Articles Posted in Puerto Rico Bond Funds

UBS Group Fined $51M By Hong Kong Securities Regulator

The Hong Kong Securities and Futures Commission (SFC) is ordering UBS Group AG (UBS) to pay a $51M fine for overcharging clients between 2008 and 2017. It is also ordering the Swiss banking giant to pay more than $25M in compensation to customers that were harmed. 

According to the Hong Kong regulator, about 5,000 clients paid more than they should have in approximately 28,700 transactions. This happened after UBS advisors and assistants added padding to spreads involving bonds, as well as structured note trades and charging extra fees. UBS Group is accused of not disclosing to clients that they were paying these fees. 

Jose G. Ramirez-Arone Jr., who formerly worked as a broker for UBS Financial Services of Puerto Rico (UBS-PR), has been sentenced to a year and a day in prison for defrauding investors. Ramirez-Arone, also called Jose Ramirez and known by many on the island of Puerto Rico as “The Whopper,” pleaded guilty to bank fraud last year.

Ramirez admitted that he made more than $1.2 million in improper commissions by persuading clients to inappropriately invest in UBS Puerto Rico Bond Funds. More specifically, Ramirez admitted to participating in a scheme where he advised his clients to borrow money against their investments from a credit line at UBS Bank and then to use that borrowed money to buy more UBS Puerto Rico Bond Funds. This use of “non-purpose” loans to buy securities was strictly prohibited.

Unfortunately, in addition to being a prohibited transaction, this type of investing – where leverage is used to buy an already leveraged investment product – is unsuitable for most investors. The vast majority, if not all, of these investors were ill-equipped and unable to handle the risks involved, which they are now claiming were misrepresented or not fully disclosed to them. When Puerto Rico bonds and closed-end bond funds plunged in value in 2013, many UBS clients ended up having to sell their investments because they lacked the assets to satisfy maintenance calls on their accounts, resulting in massive losses for some.

The First Circuit Court of Appeals has reversed a district court ruling from the lower court over whether bondholders of nearly $3 billion of debt issued by Puerto Rico’s Employees Retirement System (ERS) have a claim on the pension fund’s assets. The pension fund is designated for the island’s public employees.

In 2008, the ERS issued roughly $3 billion in bonds that were sold as having a first lien on all assets of the ERS system, including future governmental deposit. These types of bonds are issued by many pension funds to cover pension shortfalls and are commonly known as Pension Obligation Bonds, or POBs.

The original pension fund lawsuit was brought after the island’s government passed legislation that would allow the government to pay retirees the pension obligation they were owed from Puerto Rico’s general fund, rather than through payments to the ERS. The territory’s pension system, confronted with an almost 100% funding shortfall, had liquidated all cash assets.

Jose G. Ramirez-Arone Jr. (also known as Jose G. Ramirez, Jr.), a former UBS Financial Services of Puerto Rico (UBS-PR) broker, has pleaded guilty to criminal charges accusing him of defrauding investors while making over $1 million in improper commissions through the sale of Puerto Rico closed-end funds. Ramirez-Arone is scheduled to be sentenced next year.

The former UBS broker, known to many on the island as “Whopper,” and UBS Puerto Rico have together been the subject of dozens of Financial Industry Regulatory Authority (FINRA) arbitration complaints brought by customers claiming they sustained massive investment losses because not only did UBS and Ramirez-Arone sell the customers Puerto Rico bonds while misrepresenting the risks, but also, the finer broker recommended that they borrow money to purchase even more of these securities when they could not afford them.

Ramirez-Arone was one of the top-selling brokers at UBS Puerto Rico. In his guilty plea, Ramirez-Arone admitted that he was involved in a scam to help his UBS customers fraudulently obtain non-purpose credit lines, which was a violation of the firm’s policy. The credit lines came from UBS Bank USA, which is a UBS Financial Services subsidiary based in Utah. According to the U.S. Department of Justice, Ramirez-Arone took advantage of the low interest rates at UBS bank to convince his customers to buy additional shares of UBS’s Puerto Rico closed-end funds (CEFs). The former UBS broker acknowledged being a part of a scheme that involved recommending to different clients that they take money from the UBS Bank credit lines to invest to in the UBS Puerto Rico closed-end bond funds. Since using a “non-purpose” loan to buy additional securities is not allowed, Ramirez-Arone admitted advising customers to misrepresent on their credit line application what they intended to use the credit line and having the clients take the borrowed money to their retail bank and then bring the money back to UBS to buy more securities.

Santander Securities LLC has notified its Puerto Rico clients by letter that its San Juan branch will shutter its doors to the public on May 25. Santander Securities (SAN) is Banco Santander’s investment division. The move is part of the investment wing’s plan to move to a service-only model rather than its model that involves offering investment advice and soliciting sales. A scaled down staff will stay on at the branch after it closes.

Santander Securities in Puerto Rico has come under close scrutiny over the last five years. It is one of the investment firms that came under fire beginning in 2013 when Puerto Rico bonds and bond funds saw a steep drop in value and tens of thousands of investors sustained huge investment losses. Many of these investors should never have even purchased such volatile securities, which were always too risky for their portfolios and not in line with their investment goals. Yet Santander Securities brokers, as well as brokers from UBS Puerto Rico (UBS-PR), Banco Popular, and other investment firms, pushed them on clients, often in very high concentrations.

According to Bloomberg, between late 2012 and 2013, Santander Securities marketed and sold more than $280 million in Puerto Rico closed-end funds and municipal bonds, even as it shed its own holdings of these same securities. In 2015, the investment bank resolved allegations brought by the Financial Industry Regulatory Authority (FINRA) accusing the firm of deficiencies involving its structured product business, including its handling of reverse-convertible securities sales to retail customers in Puerto Rico.

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A Financial Industry Regulatory Authority Panel has ruled that UBS must pay claimant Antonio Gnocchi Franco $204,000 in compensatory damages and $66,000 in costs for his Puerto Rico bond fraud case. Franco, a Puerto Rico resident who was also the trustee of his law firm’s pension plan, accused the brokerage firm of negligence, misrepresentation, breach of fiduciary duty, breach of contract, unauthorized trading, unsuitability, overconcentration, failure to supervise, unauthorized use of loan facilities, and unjust enrichment. According to the complaint, UBS had recommended that Franco invest in UBS bond funds and Puerto Rico bonds.

This customer win is yet another in a long line of customer wins against UBS for its investment and brokerage services provided in Puerto Rico. To date, FINRA arbitrators have ordered UBS to pay hundreds of millions of dollars to investors and UBS has paid many hundreds of millions more in settlements. Recently, UBS Puerto Rico and UBS Financial Services lost another Puerto Rico bond fraud case and were ordered to pay five former customers $521,000 in compensatory damages.

In total, UBS has been named in FINRA arbitration claims brought by thousands of investors that lost money from investing in UBS-packaged bond funds and Puerto Rico bonds. UBS Puerto Rico brokers, especially, have come under fire for allegedly recommending customers concentrate their investments in UBS Puerto Rico products, even when they were not suitable for customers in almost any amount. Moreover, many of these investors have alleged that UBS encouraged them to borrow against their own accounts so that customers could invest more. For example, the firm’s financial representatives are accused of advising clients to leverage their accounts and use them as collateral, sometimes for the purposes of purchasing even more UBS investments. This is a practice that should have never happened.

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A Financial Industry Regulatory Authority panel has awarded five people $521,000 in compensatory damages in their Puerto Rico bond fraud case against UBS Financial Services (UBS) and UBS Financial Services Inc. of Puerto Rico (UBS-PR). The claimants had accused the financial firm of securities fraud, constructive fraud, common law fraud, negligent supervision, breach of fiduciary duty, and violating the Puerto Rico Uniform Securities Act.

UBS has been the subject of hundreds of FINRA arbitration claims brought by thousands of investors who sustained losses from Puerto Rico bonds and closed-end bonds, with many UBS-PR customers contending that they sustained massive losses because these investments were inappropriately recommended to them. To date, the financial firm has been ordered to pay or agreed to pay in settlements hundreds of millions of dollars to investors, with more claims still pending.

For over four years, our Puerto Rico bond fraud law firm has worked with investors on the island and the U.S. to help those investors recover their losses from losses in Puerto Rico securities. Contact Shepherd Smith Edwards and Kantas today to request your free, no obligation consultation.

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According to a recent CNBC investigation, not only did UBS Puerto Rico (UBS-PR) fail to disclose to investors the risks involved in the bond funds UBS pushed on the island’s residents, but also the brokerage firm neglected to fully apprise its own brokers of the incredible risks. While these findings are not new, the CNBC probe digs deeper into the matter.

The majority of these investors were island locals, who have now also been further devastated as a result of Hurricane Maria. Already, UBS has come under fire and paid hundreds of millions of dollars in securities settlements and awards from FINRA arbitration panels over losses investors sustained when these investments failed dramatically more than four years ago. UBS also has settled with regulators, including the U.S. Securities and Exchange Commission and FINRA, and paid over $60 million for its wrongful conduct and abuse of investors. The firm did not, however, deny or admit to wrongdoing.

UBS Executives Purportedly Knew Puerto Rico Bonds Would Fail
CNBC’s investigative team obtained approximately “2,000 pages of confidential documents” that display conversations and the “inner workings” between UBS executives in Puerto Rico and the U.S. mainland prior to the funds’ collapse. According to the documents, as far back as a year before the Puerto Rico funds failed, UBS management already knew that problems were brewing and they discussed what could happen if the firm did not deal with these issues immediately.

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Reuters reports that Senator Investment Group, Monarch Alternative Capital, and Stone Lion LP—all hedge funds—have gotten rid of hundreds of millions of dollars of Puerto Rico general obligation bonds in the wake of the devastation caused by Hurricane Maria. Similarly, another hedge fund, Varde Partners, no longer has $136M of its COFINA debt. Investors have been hoping that the island’s bonds would rebound after the territory filed for bankruptcy earlier this year. Now, however, recovery for Puerto Rico is expected to take longer after the storm. Debt prices have dropped to drastic lows, while Maria has caused tens of billions of dollars in damages.

Meantime, in the U.S. mainland and on the island, investors continue to fight to recoup their losses sustained when Puerto Rico’s bonds and closed-end bond funds plunged in value more than four years ago. Our securities fraud lawyers have been working with investors to get their funds back. Many investors were not properly apprised of the risks involved in investing in these bonds. Quite a number of them should never have invested in these securities at all.

Still, brokers from Banco Popular, UBS Puerto Rico, Santander Securities, and other brokerage firms continued to tout these investments as low risk and profitable. Some financial representatives even encouraged investors to borrow funds so that they could invest more, resulting in further devastating consequences.

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According to The Wall Street Journal, Franklin Resources Inc. (BEN), has sold hundreds of millions of dollars of Puerto Rico bonds in the wake of the devastation of Hurricane Maria. This includes Franklin Mutual Advisers LLC’s decision to sell its $294 million stake in the U.S. territory’s general obligation bonds.

Franklin, also known as Franklin Templeton, is the second largest holder of Puerto Rico bonds among mutual funds. OppenheimerFunds (OPY) is the largest.

The Wall Street Journal said that Franklin is not the only one trying to get rid of its Puerto Rico bonds. According to sources, a “swath of mutual funds and hedge funds” have finally given up on the island’s securities, too. For example, Merced Capital and Varde Funds sold their $172 million in Puerto Rico municipal bonds to other bondholders.

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