam Allegedly Funded Reality Show, & Cherry Picking Allegations Lead to SEC Charges, Stockbroker Fraud Blog, August 30, 2013

Muni Bonds Draw Investors But Come With Serious Risks, Stockbroker Fraud Blog, June 11, 2013

SEC Accuses Victorville, CA, Underwriter, and Others of Municipal Bond Fraud, Institutional Investor Securities Blog, April 29, 2013