Articles Posted in Municipal Bonds

Once again, a Financial Industry Regulatory Authority (FINRA) panel has ordered UBS Financial Services (UBS) to pay a large arbitration award to an investor. Dr. Luis E. Cummings claimed losses related to his investing in Puerto Rico bonds and Puerto Rico closed-end funds. Cummings also said sustained losses from loans made against these securities.

In his Puerto Rico bond fraud case, Cummings accused UBS of negligence, recklessness, deceit, fraud, and fault. Meantime, the brokerage firm is once again claiming that this is yet another investor who was experienced enough to make a “fully informed decision” about whether to leverage investments and invest a healthy portion of his portfolio in Puerto Rico closed-end funds and bonds.

But as Shepherd Smith Edwards & Kantas Partner Sam Edwards said when commenting on a previous case in which UBS also was ordered to pay an investor over their similar losses, “even customers who are business savvy can be abused.” The FINRA Panel ultimately awarded Dr. Cummings more than $5 million in compensation as well as forgiveness of a similar amount of debt.

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A Financial Industry Regulatory Authority (FINRA) panel said that Stifel, Nicolaus & Co. (“Stifel”) must pay June and Perry Burns over $100K for losses they sustained from Puerto Rico bonds and oil and gas investments. The Burns are in their eighties and they invested a “substantial” amount of their life savings with Stifel.

In their Puerto Rico bond fraud arbitration claim, the couple accused Stifel of negligence, unauthorized trading, and unsuitable investments, among other violations. For that portion of their case, the FINRA panel awarded the Burns $79,709, which was everything they lost, and also fees and interest. Despite the ruling, Stifel, in its own filings, continues to deny the couple’s allegations. The broker-dealer tried to have the case thrown out and removed from its FINRA records.

Senior Investors Sustained Losses From Investing in Puerto Rico Bonds
Unfortunately, the Burns are not the only senior investors whose retirement savings were seriously harmed because brokerage firms and their brokers recommended that retirees invest in Puerto Rico bonds and Puerto Rico bond funds even though these securities were too risky for their portfolios and/or not aligned with their investment objectives. For the past few years, our senior financial fraud lawyers at Shepherd Smith Edwards and Kantas have been working with older investors in the US mainland and the island of Puerto Rico to help them get their lost investments back. Aside from Stifel, other brokerage firms are accused of inappropriately recommending Puerto Rico bonds and close-end bond funds to investors, including UBS Puerto Rico (UBS-PR), Santander Securities (SAN), Banco Popular, Merrill Lynch, Morgan Stanley (MS) and others.

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FINRA Suspends Broker For Accepting $105K in Gifts

The Financial Industry Regulatory Authority Inc. has suspended a former Merrill Lynch broker, Adam C. Smith, from the securities industry for a year. The former Merrill Lynch broker, who was fired from the firm, will pay a $10K fine.

According to the self-regulatory organization, while at Merrill Lynch, Smith and his wife accepted $26K in checks from a couple whom he represented. The money was to help fund the education of Smith’s children. When one of the clients passed away, the remaining spouse gifted Smith and his wife another $53K, again to pay for their kids’ education. Smith received $26K from other clients.

Although he is settling, the ex-Merrill Lynch broker is not denying or admitting to FINRA’s findings.

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FINRA Bars Registered Rep For $15M In Unauthorized Trades

The Financial Industry Regulatory Authority has barred Craig David Dima, a former registered representative with KC Ward Financial, for making about $15M in unsuitable and unauthorized trades in the account of a 73-year-old retiree. According to the self-regulatory organization, there were 11 times when Dima sold nearly all of the customer’s stock in Colgate-Palmolive that she’d accrued from working with the company for nearly thirty years and he did that without permission.

After the elderly client told Dima not to sell the stock, he proceeded to sell them anyways. When the customer confronted Dima, he purportedly misrepresented that a computer or technical mistake had caused the sale. Meantime, the client was “deprived” of the “substantial dividends” from the Colgate shares she used to own. Dima charged the customer over $375K in fees, mark-downs, and mark-ups.

By settling, Dima is not denying or admitting to FINRA’s charges of elder financial fraud.

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A federal judge has ruled that general obligation bondholders in Puerto Rico may go ahead with a securities fraud lawsuit arguing that the U.S. territory’s government has to pay them what they are owed even as it pays off other bondholders and workers and restructures its nearly $70 billion of debt. U.S. District Court Judge Francisco Besosa said the bondholders’ case could proceed despite a new law that has placed a stay on the majority of creditors’ legal actions brought against Puerto Rico.

Owners of general obligation bonds which includes individuals and hedge funds such as Monarch and Aurelius, are arguing that Puerto Rico general obligation bonds are supposed to be constitutionally guaranteed, therefore other Puerto Rico obligations cannot be paid before general obligation bondholders. Judge Besosa said that because the general obligation bondholders’ debt lawsuit does not seek to get any kind of payment from the territory or confiscate commonwealth property, the case should be exempted from the stay.

Following Judge Besosa’s ruling, creditors of COFINA bonds, Puerto Rico’s sales tax authority, are now asking a federal court to keep the island’s government from being told to redirect bond payments to the general bond holders. The COFINA plaintiff group, which includes funds holding more than $2 billion in debt and also hedge funds such as Canyon Capital and Goldentree, contend that the general obligation bondholders’ claims are “self-serving” and without merit.

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Shepherd Smith Edwards and Kantas, LLP (“SSEK”) is pleased to announce that a Financial Industry Regulatory Authority (“FINRA”) arbitration panel has awarded an SSEK client a net of almost $9 million for his losses in Puerto Rico bonds and Puerto Rico Bond Funds. SSEK client, Dr. Luiz Romero Lopez, won his securities arbitration claim against UBS Puerto Rico with the FINRA panel awarding him a net of almost $8 million in compensatory damages and an additional $1 million in punitive damages.

According to the FINRA arbitration panel, UBS exhibited “extreme recklessness and indifference” to the consequences of abuses in its “non-purpose” loan program in Puerto Rico. The panel accused UBS of either purposely using a “non-purpose” loan to be “recycled” in a manner that violates Regulation U or doing so with “reckless” indifference to the consequences that could arise from such abusive loans.

The FINRA arbitration panel found that the loan created “additional excessive leverage.” Because of this, when the market dropped in 2013, the Claimant lost more money than if his funds had been more suitably invested with “less leverage.”

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The Puerto Rico government has defaulted on more debt payments that were due to bondholders. The U.S. Territory did not meet the February 1, 2017 due date on $312 million in principal plus interest. The default includes Puerto Rico General Obligation bonds that are supposed to be constitutionally protected.

The Puerto Rican Government Development Bank owes $279 million of the defaulted debt. A spokesperson for Puerto Rico’s Aqueduct and Sewer Authority, however, said that the Commonwealth paid $295 million of interest, which was due on some of the debt.

Puerto Rico owes $70 billion of debt and the island has been embroiled in financial troubles for over three years. The territory has struggled to pay back the debt it owes, defaulting more than once on payments that were due. Last weekend, Puerto Rico’s federal oversight board voted to extend the stay placed on litigation against the island for debt payments that have been missed. The stay was supposed to lift on February 15, 2017. Now that date is May 1, 2017.

The island’s new governor, Ricardo Rosselló, was also granted an extension for when he has to turn in a fiscal blueprint, mapping out how Puerto Rico plans to restore its fiscal health. He now has until February 28, 2017.

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Port Authority Admits Wrongdoing Related to Failure to Disclose Municipal Bond Risks to Investors

The Port Authority of New Jersey and New York will pay a $400K to resolve Securities and Exchange Commission charges accusing the municipal issuer of knowing about the municipal bond risks involved a number of NJ roadway projects yet failing to tell investors who bought the bonds that would pay for these projects about the risks. The Port Authority admitted wrongdoing.

According to the SEC’s order, the Port Authority sold $2.3B of bonds even though there were questions as to whether certain projects exceeded their mandate and might not be legal to execute. Despite these concerns, the Port Authority did not mention the municipal bond risks in offering these documents.

SEC Cases Seeks to Hold Companies Accountable for FCPA Violations

Already this year, the SEC has brought and/or settled a number of civil cases involving alleged violations of the Foreign Corrupt Practices Act. Early last month, Biomet, a medical device manufacturer, agreed to pay over $30M to settle parallel Justice Department and SEC probes over purported repeat FCPA violations.

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A few weeks after a FINRA arbitration panel ordered UBS (UBS) to pay $18 million in a Puerto Rico bond fraud case, the firm has been ordered to pay another customer a large amount in a similar municipal bond claim. In this latest ruling, the Gomez family claimed they lost $22.87 million from investing in Puerto Rico securities. UBS Puerto Rico (UBS-PR) brokers had purportedly suggested the Gomez family invest in Puerto Rico bonds despite the fact that they wanted investments that were safe. The family relied on the funds from their investments to cover their living expenses.

UBS argued that Mr. Gomez was an experienced investor. The firm claimed that when Gomez opted to concentrate his portfolio in Puerto Rico bonds, he knew what he was doing.

The FINRA panel disagreed with UBS’s assessment, awarding the Gomez family almost $20 million in cash and refusing to enforce almost $6 million is loans the Gomez family owed to UBS. The securities arbitration award to the Gomezes includes $4 million in punitive damages.

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The U.S. Court of Appeals for the First Circuit has revived a Puerto Rico bond fraud lawsuit brought by Puerto Rico Employee Retirement System bondholders. The pension fund is the largest on the island and the plaintiffs are suing the territory’s government.  The bondholders brought their case after former Puerto Rico Governor Alejandro García Padilla put into effect a fiscal emergency law that blocked the repayment of the debt owed to the Employee Retirement System, diverting the funds that were promised to the Employee Retirement System as collateral. Invoking the fiscal emergency law has allowed the island to keep up its public services. The pension bondholders, however, are arguing that diverting the money is hurting them because there may not be enough money left to repay the bondholders what they are owed.

Also, under PROMESA (the Puerto Rico Oversight, Management and Economic Stability Act) which is the federal rescue law that was passed last year, lawsuits brought against the island over debt payments have been temporarily frozen to give the territory time to restructure the deals it would need so it can try to pay back its $70 billion of debt the Commonwealth owes. However, this has not stopped creditors from suing Puerto Rico for their money. Many bondholders are contending that the fiscal emergency law is not constitutional and that the litigation stay should not affect them.

Although the First Circuit did not rule on whether the funds owed to the bondholders should continue to be repaid, it ordered a lower court to decide whether the case could go forward. The appeals court, however, blocked a similar lawsuit brought by holders of the bonds issued by Puerto Rico Highways and Transportation Authority (PRHTA). Those same bondholders also believe that their collateral was confiscated. The First Circuit said that these plaintiffs did not succeed in demonstrating that they were harmed.

Meantime, in Puerto Rico, a judge is currently deliberating over whether to halt another bond fraud lawsuit by invoking the litigation stay. This case involves general obligation bondholders who are owed $13 billion. The plaintiffs claim that they are the ones who should get the sales tax revenue that was promised to another group of creditors.

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